Research Handbook On International

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RESEARCH HANDBOOK ON INTERNATIONAL

FINANCIAL CRIME
Barry Rider - 9781783475780

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RESEARCH HANDBOOKS IN FINANCIAL LAW

Series Editor: Rosa Lastra, Queen Mary, University of London, UK
This important new Handbook series presents high quality, original reference works that
cover a range of subjects within the evolving field of financial law. National, regional and
global financial markets are at the epicenter of economic, political and social developments.
They are shaped by their own intrinsic dynamics, but are also at the receiving end of potent
external forces, including monetary developments, state regulation and policies towards
international and regional financial integration and free trade areas.
Under the general editorship of Rosa Lastra, these Handbooks are edited by leading
scholars in their respective fields, and comprise specially commissioned contributions from
distinguished academics, who critically, innovatively and substantially analyze a wide range
of current issues in financial law.
Each of the individual handbooks is a definitive reference work, essential for both scholars
of financial law as well as for practicing lawyers. The comprehensive coverage and thorough
examinations of the significant topics and ideas in financial law signify the Handbooks’
position as authoritative and scholarly information resources.
Titles in the series include:
Research Handbook on International Insurance Law and Regulation

Edited by Julian Burling and Kevin Lazarus
Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Edited by Phoebus Athanassiou
Research Handbook on Securities Regulation in the United States
Edited by Jerry W. Markham and Rigers Gjyshi
Research Handbook on Secured Financing in Commercial Transactions

Edited by Frederique Dahan
Research Handbook on Crisis Management in the Banking Sector

Edited by Matthias Haentjens and Bob Wessels
Research Handbook on International Financial Crime
Edited by Barry Rider
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Research Handbook on International

Financial Crime
Edited by
Barry Rider
Professorial Fellow, Centre for Development Studies,
University of Cambridge, UK
RESEARCH HANDBOOKS IN FINANCIAL LAW
Cheltenham, UK + Northampton, MA, USA
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© The Editor and Contributors Severally 2015
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means, electronic, mechanical or photocopying, recording,
or otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.

William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book

is available from the British Library
Library of Congress Control Number: 2015940692
This book is available electronically in the

Law subject collection
DOI 10.4337/ 9781783475797
ISBN 978 1 78347 578 0 (cased)

ISBN 978 1 78347 579 7 (eBook)
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Contents
List of contributors ix
Foreword: some reflections on the evolution of economic and financial crimes
by Michael Levi xxviii
Introduction by Barry Rider xxxvii
Table of cases xli
PART I THE NATURE AND CHARACTERISTICS OF ECONOMIC

AND FINANCIAL CRIME
1 The characteristics of economic crime and criminals 3

William Tupman
2 The concept of fraud: a comparative analysis 15
Gilbert Crentsil
3 Financial crime: a historical perspective 32
George Gilligan
4 Internationalization of crime and technology 42
Peter M. German
5 Crimes of the powerful and legitimization 51
Leonid Fituni and Irina Abramova
PART II THE ENTERPRISE OF CRIME
6 Organized economic crime 65

Shima D. Keene
7 Trafficking crimes 75
Frank G. Madsen
8 Economic crime and terror: spinning a web of greed and fear 86
Shazeeda A. Ali
PART III BUSINESS CRIME
9 The misuse and abuse of the corporate form 103

Hans Tjio
10 Anti-money laundering regime in Hong Kong 113
Mark R.C. Sutherland
11 Unfair competition and crime 125
Shirley Quo
12 Transparency and responsibility: recent developments in the regulation
of hedge funds in the US and the EU 144
Thomas R. Hurst
v
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vi Research handbook on international financial crime
13 Corporate governance and responsibility 155

Chizu Nakajima
14 Good corporate governance and corporate social responsibility in
Indonesian banking institutions: a pathway to preventing financial crime 166
A. Suhartati Lukito
15 Fiduciary duty of loyalty 178
Cindy A. Schipani
16 Corporate criminal responsibility: a South African perspective 191
Johan Henning and Mignon Hauman
17 Insolvency-related crime 206
Laura Atherton and Nadia Saleh
PART IV THE FINANCIAL SECTOR AT RISK
18 Engendering confidence in the financial system – challenges and

observations 219
Jackie Harvey
19 The financial crisis, economic crime and development 229
John Jeremie
20 Responsibility and accountability in the financial sector 239
Graeme Baber
21 A new era of sentencing insider crimes 250
Rita Cheung
22 Regulation of insider dealing in China from the perspective of protecting
the integrity of the capital markets 262
Zhen Ye
23 Compliance issues in the financial sector 279
Dayanath Jayasuriya
24 Compliance – the risks and obligations 288
Stuart Bazley
25 Practicalities of financial crime deterrence 300
Richard Parlour
PART V FRAUD
26 Fraud in civil and criminal law 315

Jonathan Fisher
27 Fraud and restitution 328
David Hayton
28 Theory of fraud in French law: fraus omnia corrumpit – old law, new
opportunities? 338
Catherine Pédamon
29 The concept of fraud in Islamic law 356
Siti Faridah Abdul Jabbar and Asma Hakimah Ab Halim
30 Computer related fraud 366
Jonathan Clough
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Contents vii
PART VI CORRUPTION
31 The legal mechanisms to control bribery and corruption 381

Nicholas Ryder
32 Corruption – new strategies 394
Jesper Johnsøn
33 Corruption and international development assistance 405
Ingrida Kerusauskaite
34 Corruption in China 419
Li Hong Xing, Xuebin Li and Enze Liu
35 Corruption and public policy in post-conflict states 435
Matthew Glanville
PART VII THE PROCEEDS OF FINANCIAL AND ECONOMIC CRIME
36 The pursuit of criminal property 447

Richard Alexander
37 Confiscation and forfeiture 462
Kenneth Murray
38 Money laundering offences 473
Jeffrey Bryant
39 Money laundering and the consent regime in the United Kingdom – time
for change? 485
Andrew Campbell and Elise Campbell
40 Civil asset recovery: the American experience 496
Stefan D. Cassella
41 The management of information in the context of suspected money
laundering cases 507
Alan Bacarese, Kenneth Levy and Hari Mulukutla
42 Anti-money laundering measures and the effectiveness question 520
Louis de Koker and Mark Turkington
43 AML: maintaining the balance between controlling serious crime and
human rights 532
M. Michelle Gallant
44 The regulation of the financing of terrorism 542
Fletcher N. Baldwin
PART VIII ENFORCEMENT AND CONTROL
45 The traditional criminal justice system: its efficacy in dealing with

financial and economically motivated crime 553
David Fitzpatrick
46 The management of complex fraud cases 563
David Kirk
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47 Defending individuals charged with white collar crimes – challenges

and strategies 573
Kathryn Arnot Drummond
48 Protecting the whistleblower 583
Anona Armstrong and Ronald D. Francis
49 Rewards for whistleblowing 602
Caroline Bradley
50 Auditors and fraud detection: an elusive role? 612
Maria Krambia-Kapardis
51 Control liability and compliance: tools for controlling financial crime 625
Christopher Stears
52 Disruption of crime and the use of intelligence 638
David Johnston
53 Extradition 647
Colin Wells and Emma Stuart-Smith
54 International co-operation in fighting financial crime 658
John Reading
55 The International Criminal Court and financial crime 668
Jessie Ingle
56 Offshore issues in policing financial crime 679
John L. Masters
57 Civil enforcement in the United States securities and banking industries 691
Arthur Middlemiss, Hillary Rosenberg and Chiara Spector-Naranjo
58 The practical issues in tracing and freezing in the context of civil
recovery proceedings 703
Peter Gray and Nooree Moola
59 Disqualification of those engaged in the management of companies
and financial institutions 714
Adrian Walters
60 Strategic tools – for now and perhaps the future? 726
Barry Rider
Name index 755

Subject index 763
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Contributors
Professor Irina Abramova, BA (Hons) (Moscow State University); MA, PhD (Insti-
tute for African Studies). Irina is Deputy Director of the Institute for African Studies
(IAS), Russian Academy of Sciences in Moscow. She is also Full Professor, Depart-
ment of Global Problems and International Relations, Russian Academy of Sciences in
Moscow and a Visiting Lecturer at the Universities of Tuebingen, Bochum, Heidelberg
(Germany) and University of St. Gallen (Switzerland). In 2004–2005 she participated
in a number of training activities and international conferences organised by the
Council of Europe in the capacity of an international expert on combating money
laundering and terrorist financing. Irina is the author of more than 110 research works
published in Russia and abroad, including eight major monographs.
Dr Richard Alexander, MA (Cantab); PhD (Lond); Barrister (England and Wales).

Richard is Lecturer in Financial Law at SOAS, University of London. He has also been
a Visiting Expert for the Inter-Governmental Action Group Against Money Laundering
in West Africa (GIABA) and regularly lectures at institutions in several jurisdictions
including Italy, Poland and China. Before joining SOAS, he was a Research Fellow at
the Institute of Advanced Legal Studies, London and has also been a Visiting Scholar at
the University of Florida. He has written a book and a number of articles primarily on
the control of abuse of the financial markets, corruption and money laundering.
Dr Shazeeda A. Ali, LLB (Hons) (UWI); LLM (Cantab); PhD (Lond); Attorney-at-
Law. Shazeeda was appointed a Senior Lecturer in the Faculty of Law at the University
of the West Indies, Mona Campus, in 2012. She is currently a Deputy Dean in that
faculty and is also a Course Director in legal professional ethics at the Norman Manley
Law School. Shazeeda previously served as a technical advisor in the Attorney
General’s Chambers of Jamaica where she was involved in the process leading up to
the enactment of the Proceeds of Crime Act (POCA). She has presented and published
a number of papers, both locally and internationally, on financial services regulation,
financial crime and legal ethics.
Professor Anona Armstrong, BA (Hons), PhD (Melb); FIPAA (Vic); FAPS, FAES,
FAICD, AM. Anona is Professor of Governance and Director of Research and Research
Training in the Faculty of Law and Justice, Victoria University, Melbourne. She was
elected a Life Fellow of Clare Hall, Cambridge University in 2005 and was invested
with the Member of the Order of Australia in 2008. In her current position she
supervises a number of PhD students and chairs a Victorian Government’s Health
Advisory Committee. Anona has written and published a number of books and articles
in the area of corporate misconduct and related issues of governance and ethics,
particularly in relation to the public sector.
ix
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x Research handbook on international financial crime
Ms Laura Atherton, MA (Cantab); Solicitor-Advocate (England and Wales). Laura is

a Senior Associate in the London office of K&L Gates LLP. She began her career as a
criminal and common law barrister at the London Bar before moving to become a
solicitor-advocate. Laura’s practice is a mix of regulatory, criminal work, investigations
and commercial disputes.
Dr Graeme Baber, MA (Oxon); LLB (Hons), LLM (Lond), BSc, MSc (Oxon); PhD
(Lond); MBA (Heriot-Watt); MSc (Herts); PGCPE (BPP); FHEA, MCT, ACSI, ALCM.
Graeme is an LLM Senior Lecturer at BPP University Law School, specialising in
international and financial law. He publishes regularly and extensively on the law of
financial services regulation. Graeme has written a number of books and articles on
financial law and is an accomplished pianist in respect of music of the baroque and
classical periods.
Mr Alan Bacarese, LLB (Hons) (Leeds); Barrister (England and Wales). Alan is a
Director of Stream House, an international anti-corruption consultancy, where he leads
on anti-corruption and asset recovery matters. He is a UK barrister and was a Senior
Crown Prosecutor with the UK’s Crown Prosecution Service until 2007 before helping
to establish the International Centre for Asset Recovery (ICAR) in Basel, Switzerland.
In 2014, Alan worked as an EU-funded legal advisor to the government of Montenegro
on EU accession and rule of law reform. Alan currently works in many jurisdictions on
both rule of law policy and legal case work.
Professor Fletcher N. Baldwin, JD, LLM (Yale); LLM (Illinois); JD Hon (Georgia).
Fletcher is the Chesterfield Smith Professor of Law Emeritus and Director, Centre for
International Financial Crimes Studies, University of Florida, Visiting Professor at
Montpellier University and Honorary Fellow, Institute of Advanced Legal Studies,
University of London. He taught at Makerere University, Uganda as a Fulbright Fellow
and at Baylor University, UNLV. He was Visiting Professor at both the University of
Natal Pieremaritzburg and Stellenbosch University, South Africa, CEELI Legal Advisor
to the Constitutional Court Ukraine and a consultant to the Attorney General,
Indonesia. He was Special Advisor for the Philippine Money Laundering Council and
Advisor-Lecturer for the Afghanistan Rule of Law Project in Kabul in 2008. He has
written books and articles, including the five volume treatise entitled Money Launder-
ing Asset Forfeiture and International Financial Crimes (1993–2008, Oxford Univer-
sity Press), and co-authored the three volume treatise entitled Cybercrime and Security.
Professor Stuart Bazley, LLB (Hons), LLM, PhD (Lond). Stuart is a Visiting
Professor in Financial Regulation and Compliance Law at BPP University Law School.
Stuart has over 30 years’ experience working in the financial services industry and is a
former employed Barrister having held senior roles as In-House Lawyer, General
Counsel and Head of Compliance. Stuart now works as an expert regulatory consultant,
with a wide range of medium-sized enterprises and large complex transnational
financial services firms in the securities, wealth management and banking sectors,
advising on and investigating market and sales practice compliance, regulatory mis-
conduct and enforcement matters. Stuart has published a number of books and many
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Contributors xi
articles on regulatory and legal issues, particularly relating to market abuse and
compliance.
Professor Caroline Bradley, MA, LLM (Cantab). Caroline is a Professor of Law at

the University of Miami School of Law in Coral Gables, Florida. Before moving to the
University of Miami she taught in the Law Department at the London School of
Economics and Political Science. She is a Section Editor of the corporate law section
of Jotwell (http://corp.jotwell.com/). Her research has focused on financial regulation,
changing relationships between geography and money, legal convergence, and on the
disruptions technological change causes for financial markets.
Mr Jeffrey Bryant, LLB (Birmingham); Barrister (England and Wales). Jeffrey is a

barrister who started his career at the Chambers of Andrew Mitchell QC in 2001, where
he subsequently took tenancy. Since 2007, Jeffrey has been an employed barrister in the
Crown Prosecution Service for England, Wales and Northern Ireland. Jeffrey has
brought restraint and confiscation proceedings on behalf of numerous foreign govern-
ments. He was the reviewing lawyer in the leading Supreme Court case of R v Waya
[2013] 1 AC 294. Jeffrey is a contributor to Mitchell, Taylor and Talbot on Confiscation
and the Proceeds of Crime and is also a Visiting Lecturer at BPP University.
Professor Andrew Campbell, LLB, MPhil (Wales); Solicitor of the Supreme Court of
England and Wales; Chartered Banker. Andrew is Professor of International Banking
and Finance Law at the School of Law at the University of Leeds. He is particularly
interested in bank insolvency, protecting depositors and financial crime, in which areas
he has published a number of books and articles.
Miss Elise Campbell, LLB (BCU); MA (Leeds). Elise is undertaking research into
aspects of human rights law and financial crime, having recently completed an MA by
Research with Distinction at the University of Leeds School of Law.
Mr Stefan D. Cassella, JD (Georgetown); BS (Cornell); AUSA (District of Maryland);

CEO of Asset Forfeiture Law, LLC. Stefan was a US federal prosecutor specialising in
asset forfeiture and money laundering law for 30 years, and served as an Assistant U.S.
Attorney and as a Deputy Chief of the Justice Department’s Asset Forfeiture and
Money Laundering Section during that time. He handled some of the largest forfeiture
cases ever brought by the US, and was the principal author of much of the federal
legislation dealing with the proceeds of crime and the applicable sections of the Federal
Rules of Civil and Criminal Procedure. He has published over 30 law review articles on
asset forfeiture and money laundering, as well as a treatise entitled Asset Forfeiture
Law in the United States.
Stefan is presently the CEO of Asset Forfeiture Law, LLC, a consulting firm advising
law enforcement agencies and others in the application of the federal forfeiture and
money laundering laws. He also teaches asset forfeiture procedure at the Federal
National Advocacy Center at the University of South Carolina, serves as an expert
witness on US law in foreign cases, and has trained prosecutors in numerous other
countries, including South Africa, Tanzania, Australia and Bosnia.
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xii Research handbook on international financial crime
Dr Rita Cheung, LLB (Hons), PCLL (HKU); LLM, PhD (King’s College Lond);
Barrister-at-Law (High Court of Hong Kong). Rita is an Assistant Professor in the
Faculty of Law at the Chinese University of Hong Kong where she teaches in the areas
of company law and commercial law. Prior to pursuing her doctorate degree, she
practised in one of the UK’s magic circle law firms. She is now a Barrister-at-Law of
the High Court of Hong Kong. Rita has published books and has written in the field of
corporate law and corporate economic crime in leading internationally refereed
journals.
Professor Jonathan Clough, BSc, LLB (Hons) (Monash); LLM (Cantab); PhD
(Monash), Barrister and Solicitor (Victoria). Jonathan is a Professor and Director,
Higher Degrees by Research in the Faculty of Law at Monash University. He teaches
and researches in the areas of criminal law and evidence, with a particular focus on
cybercrime. In addition to teaching Cybercrime in the Monash LLM programme, he
has written numerous articles on the topic and is the author of of Principles of
Cybercrime, 2nd edn (Cambridge University Press, forthcoming). He has provided
advice to government on cybercrime related issues and was a member of the
Commonwealth Working Group of Experts on Cybercrime.
Mr Gilbert Crentsil, BA (Gh); GDL, PG Dip (Legal Practice) (Lond Met); LLM
(Northumbria); Solicitor of the Supreme Court of England and Wales. Gilbert is
pursuing doctoral studies at the Institute of Advanced Legal Studies (IALS) University
of London. Gilbert’s research interest is in the phenomenon of fraud approached from
a comparative perspective. He is currently looking at financial services, real estate and
consumer credit frauds through the lenses of English law, Islamic and Judeo-Christian
traditions. Gilbert also practises as a solicitor in England and Wales and is a consultant
solicitor at Scott-Moncrieff and Associates, Holborn, London.
Professor Louis de Koker, BIuris, LLB, LLM (UOFS); LLM (Cantab); LLD (UOFS);
Attorney of the High Court of South Africa. Louis holds a Chair of Law at the Deakin
Law School, Deakin University. He also holds a Visiting Professorship in commercial
law at the University of Johannesburg and an Extraordinary Professorship in mercantile
law at the University of the Free State (South Africa). Louis is the Foundational
Director of the University of Johannesburg’s Centre for the Study of Economic Crime.
He is currently the programme leader of the Law and Policy research programme of
the Australian government-funded Data to Decisions Cooperative Research Centre. His
research on anti-money laundering laws and their impact on financial inclusion in
developing countries has been cited in publications of various international bodies
including the International Monetary Fund, the World Bank, the Basel Committee on
Banking Supervision and the Financial Action Task Force.
Ms Kathryn Arnot Drummond, MA (Edinburgh); Barrister (England and Wales).

Kathryn is a barrister at the English Bar and is a tenant at 25 Bedford Row in London.
She specialises in criminal defence. Kathryn is a member of The Honourable Society of
the Inner Temple and was President of the Inner Temple Junior Bar Association
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Contributors xiii
between 2012 and 2013. Before coming to the Bar, Kathryn worked at Peters & Peters
LLP and Kingsley Napley LLP.
Mr Jonathan Fisher QC, BA (Hons), LLB (Cantab); Barrister (England and Wales).
Jonathan is a practising barrister at Devereux Chambers in the Temple, London where
he specialises in cases involving corporate crime, financial services regulation, fraud,
proceeds of crime and tax evasion. He is highly recommended as a leading Queens
Counsel in the independent legal directories. In addition, Jonathan is a Chartered Tax
Adviser (Fellow), an accredited Trusts and Estates Practitioner, Visiting Professor in
Practice at the London School of Economics, General Editor of Lloyds Law Reports:
Financial Crime, and an Editorial Board Member of Simon’s Taxes. He was a
Commissioner on the Commission for a Bill of Rights in the United Kingdom.
Professor Leonid Fituni, MA (Moscow State University); PhD (Institute of African

Studies); DSc (Academy of Sciences). Leonid is Director of the Centre for Strategic
and Global Studies and Deputy Director, Institute for African Studies, Russian
Academy of Science (Moscow). He is President of the Independent Centre for
Documentation on Liberty, Democracy and Justice (Moscow). He is also Full Profes-
sor, Chair of Asian and African Economies, Lomonosov Moscow State University
(MGU). Leonid has been Head of the Centre for Strategic and Global Studies at the
Russian Academy of Science since 1992. Since 2013 he has been President of the
Independent Centre for Documentation on Liberty, Democracy and Justice, in Moscow.
From 1998 to 2009 he held the Chair in World Economy at the Faculty of World
Economy and International Relations at the Independent International University of
Political and Environmental Sciences (IIUPES), Moscow and from 1999 to 2007 was
Dean of the Faculty of World Economy and Sustainable Development of IIUPES. He
also taught as Invited Professor at various renowned Universities in the US, Germany,
Switzerland, Austria and Spain. He has over 20 years’ experience as a consultant and
adviser with major international organisations including the Council of Europe, the
Bank for International Settlements, the World Bank and the United Nations. Between
2003 and 2010 he led a number of Council of Europe projects against money
laundering and terrorist financing and against corruption in the Russian Federation. He
is the author of 16 books and editor and contributor to 18 others as well as the author
of over 200 academic articles, published in Russian, English, German, Portuguese and
Arabic languages.
Mr David Fitzpatrick, MA (Cantab); Barrister (England and Wales) (Hong Kong).

David is a barrister who has practised in Hong Kong since 1981, when he joined the
Prosecutions Division of the Attorney General’s Chambers. After 12 years in govern-
ment he went into private practice, though the bulk of his work still involved appearing
for the government, as a prosecutor or in civil litigation, usually having some link to
fraud or insolvency. David has lectured widely in Hong Kong and written articles on
the operation of the criminal justice system and its shortcomings, in particular, on the
difficulties that the investigator and prosecutor face when covert methods must be
employed. He is currently conducting research into the use of disruption by UK law
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xiv Research handbook on international financial crime
enforcement agencies as an alternative to the investigation and prosecution of different

types of fraud and organised crime.
Professor Ronald D. Francis, MA (NZ); PhD (Melb), DipCrim (Cambridge). Ronald

is Professor Emeritus at the College of Law and Justice at Victoria University in
Melbourne. He is the author of a number of books and of numerous articles. As a
presenter and co-presenter at various sessions at Jesus College, Cambridge on the topic
of whistleblowing, he is well-versed in the issues relating to that topic. His other
experiences include reviewing articles for several national journals, acting as an
assessor for manuscripts for publishers, and as a reviewer of books. His qualifications
are in philosophy, psychology and criminology.
Professor M. Michelle Gallant, BA (Hons) (UPEI); LLB (Hons) (UNB); LLM

(UBC); PhD (Lond); Barrister and Solicitor (Manitoba). Michelle is a Professor of Law
at the University of Manitoba and a member of the Manitoba Law Reform Commis-
sion. Her research and scholarship focuses principally on the regulation of financial
crime including global money laundering norms and the intersection of civil proceed-
ings and proceeds of crime. She is the author of a book on economic crime and journal
articles related to tainted finance. She teaches courses on taxation law and the global
and domestic governance of tainted finance.
Dr Peter M. German OOM, BA (Hons) (Mt Allison); MA (Simon Fraser); LLB

(Hons), LLM (UBC); PhD (Lond). Peter retired from the Royal Canadian Mounted
Police as its Deputy Commissioner for Western and Northern Canada. He was
previously Director General Financial Crime and a Detective Inspector tasked with
major fraud and corruption investigations. He is the author of a text on proceeds of
crime and money laundering. His doctoral dissertation focused on kleptocrats and asset
recovery. Peter previously practised law privately, including criminal prosecution and
defence. He is the recipient of various medals and awards, including a Gold Medal for
his contribution to the goals of the International Society for the Reform of Criminal
Law.
Dr George Gilligan, MPhil, PhD (Cantab); MA (La Trobe). George is a Senior

Research Fellow at both the Centre for Law, Markets and Regulation in the Faculty of
Law at the University of New South Wales and the Centre for Corporate Law and
Securities Regulation in the Faculty of Law at the University of Melbourne. His
research interests centre on: governance, and regulatory theory and practice, especially
in relation to the financial services sector; white-collar crime; organised crime; and
corruption. He has published extensively in these areas, conducted numerous field
research projects and appeared as an expert witness before Commonwealth of Australia
Senate and Joint Parliamentary Committees.
Mr Matthew Glanville, MA (Oxon); IMC. Matthew is a Senior Advisor at KPMG

where he works on development issues focusing on fraud and corruption within Aid
programmes. He has worked on fraud in some of the most dangerous and corrupt
countries in the world including Iraq, Afghanistan and the Democratic Republic of the
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Contributors xv
Congo. His particular interest is on fraud and corruption within internationally

sponsored military programmes. He is a UN recognised expert on conflict and regularly
appears on BBC and Sky discussing international and defence issues.
Mr Peter Gray, MA (Cantab); Solicitor of the Supreme Court of England and Wales.
Peter focuses on fraud, corruption and other white collar crime matters He has
represented governments, private claimants and defendants in such matters. Peter has
previously written and spoken on a number of aspects of multi-jurisdictional litigation,
fraud, white-collar crime and asset recovery. He is a regular speaker at the annual
Cambridge Symposium on Economic Crime.
Ms Asma Hakimah Ab Halim, LLB, LLB (Shariah), CiCA (IIUM); LLM (UKM);
Advocate & Solicitor of the High Court, Malaya. Asma is a Lecturer at the Faculty of
Law, Universiti Kebangsaan Malaysia (National University of Malaysia). She was
previously a Lecturer at the University of Multimedia (MMU), Malaysia and part-time
tutor at Kolej University Islam Malaysia, currently known as Universiti Sains Islam
Malaysia (USIM). Apart from academic work, Asma is also actively involved in
programmes organised by NGOs that include seminars, talks, intellectual discourses
and social activities on issues related to the promotion of integrity.
Professor Jackie Harvey, BSc, PhD (Bradford); PCAPL (Northumbria). Jackie is

Professor of Financial Management and Director of Business Research in Newcastle
Business School at Northumbria University. Her research is in the field of money
laundering. Early outputs considered costs and benefits of regulatory compliance before
moving to evaluation of the effectiveness of the anti-money laundering framework.
Jackie has been invited to speak at a number of very high profile academic and
practitioner conferences in both the UK and Europe. She is on the editorial board for
the European Cross-Border Crime Colloquium that brings together researchers from
across Europe. Prior to becoming an academic, Jackie, whose PhD is in Taxation
Policy, spent ten years working for a major merchant bank, followed by a three-year
posting as fiscal policy adviser (under the auspices of the British Government) to the
Ministry of Finance in Belize.
Ms Mignon Hauman, LLB, LLM (cum laude) (UFS); Candidate Attorney (South
Africa). Mignon is a candidate attorney in Bloemfontein, South Africa and a researcher
in mercantile law and academic tutor in the Faculty of Law, at the University of the
Free State, Bloemfontein, South Africa. Recently she was awarded the Dean’s Medal as
the best master’s degree student in the Faculty of Law of the UFS. Mignon has assisted
with research for and co-authored several publications in the field of mercantile law.
The Hon Mr Justice David Hayton, LLD (Cantab); LLD (Newcastle); TEP (Hon),
Master of the Bench of Lincoln’s Inn. David is a Justice of the Caribbean Court of
Justice. He was a Fellow of Jesus College, Cambridge before becoming Professor of
Law at King’s College, London while practising at the Bar and, from 1984, sitting as a
part-time judge in England and the Bahamas. Well known for Underhill & Hayton on
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xvi Research handbook on international financial crime
Trusts, as author or editor he has produced fourteen books in the areas of trusts,
property, succession and tax and published many articles.
Professor Johan Henning, BIur, LLB (UOVS); LLD (UFS); Attorney (South Africa).
Johan is a Distinguished Professor and Director of the Centre for Business Law in the
Faculty of Law and sometime Dean of Law at the University of the Free State,
Bloemfontein, South Africa. He is also a Professor Extraordinarius at the College of
Law of the University of South Africa and Visiting Professor in Corporate and
Commercial Law at the BPP University School of Law, London.
From 2000 until 2010 he was also the Director of the Centre for Comparative
Company Law of the Institute of Advanced Legal Studies at the University of London.
He was a Visiting Professor and a Guest Professor at several Universities in Germany,
the UK and the US. He was a member of the South African Standing Advisory
Committee on Company Law and Chair of its Standing Subcommittee on Close
Corporations, and later was a member of the national reference group for the drafting
of the Companies Act of 2008. He is a member of both the Academy of Science of
Southern Africa and the Akademie vir Wetenskap en Kuns and is also an Honorary
Member of the Order of the Coif (US). He has published more than 60 books and
monographs and more than 200 articles primarily in the areas of company law, close
corporations law, law of partnership and the combating of economic crime.
Professor Thomas R. Hurst, BA (Wisconsin); JD (Harvard). Thomas is S.T. Dell

Professor of Law Emeritus at the University of Florida Levin College of Law. He has
practiced law with the US Department of Labor and corporate law with the US law
firm of Foley & Lardner. He has taught corporate law, securities law and contract law
at the University of Texas, Emory University and the University of Georgia in addition
to the University of Florida. He is the author of casebooks on unincorporated business
organizations and corporations and has also published articles many in many legal
periodicals.
Ms Jessie Ingle, BInst, LLB (Hons) (UNSW); LLM (Cantab). Jessie is a solicitor at
Linklaters LLP, London. Before taking her position, she completed her Masters of Law
at the University of Cambridge, focusing primarily on philosophy and international
criminal law. Jessie has been an editor of the Cambridge Journal of International and
Comparative Law as well as the Australian Journal of Human Rights. She was also a
researcher at the University of New South Wales and at Wentworth Chambers, Sydney,
concentrating principally on international financial regulation.
Dr Siti Faridah Abdul Jabbar, LLB (UKM); LLM (Cantab); PhD (Lond); Advocate
& Solicitor of the High Court, Malaya. Faridah is Associate Professor in Law at the
Faculty of Economics and Management, Universiti Kebangsaan Malaysia (National
University of Malaysia). She also lectured at the BPP University in London from 2008
until 2010 on subjects relating to Islamic finance and financial regulation. Faridah has
presented at conferences and published in journals on issues relating to the legal and
regulatory aspects of Islamic finance. To date, Faridah has received three Outstanding
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Contributors xvii
Paper Awards from the Emerald Literati Network of Excellence for her work on
financial regulation and Islamic finance.
Dr Dayanath Jayasuriya PC, LLB, PhD (Colombo); FICA, Hon FSALS, FIFAA,
Attorney at Law and President’s Counsel (Sri Lanka). After working for ten years in the
Attorney General’s Department of Sri Lanka, Dayanath served for more than 20 years
with the UN and its specialised agencies in Geneva, Vienna, Bangkok, New Delhi and
Islamabad. After returning to Sri Lanka he has held the positions of Director General
and later as Chairman of the Securities Exchange Commission and Insurance Board of
Sri Lanka. In 2005 he was elected as the Chairman of the IOSCO Presidents’
Committee. He served as the first Regional Director (Academic Affairs) of the
International Compliance Regional Office for Asia.
Dayanath has been a Visiting Professor of Mercantile Law at the University of the
Free State in South Africa; Visiting Scholar at Harvard University, Boston and has
delivered guest lectures at Oxford University, University of London, Cambridge
University, University of New South Wales, University of Tasmania, University of
Montreal, Delaware Law School, and so on. He is a Distinguished Visitor at the
Georgetown Law School, Washington DC.
Dayanath has written more than 20 books, 25 monographs and published over 200
articles. His books have been cited in judgments of the US Appeal Courts. He is on the
editorial board of several British journals such as The Company Lawyer; International
Journal of Islamic and Middle Eastern Finance and Management; Journal of Financial
Crime; Journal of Money Laundering Control; and Journal of Qualitative Research in
Financial Markets.
He is the Chairman of Orient Finance plc and Bartleet Finance plc; Managing
Partner of Corporate Governance Advisory Services Pte Ltd Singapore; and Chairman
of the Rating Committee of Lanka Rating Agency Pvt Ltd.
The Hon Mr John Jeremie SC, LLB (UWI); LLM (Lond); Senior Counsel (Trinidad
and Tobago). John is a Senior Lecturer in the Faculty of Law at the University of the
West Indies. He served as Attorney General of Trinidad and Tobago between 2004 and
2010. He has presented papers on co-operation in criminal matters at meetings of the
Commonwealth Law Ministers and has represented Trinidad and Tobago at meetings of
Law Ministers in the Caribbean, throughout the Commonwealth and in Latin America.
He has written extensively in the area of international crime and commercial law. John
practices at the Inner Bar in Trinidad and Tobago.
Dr Jesper Johnsøn, MA, BA (Copenhagen); MPhil, PhD, (Cantab). Jesper specialises

in how to design, implement and evaluate governance and anti-corruption reforms in
developing countries. As Senior Advisor at the U4 Anti-Corruption Resource Centre at
the Chr. Michelsen Institute he conducts research, provides policy advice and delivers
training for eight bilateral aid agencies and their partners. Jesper leads U4’s thematic
work on evaluation and measurement and fragile states. Previously, he worked as
Senior Consultant in the Public Administration and Governance practice area for an
international consultancy. His areas of expertise span across the areas of policy and
programme design, risk management and evaluation.
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xviii Research handbook on international financial crime
Mr David Johnston QPM, MSc (Glamorgan); PG DipCrim (Cantab). As a career law

enforcement officer David has been involved at a senior level since 2000 in developing
and formulating the UK police approach to investigating and preventing economic
crime. Between 2004 and 2008 he held the office of Commander for Economic Crime
Investigation at Scotland Yard and was involved in developing joint industry approaches
to intelligence sharing, intelligence lead money laundering investigation and prevention
strategies for economic crime.
His national roles have included working as advisor to the Law Society on reform of
the criminal law and policy and as a national advisor to law enforcement and private
companies on crisis management and the management of critical incidents.
In 2008 David was awarded the Queen’s Police Medal for outstanding contribution
to national policing.
Dr Shima D. Keene, BSc (Hons) (Buckingham); MPhil (Cranfield); PhD (Lond).

Shima is a Director and Senior Fellow of the Institute for Statecraft, London and
consultant to the Head of Force Intelligence and Specialist Operations, Thames Valley
Police.
Shima is a former senior investment banker in the city of London, a Senior Research
Fellow at the Defence Academy of the United Kingdom, Shrivenham, Special Advisor
to the Ministry of Defence, and Specialist Investigator and Senior Analyst in Major
Crime at Thames Valley Police. Shima also lectures at BPP University and the
University of Cambridge.
Shima is the author of Threat Finance, a book which examines how finance is used
by terrorist and criminal organisations and how it can be better controlled.
Ms Ingrida Kerusauskaite, BA (Hons) (SOAS, Lond); MPhil (Cantab). Ingrida is a

researcher and PhD candidate at the University of Cambridge. She has worked with a
wide range of organisations in the field of international development assistance,
including United Nations agencies such as the United Nations Resident Coordinator in
Damascus, Syria and the United Nations Industrial Development Organisation’s Invest-
ment and Technology Promotion Office in Beijing, China, as well as private companies
such as TES Global and, most recently, KPMG’s International Development Assistance
Services team in London.
Ingrida’s academic research has focused on corruption, education and international
migration. Ingrida has taught at both masters and undergraduate levels at various
departments of the University of Cambridge.
Mr David Kirk, MA (Oxon); Solicitor of the Supreme Court of England and Wales.
David is a Partner at McGuireWoods London LLP specialising in economic crime in
both private and public sectors. He worked in the 1980s for the Director of Public
Prosecutions and the Attorney General. In 1988 he set up the City’s first specialist fraud
practice at Stephenson Harwood. Between 1994 and 2006 he was a Partner at Simons
Muirhead and Burton. In 2006 he was appointed Director of the Fraud Prosecution
Service at the Crown Prosecution Service, and in 2009 became the Financial Services
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Contributors xix
Authority’s first Chief Criminal Counsel. In 2014 he became a Partner at McGuire-

Woods. He is the co-author of Serious Fraud: Investigation and Trial (Butterworths),
and Chairman of the Board of Trustee Directors of the Fraud Advisory Panel.
Associate Professor Maria Krambia-Kapardis, BEc (La Trobe); MBus (RMIT); PhD
(Edith Cowan), FCA, ACFE. Maria is an Associate Professor in Accounting at Cyprus
University of Technology. She is Chair and a founding member of Transparency
International – Cyprus, has been representing Cyprus on corruption at the European
level and has chaired the Economic Crime and Forensic Accounting Committee of the
Institute of Certified Public Accountants of Cyprus for a number of years. She has
authored two books on the topic of economic crime, a number of chapters in peered
reviewed books in Greek, French and English and has edited three books. She has
received a number of awards for her publications. Her work is published in
international/local, professional and academic journals and she has presented her
research locally and internationally in peered review conferences. Her research interests
are fraud detection and investigation, anti-corruption, corporate social responsibility,
corporate governance and business ethics and has won a number of EU-funded
projects.
Professor Michael Levi, MA (Oxon); DipCrim (Cantab); PhD (Soton); DSc (Econ)
(Cardiff); Fellow of the Academy of Social Sciences; Fellow of the Learned Society of
Wales. Michael is Professor of Criminology at Cardiff University. He has been
conducting international research on the control of white-collar and organised crime,
corruption and money laundering/financing of terrorism since 1972, and has published
widely on these subjects as well as editing major journals. His current public roles
include President, US National White-Collar Crime Research Consortium; and he is a
Member of the European Commission Group of Experts on Corruption and of the
Committee on the Illicit Tobacco Market, US National Academy of Sciences; UK
Crime Statistics Advisory Committee; and adviser to the UK and EC on financial crime
issues. In 2013 he was given the Distinguished Scholar Award by the International
Association for the Study of Organised Crime, and in 2014, the Sellin-Glueck prize by
the American Society of Criminology for his contribution to international and compara-
tive criminology.
He is a Senior Fellow at Rand Europe and an Associate Fellow at the Royal United
Services Institute. He is also an adviser to Europol on the Serious and Organised Crime
Threat Assessments and on the Internet-enabled Organised Crime Threat Assessments.
He is currently engaged in work on the detection of insider frauds and other threats;
public–private sector collaboration against economic and organised crime; and the
criminalisation and investigation of organised crime in the EU.
Mr Kenneth Levy, BA (Michigan); JD (Rutgers Law School). Kenneth is an American

attorney licensed in New York, New Jersey and the District of Columbia. Throughout
his career he has specialised in developing regulatory structures for government and
programme management in both the public and private sectors. He has served as a
senior official at the Federal Communications Commission and as General Counsel of
the organisation responsible for administering multi-billion dollar FCC programmes, a
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xx Research handbook on international financial crime
key function of which is to protect the programmes against waste, fraud and abuse. He
has represented the US before the International Telecommunications Union and was a
member of a USAID team conducting regional training in Namibia. He has worked as
a consultant for the International Centre for Asset Recovery of the Basel Institute on
Governance, helping to design its mission and curriculum and launching an anti-
corruption project in India. Recently, as a member of the Stream House network of
experts, Kenneth has assisted in reviewing training materials designed for implementa-
tion of the whistleblowing mechanism for the International Conference on the Great
Lakes Region (ICGLR) in Eastern DR Congo.
Dr Xuebin Li, BSc (Criminology, Criminal Police University of China); PhD (Cardiff).
Xuebin is Lecturer of Chinese Criminal Law and Public Law at the BBP University,
London. He is a consultant on Chinese law and policy, in particular on Chinese
anti-money laundering regulation and anti-corruption practice. Xuebin also works for
the Ministry of Justice of the UK. He has written and published articles on money
laundering and related issues, and is a contributor to Journal of Money Laundering
Control. Before coming to the UK, Xuebin was a senior official in the Political Bureau
of Shengyang Police, China.
Mr Enze Liu, BA (Shanghai Jiaotong); BA (Hons)(Stirling); LLM (BPP). Enze is a

researcher in financial crime at Institute of Advanced Legal Studies, University of
London, where he is also a doctoral candidate. He studied finance at Shanghai Jiaotong
University in China and then at the University of Stirling. He then studied law at Hosei
University, Tokyo and took an LLM at BPP Law School in London where he graduated
with a distinction. He has a special interest in the area of economic crime and has been
an active participant and contributor for many years at various international conferences
and seminars. His research currently lies in the prevention and control of economic
crime in China.
Dr A. Suhartati Lukito, SH (Hons), MHum (Hons) (University of Surabaya), PhD

(Airlangga University); Advocate (Indonesia). Suhartati is a Lecturer in the Faculty of
Law, University of Surabaya, Indonesia and teaches several subjects, including eco-
nomic crime, corporate crime, criminal law, banking law and criminal law procedure.
She has a practical expertise as a Legal Consultant and Senior Associate in the law firm
Martin Suryana and Associates. She is a member of the International Bar Association,
and is also a member of the Indonesian Advocates Association and the Indonesian
Society for Criminal Law and Criminology. She has delivered several papers in
numerous international and national events. She has also written and published several
articles primarily in the area of economic crime, criminal law, financial fraud and so
forth.
Dr Frank G. Madsen, MA (equiv. Paris; International Affairs); Ph.D (Cantab). Frank

is an Associate University Lecturer at the Centre of Development Studies, University of
Cambridge and a Research Associate at the Von Hügel Institute, St Edmund’s College,
Cambridge. Frank teaches trans-national crime justice and development at the Univer-
sity of Cambridge, while pursuing his interests in trafficking crimes and denied demand
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Contributors xxi
at St Edmund’s College, where he directs research into the illicit traffic in organs for
transplantation. He is the author of Transnational Organised Crime (2009) and a
number of peer-reviewed journal articles and chapters in books. He was formerly Head,
Criminal Intelligence, Interpol HQ, France and then Director, Corporate Security at a
US Fortune-100 company.
Mr John L. Masters, LLB (ANU); LLM (Canberra); MPhil (Cantab); Barrister

(England, Wales and Australia). John is currently practising as a member of Blackburn
Chambers in both Australia and the UK. His main area of practice is financial law,
including prosecuting money laundering, corruption and asset recovery. He has been an
international practitioner for over 27 years and has served as a specialist Crown
Advocate in the Crown Prosecution Service in the UK and as Senior Crown Counsel
(International Cooperation) in the Cayman Islands. He has also worked as General
Counsel for a major corporation and served as a sworn member in the Australian
Federal Police in the early to mid-1980s. He has written and published a number of
articles relating to money laundering and corporate compliance.
Mr Arthur Middlemiss, JD (Boston University). Arthur is a Partner at the law firm

Lewis Baach PLLC Kaufmann Middlemiss, the New York Office of Lewis Baach
PLLC. Arthur practices in the area of financial crimes compliance. He focuses on
providing strategic counsel to foreign and domestic entities seeking to mitigate
regulatory, criminal and reputational risk in the areas of anti-money laundering and
anti-corruption. Prior to joining the firm, Arthur was the Director of the Global
Anti-Corruption Program at JPMorgan Chase & Co., responsible for designing and
executing an enterprise-wide anti-corruption compliance programme. In the public
sector, Arthur served as an Assistant District Attorney in the Manhattan District
Attorney’s Office where he conducted and supervised investigations involving complex
securities fraud and money laundering.
Ms Nooree Moola, BAppSc, LLB (Hons) (Qld.UT), LLM (Qld.). Nooree is an

Associate at Gibson Dunn. Nooree is admitted to the Supreme Court of Queensland
and the High Court of Australia. She focuses on financial litigation and high-value
fraud claims, particularly those with a multi-jurisdictional element. Nooree practised at
a leading international law firm in Melbourne before relocating to Dubai.
Hari Mulukutla, MS (Ohio). Hari is Managing Director of Stream House, an

international anti-corruption consultancy. Hari has advised on anti-corruption, stolen
asset recovery and information management projects in developing countries for
organisations such as the World Bank and the United Nations Office on Drugs and
Crime (UNODC) since 2009. Prior to that he was a founding member of the
International Centre for Asset Recovery in Basel, Switzerland, serving as its Chief
Information Officer (2006–2009). Hari has developed solutions for managing income
and asset declarations of public officials, natural resource governance, whistleblowing
systems and for recovering stolen assets.
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xxii Research handbook on international financial crime
Mr Kenneth Murray, MA (Edinburgh); CA. Kenneth is Head of Forensic Account-

ancy at Police Scotland. He is a Chartered Accountant and has provided a professional
forensic accountancy service within Law Enforcement in Scotland for some eight
years, acting as reporting accountant and expert witness in high profile criminal and
civil recovery cases. He is the author of a number of award winning papers on
economic crime published in the academic press and is currently engaged in writing a
major paper on organised crime business structures commissioned by the Lisbon-based
EU agency, the European Monitoring Centre for Drugs and Drug Addiction.
Professor Chizu Nakajima, LLB (Hons), LLM (International Law) (Keio); PhD
(Lond); FSALS. Chizu is Professor of Corporate Law and Governance and Director of
the International Centre for Integrity and Governance at the London Guildhall Faculty
of Business and Law and Chair of the British Japanese Law Association, London. She
has served for many years as Co-Director of the annual International Symposium on
Economic Crime at the University of Cambridge. Chizu is Chair of the British
Academy of Management’s Corporate Governance Special Interest Group, Visiting
Professor of Comparative Law of BPP University, Senior Associate Research Fellow of
the Institute of Advanced Legal Studies, University of London and Fellow of the
Society for Advanced Legal Studies. She specialises in corporate law and governance,
corporate social responsibility, financial services law, and the prevention and control of
financial crime and has published extensively in law and management journals. Chizu
has substantial experience in advising inter-governmental and governmental organ-
isations on various legal and management issues and serves on the governing body of
the City of London’s livery company.
Mr Richard Parlour TD, MA (Cantab); FRSA, FSALS; Solicitor. Richard Parlour

runs Financial Markets Law International (www.fmli.co.uk). He advises on compliance
transformation for financial institutions and markets, including deterrence of financial
crime, risk management, enhanced due diligence and accelerated learning. He won and
ran the European Bank for Reconstruction and Development’s (EBRD’s) largest
technical assistance project, restructuring financial markets at state level, and was
heavily involved in the UK’s leading example of compliance transformation. He has
worked as in-house counsel at the London International Financial Futures and Options
Exchange (LIFFE) and in Brussels. He has been part of the UK’s HM Treasury Money
Laundering Experts Group. He writes widely on financial crime issues and is a visiting
lecturer at BPP University as well as the University of Warwick and University of
London. He is UK Strategic Regulatory Advisor of the Year 2014. FMLI is UK Anti
Money Laundering Law Firm of the Year 2014.
Mrs Catherine Pédamon, LLB, LLM (Paris II, Pantheon-Assas); LLM (Harvard Law
School); Fulbright Scholar; Admitted to the Paris and New York Bars. Catherine is
Senior Lecturer in Law and Deputy Head of the LLM in International Commercial Law
at Westminster Law School. Before joining the University of Westminster, she taught at
BPP Law School and the University of Texas at Austin. She also practised international
corporate and financial law with Sullivan & Cromwell (New York), Gide Loyrette Noel
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Contributors xxiii
(Paris) and Allen & Overy (London). She has published in the area of comparative
contract law, corporate social responsibility and arbitration, among others.
Dr Shirley Quo, BCom (UWA); GradDipLibStudies (Curtin); LLB, LLM, SJD

(Monash). Shirley is a Senior Lecturer in Law at Murdoch University, School of Law,
Western Australia. Prior to this, Shirley was a Senior Lecturer in Law at Auckland
University of Technology in New Zealand. She has previously taught at Monash
University where she completed her doctorate in commercial law. Shirley has also
worked as a corporate lawyer for the Telecommunications Industry Ombudsman
(Melbourne). In 2014, Shirley was granted a visiting fellowship to Cambridge
University in order to conduct research in her area of expertise, as part of her
sabbatical. She has written and published a number of peer-reviewed journal articles
primarily in the areas of company law, competition law, insolvency law and corporate
social responsibility. Shirley has also presented papers at the Economic Crime
Symposium at Cambridge University. She is a member of the Editorial Board of The
Company Lawyer.
Mr John Reading SC, BBS, DipLaw (BAB); DipCrim (Sydney); BA (Hons) (Deakin);
LLM (HKU). John is currently head of Pacific Chambers in Hong Kong and an
Adjunct Professor of Law at the City University of Hong Kong. He was a public
prosecutor for over 30 years and for nine years was Deputy Director of Public
Prosecutions in Hong Kong.
He was appointed Senior Counsel in 1999, and in the 2008 Hong Kong Honours list
was awarded the Bronze Bauhinia Star. John has been a contributor to Halsbury’s Laws
of Hong Kong and has had a number of articles published in various periodicals.
Professor Barry Rider OBE, CP, LLB (Hons) (Lond); MA (Cantab); PhD (Lond);
PhD (Cantab); LLD (Hon) (UFS); LLD (Hon) (Penn State); FSALS, FRSA, FIPI,
Barrister. Barry has taught law in the University of Cambridge since 1976, when he
was elected a Fellow of Jesus College. He is currently a Fellow Commoner of Jesus
College and a Professorial Fellow in the Centre for Development Studies in the
University of Cambridge. Barry was Director of the Institute of Advanced Legal
Studies and a Professor of the University of London from 1993 to 2003 and is currently
an Honorary Senior Research Fellow. He is also a Professor of Law at BPP University;
Professor of Comparative Law at Renmin University, China and a Professor of
Mercantile Law at the University of the Free State. Barry has held and continues to
hold a number of visiting appointments including at the University of Palermo, Hong
Kong, Florida and Beijing Normal University. He is a Master of the Bench of the
Honourable Society of the Inner Temple and a Past-Master of both Witan Hall and the
Worshipful Company of Patternmakers in the City of London. Barry has also practised
law and has been counsel to a number of law firms and inter-governmental organ-
isations including the IMF, the Commonwealth and Islamic Financial Services Board.
He has also served as a specialist adviser to the Trade and Industry and Home Affairs
Select Committees of the House of Commons. Barry has also served as a public servant
and diplomatic officer to a number of inter-governmental organisations and governmen-
tal agencies and has for a number of years been head of an intelligence unit concerned
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xxiv Research handbook on international financial crime
with economic and organised crime. He holds a number of editorial positions including
being the General Editor of The Company Lawyer, Journal of Financial Crime, Journal
of Money Laundering Control and Amicus Curiae.
Ms Hillary Rosenberg, JD (Cornell). Hillary is Counsel at the law firm Lewis Baach
PLLC Kaufmann Middlemiss, the New York Office of Lewis Baach PLLC. Her
practice specialises in the area of financial crimes compliance. Hillary advises foreign
and domestic entities seeking to mitigate risk related to anti-money laundering,
anti-corruption and financial sanctions. Her practice includes developing best practices
compliance programmes for financial institutions and corporate entities. An experi-
enced trial attorney, she also represents clients in white-collar criminal, civil and
regulatory matters. Prior to joining the firm, Hillary was a Vice-President and
Compliance Director of the Global Anti-Corruption Program at JPMorgan Chase & Co.
In the public sector, Hillary served as a prosecutor in the Manhattan District Attorney’s
Office.
Professor Nicholas Ryder, LLB (Glamorgan); LPC (Bristol); PhD (Glamorgan).

Nicholas is a Professor in Financial Crime at the University of the West of England. He
has written four monographs including The Financial War on Terror: A Review of
Counter-Terrorist Financing Strategies since 2001 (Routledge, 2015), The Financial
Crisis and White Collar Crime: The Perfect Storm? (Edward Elgar, 2014), Money
Laundering – an Endless Cycle? (Routledge, 2012) and Financial Crime in the 21st
Century – Law and Policy (Edward Elgar, 2011). He has also published two text books
The Law Relating to Financial Crime in the United Kingdom (Ashgate, 2013) and
Commercial Law: Principles and Policy (CUP, 2012). Nicholas is currently a member
of five editorial boards, the Series Editor for Routledge’s ‘The Law Relating to
Financial Crime’ and Co-series Editor for ‘Risky Groups and Control’ for Palgrave
MacMillan.
Ms Nadia Saleh, LLB (Hons) (Durham); Solicitor to the Supreme Court of England
and Wales. Nadia is a Senior Associate at the London office of K&L Gates LLP. She
concentrates her practice on insolvency and restructuring, working on both contentious
and non-contentious matters.
Professor Cindy A. Schipani, JD (Chicago); BA (Michigan). Cindy is the Merwin H.

Waterman Collegiate Professor of Business Administration and Professor of Business
Law at the University of Michigan Ross School of Business. She has held visiting
appointments at the University of Michigan Law School, University of International
Business and Economics in Beijing, University of Political Science and Law in Beijing,
the University of Sydney Faculty of Law and Flinders University of South Australia.
Her primary research interests are in the area of corporate governance, with a focus on
the relationship among directors, officers, shareholders and other stakeholders. She also
serves as an expert in corporate governance in litigation involving issues of fiduciary
duties.
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Contributors xxv
Ms Chiara Spector-Naranjo, JD (Georgetown). Chiara is an attorney with the firm

Lewis Baach PLLC and is licensed to practice law in New York and Washington DC.
Chiara’s practice is focused on commercial litigation and complex international
disputes. In the private sector, she has represented domestic and foreign clients in a
wide variety of cross-border corporate and litigation matters involving financial frauds,
sophisticated financial products, money laundering, international insolvency and inter-
national discovery.
Mr Christopher Stears, LLB (Hons); LLM; Chartered MSCI; Solicitor of the

Supreme Court of England and Wales. Chris is a solicitor, academic and member of the
Chartered Institute for Securities & Investment. He is a founding director of the CCP
Research Foundation CIC and consultant legal counsel specialising in legal risk,
financial regulation and compliance, company/commercial law and corporate finance,
having formally practised at City law firm Reynolds Porter Chamberlain LLP. Chris is
also a Visiting Lecturer in Law at BPP University and a PhD candidate at the Institute
of Advanced Legal Studies, researching the legal risk profile of asset/wealth manage-
ment services.
Chris has authored/contributed to various academic and practice-focused publica-
tions; is Editor-in-Chief of the IALS Student Law Review; and Consultant Contributor
on the Law and Practice relating to Financial and Corporate Risk for the Company
Lawyer. Chris has also spent time as Visiting Scholar at the Levin College of Law,
University of Florida and with the Law Commission assisting with its project on
fiduciary duties of investment intermediaries.
Ms Emma Stuart-Smith, BA (Bristol); Barrister (England and Wales). Emma is a

barrister at 25 Bedford Row specialising in all areas of criminal defence and extradition
law. Her practice includes representing those charged with dishonesty offences and
offences of fraud. She was instructed by the Serious Fraud Office as a disclosure junior
in Tchenguiz v Director of the Serious Fraud Office. She has represented people facing
extradition requests to both category 1 and 2 countries in the Magistrates’ Court and the
High Court.
Mr Mark R.C. Sutherland, LLB (Hons) (Exon); LLM (Hons) (Cantab); Barrister-at-
Law (Hong Kong). Mark is a Barrister-at-Law of the High Court of Hong Kong and is
called to the Bar at The Honourable Society of the Middle Temple. Mark’s practice
includes civil and criminal litigation. Mark served as a member of the Board of Review
constituted pursuant to the Inland Revenue Ordinance (Chapter 112 of the Laws of
Hong Kong) for nine years from 2006 to 2015. Mark is a Fellow of the Chartered
Institute of Arbitrators and a member of the Hong Kong Institute of Arbitrators and an
Accredited Mediator. Mark is a contributing editor of Hong Kong Civil Procedure or
the Hong Kong White Book. Mark is also a Fellow of the Hong Kong Institute of
Directors and a non-executive Director of Vision First, an independent non-
governmental organisation which seeks to improve the livelihood of refugees in Hong
Kong. Mark also holds a Diplôme d’Etudes en Droit Privé Français from the Université
d’Aix-Marseille in France. Mark was awarded the Henry de Bracton Law Prize for best
performance by the University of Exeter and the Thomas Warraker Scholarship by
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xxvi Research handbook on international financial crime
Trinity Hall, University of Cambridge. Mark is a Liveryman of the Worshipful

Company of Scriveners.
Professor Hans Tjio, MA (Cantab); LLM (Harv); Barrister (England and Wales);
Advocate & Solicitor (Singapore). Hans is a Professor of Law at the National
University of Singapore and Co-Director for its Centre for Banking & Finance Law. He
has written and edited books on securities regulation and trust law, and is a contributor
to Palmer’s Company Law (Geoffrey Morse ed.). He was previously seconded to the
Monetary Authority of Singapore and the Ministry of Law. He is presently serving on
the Securities Industry Council, and is a consultant with Linklaters Singapore. He was
a Visiting Scholar at Stanford’s Program on International Legal Studies and Mel-
bourne’s Centre for Corporate Law and Securities Regulation.
Professor William Tupman, BA (Exon). Bill is Visiting Professor of Criminal Justice

at BPP University. He is also a research fellow at Anglia Ruskin University in
Cambridge. He retired from Exeter University in 2005 and retains an Honorary
Fellowship there. He was Director of the Centre for Police Studies at Exeter and has
been involved with the Symposium on Economic Crime for many years. He publishes
on terrorist financing, organised crime and cross-border police response.
Mr Mark Turkington, BA (UNSW); MSocSci (RMIT). Mark is a senior compliance

professional within a top tier international bank, with global responsibility for the
effective implementation of financial crime countermeasures. Mark is also responsible
for ensuring that appropriate regulatory and other legislative obligations are met within
the bank. Mark has over 15 years’ financial services experience across a diverse range
of organisations and roles within the industry. More recently, Mark has been accepted
by Deakin University as a part-time PhD candidate conducting research on the
engagement of the private sector financial institutions in global measures to combat
financial crime.
Professor Adrian Walters, MA (Cantab); Solicitor of the Supreme Court of England

and Wales. Adrian is the Ralph L. Brill Professor of Law at the Chicago-Kent College
of Law, Illinois Institute of Technology and a Visiting Professor at Nottingham Law
School, Nottingham Trent University, where he was formerly the Geldards LLP
Professor of Corporate and Insolvency Law. He is co-author (with Malcolm Davis-
White QC) of Directors’ Disqualification and Insolvency Restrictions (Sweet &
Maxwell, 2010) and a contributor to Lightman & Moss, The Law of Receivers and
Administrators of Companies (Sweet & Maxwell, 5th edn, 2011).
Mr Colin Wells, MA (Warwick); Barrister (England and Wales). Colin is a senior

barrister at 25 Bedford Row, London specialising in defending individuals and
corporations accused of financial crime, both in the UK and abroad (with cases
covering Azerbaijan, Canada, Dubai, Hong Kong, the Isle of Man, Ireland, Malta,
Mauritius, Nigeria, Poland, Seychelles, Spain, Switzerland, Tanzania, Ukraine and the
US). He has appeared in a number of reported cases including the Supreme Court
fraud/extradition case of R v Brian O’Brien [2014] UKSC 23.
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Contributors xxvii
He co-authored Fraud: A Practitioner’s Handbook (Bloomsbury, 2014) and contrib-

uted to Fraud: Law, Practice and Procedure (Lexis Nexis, 2014). He is a regular
speaker at domestic and international conferences on fraud topics including the 2014
Sentencing Guidelines.
Ms Li Hong Xing, BSc (PUMC, China); BA (Beijing University); CPSE (PRC); MBA
(ARU); FRSA. Ms Li Hong Xing is a Lecturer in Law and Programme Leader in
Chinese Business and Finance Law at BPP University. She is also a Guest Lecturer at
the University of Cambridge and a Freeman of the City of London.
She was a consultant to the law firm Beachcroft LLP in the City of London and has
also served as a consultant to the Supreme People’s Procuratorate in China. She is the
Overseas Director of the annual Cambridge Symposium on Economic Crime and
Deputy General Editor of the Journal of Financial Crime and the Journal of Money
Laundering Control. She is also a Research Director at the Centre for International
Documentation on Organised and Economic Crime (CIDOEC). She has published a
number of books, reports and articles on issues relating to financial crime and
corruption in particular.
Dr Zhen Ye, LLB (Jilin University); LLM (Lond), MPhil, PhD (Cantab). Zhen’s
academic research has focused on the law and its administration in China relating to
insider dealing and market abuse, financial and securities regulations and corruption.
She has worked for several law firms, including UK LAW, Rustem Guardian LLP,
Jungian & Gongcheng Law Firm, as well as international organisations such as the
International Association of Anti-Corruption Authorities. She has also lectured at the
University of Cambridge and at BPP University.
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Foreword: some reflections on the evolution of

economic and financial crimes
Michael Levi1
DEFINITIONS AND A TYPOLOGY OF FINANCIAL CRIME

HARMS
‘Financial crime’ is normally not a legal but rather an administratively functional
category and has been growing in use, especially in OECD countries, though in
continental Europe and parts of Africa, ‘economic crime’ is more commonly used and
overlaps extensively.2 A lightly grounded paper by the IMF (2001: 3) defines it very
broadly beyond economic crime or crimes in the financial sector, prefiguring the
extension of money laundering offences to the proceeds of all crimes for financial gain:
Financial crime, which is a subset of financial abuse, can refer to any non-violent crime that
generally results in a financial loss, including financial fraud. It also includes a range of
illegal activities such as money laundering and tax evasion. Money laundering refers to
activities involving the processing of criminal proceeds to disguise their association with
criminal activities.
At the 11th UN Crime Congress, the UNODC (2005: 1) adopted a fairly protean view:
‘[E]conomic and financial crime’ refers broadly to any non-violent crime that results in a
financial loss. These crimes thus comprise a broad range of illegal activities, including fraud,
tax evasion and money-laundering. The category of ‘economic crime’ is hard to define and its
1
Michael Levi, PhD, DSc (Econ.), Professor of Criminology, Cardiff University.
Levi@Cardiff.ac.uk.
2
The major developing country with a reputation for fraud, Nigeria, calls its central agency,
established in 2004, the Economic and Financial Crimes Commission, though the difference
between ‘economic’ and ‘financial’ is not elaborated. To some extent this is semantic pedantry,
as issues of jurisdiction are often set out in legislation. It may be that ‘economic’ is seen as
wider than ‘financial’, since it might cover agricultural, industrial and service sector corruption,
scams and environmental crimes that go beyond the financial services frauds (contrary to s.419
of the Nigerian Criminal Code) for which Nigerians have long enjoyed an unenviable reputation
worldwide. The UK Treasury and Financial Services Authority had ‘financial crime’ sections,
reflecting their remit for financial services. (Though in mid-2015, the Treasury refined this into
Financial Sanctions and Anti-Money Laundering and Terrorism Finance, and the Financial
Conduct Authority has simply ‘Enforcement and market oversight’ and ‘Risk and compliance
oversight’ divisions, so ‘financial crime’ has vanished from history.) The City of London police
– the ‘lead force’ for fraud investigations in England and Wales – calls its unit the ‘Economic
Crime Department’ and the National Crime Agency – created in 2012 – places its fraud work
within the ‘Economic Crime Command’.
xxviii
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Foreword xxix
exact conceptualization remains a challenge. The task has been further complicated by rapid
advances in technology, which provide new opportunities for such crimes.
In addition to its central role in the UN Convention against Corruption and further
anti-corruption efforts, the main component in the UN’s construct of economic crime
appears to be fraud and identity-related crime (UNODC, 2011).
The growth of financial crime as a term reflects the extension of the crime control
functions of states internationally under the pressures of ‘mutual evaluation’, a key part
of which is the consequent superintending (or ‘responsibilisation’) of the private sector
against ‘crimes of globalisation’ (Favarel-Garrigues et al., 2011; Levi and Gilmore,
2002; Levi, 2010). Collectively, other terms used to package these diverse activities
include ‘threat finance’ (Levi, 2010) or ‘illicit finance’, chosen by HM Treasury in the
UK, and ‘Terrorism and Illicit Finance’, for the US Treasury.
Prior to the 21st century, to the extent that the term was used at all, ‘financial crime’
meant just fraud and, later (from the late 1980s), money laundering. Indeed, the
administrative agency created in 1990 as part of the US Treasury to process reports
from banks on large currency deposits, cross-border cash and wire transfers, and others
required under the Bank Secrecy Act 1970 and money laundering legislation, was
called the Financial Crimes Enforcement Network (FinCEN). However, its scope and
that of the criminal law and financial services/corporate regulation have been expand-
ing at frequent intervals since the 1990s. ‘Financial crime’ now includes:
1. frauds of different types with different victims (from wealthy corporates and High
Net Worth Individuals to the very poor and from very rich to very poor
governments);
2. ‘market abuse’ such as insider dealing/trading (which covers a range from corrupt
relationships between investors and insiders to giving talks about company
prospects to some important analysts before releasing results to the general
market);
3. money laundering (of all crimes, increasingly including tax fraud3);
4. financing of terrorism (mostly since 2001) and (since 2008) of Proliferation
Financing, including Weapons of Mass Destruction (WMD); and
5. transnational bribery (usually by corporates paying public officials in developing
countries, but also in their own – wealthy or poor – countries).
Some of these offences – like fraud – are longstanding, though even there, legislative
changes have been needed (as is the case with the Fraud Act 2006 in the UK, excepting
Scotland where common law currently is retained), for example to cope with
3
Though countries vary substantially in how they define ‘tax fraud’. Switzerland for
example restricts it to active deception (e.g. falsification of data in tax submissions made to it),
excluding omissions and non-reporting of tax obligations elsewhere. So if someone with a Swiss
account does not need to file tax documents in Switzerland, they cannot commit tax fraud there
and cannot normally be extradited for this. On the other hand, since 2008, there has been a great
deal of international action on mutual cooperation in tax matters and in withholding tax
arrangements, though these too are subject to sophisticated avoidance mechanisms. See de
Willebois et al. (2011), Sharman (2011) and Shaxson (2011) for good contemporary analyses.
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xxx Research handbook on international financial crime
computer-enabled crimes. Others are new since the 1980s (such as insider dealing/
trading and money laundering); while others still typically are only a few years old or
are in a process of major adaptation (like financing of terrorism and nuclear
proliferation, and transnational bribery). In addition, offences involving Intellectual
Property can be treated as part of ‘financial crime’, if only via their role (with all other
offences) as part of the ever-extending list of ‘predicate crimes’ for money laundering
offences. Indeed, to the extent that most crimes for gain lead to concealment or
transformation of some proceeds, it is arguable that all such crimes ipso facto become
‘financial crimes’ and thereby those who facilitate them and the movement of moneys
from them are liable to increased risks of ‘criminalisation’, at least in principle. It may
be useful to regard ‘financial crime’ and its sub-sets – ‘money laundering’ and
‘corruption’ – as floating signifiers, a moral category of illicit capitalism which
contains whatever pressure group politics succeeds in placing therein. An almost
universal core component of this is the passage of criminal laws and regulatory
processes meeting evolving Financial Action Task Force (FATF) criteria. For example,
anti-money laundering legislation (AML) must now cover both tax evasion and the
financing of WMD proliferation (FATF, 2012).
Although the pressure to show evidence of harm reduction from control measures is
an especially British development, paralleled in Australia, the Netherlands, Sweden and
some other parts of the EU (and the European Commission itself), ‘crime control’ is
often a matter of expressing values rather than science (or pseudo-science) in many
parts of the globe. Even in those countries where evidence-based policing is not a
mantra, however, some performance data are called for, though countries struggle to
utilise sensibly their analytical value as proxies for effectiveness. The FATF and
FATF-style evaluations ask countries to show evidence of performance in AML by the
number of criminal laundering prosecutions. The easiest way to please the evaluators is
to prosecute more self-laundering cases and thus increase recorded ‘money laundering’
and ‘financial crimes’. Halliday et al. (2014) were rather critical of the Third Round
FATF evaluation process, likening it at times to the Tsarist Potemkin Villages in which
an appearance of compliance and formal structures were often sufficient to impress and
to get a good compliance score. It remains an open question to what extent this will
change in the more reality and outcome-focused Fourth Round using the significantly
revised FATF (2013) Methodology. What is clear is that the majority of countries have
begun already to experiment with National Risk Assessments based around this
evaluation process.
There have been few attempts to develop a coherent policy for all the disparate acts
that fall under the umbrella term ‘financial crime’, nor is there any obvious prioritisa-
tion outside acts regarded as important for ‘national security’ and the interests of
corporate capital, such as protection from (primarily Iranian) financing of nuclear
proliferation and from broader state-sponsored attacks on corporate/national infrastruc-
ture cybersecurity. The control of at least some of the offences in the five sub-
categories above has become the responsibility of national regulators of financial
services and (at least in Europe, where regulation is broader) of the professions, often
termed ‘gatekeepers’ (Gilmore, 2011). Curiously, this regulatory remit excludes most
frauds by volume, since in the UK, for example, only those committed against or by
regulated firms that achieve the undefined category of ‘significant’ are in scope, and
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Foreword xxxi
even there, nothing is known about the follow up to such reports. The criminalisation of
transnational (and sometimes national) bribery affects banks directly via risks (should
they fail to report any suspicions they may have) of money laundering charges (1)
against their own individual Money Laundering Reporting Officers (who are required
by regulators to be appointed and approved by them as part of the ‘responsibilisation
process’) and (2) perhaps against the banks themselves. It also affects banks indirectly
because of the risks (however remote in practice) that companies to whom they have
lent money might be damaged by severe penalties should they be convicted of
corruption. The implications of these developments are important. When senior staff on
the best-selling UK tabloid newspapers The Sun and the (now closed) News of the
World were arrested and accused of bribing the police and other public officials, this
created global risk for the Murdoch News International corporation in the US under the
extra-territorial provisions of the Foreign Corrupt Practices Act 1977 (FCPA) in ways
that were doubtless not envisaged by the media staff if and when they ‘bought’ the
information for the stories.
As used in different countries, ‘financial crime’ and ‘economic crime’ comprise
crimes with different categories and levels of harm, committed by and impacting upon
highly diverse sectors of the population. Their sub-components are investigated (and
investigatable) by very different policing and regulatory methodologies both before and
after ‘crime’ commission. Because of this, it is difficult to see what purposes the terms
serve except to differentiate them from street and household crime and, unintentionally
perhaps, to obfuscate which resources are being given to or withheld from investigating
particular sorts of activities. Close analysis by Gannon and Doig (2010) detailed the
unannounced drift of investigative attention in England and Wales from serious fraud to
the financial assets of general criminals within the overall rubric of ‘financial
investigation’ (though this was partly counter-balanced by the employment in the UK
of civilians, often ex-police, as financial investigators). This is paralleled with the drift
in resource in banks from fraud structures within compliance to financial crime
departments that also may deal with money laundering and sanctions. Money launder-
ing offences can arise in principle from drugs trafficking or from any crime for gain,
including all forms of fraud; terrorist financing and the financing of proliferation can
come from both licit and illicit sources, and primarily probably come from licit sources
(including, but by no means restricted to, countries like Iran that are defined as ‘rogue
states’). As a legal category, ‘laundering’ does not enable us to distinguish between
professional money launderers, people who launder money from their own crimes (like
burglars putting money into their own bank accounts in their own names), and banks
who intentionally or recklessly ignore their obligations to report suspected money
laundering or who turn a wilfully blind eye to ‘smurfing’ by customers to fall below the
$10,000 reporting threshold in the US and the €15,000 threshold in the EU, which will
fall to €10,000 under the Fourth Money Laundering Directive.4
4
To give some idea of the scale and potential consequences, in 2010, Wachovia Corp. –
which by then had merged with Wells Fargo Bank in the aftermath of the financial crisis –
agreed in a deferred prosecution agreement to pay $160 million in forfeitures and fines for
allowing the laundering of at least $110 million in drug proceeds. US federal prosecutors had
accused it of ‘willfully’ overlooking the suspicious character of more than $420 billion in
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xxxii Research handbook on international financial crime
A particular practical complication is that although we normally conceive of

victim–offender or consensual crime relationships – whether violent or for financial
gain – as occurring within countries, many significant financial crimes (not just
cybercrimes) occur between people in different legal jurisdictions, at least at some
stages in the criminal supply chain, from production/planning to money laundering. We
therefore need a greater breakdown of sub-types to make sense of these acts, which
also are problematic to capture in national crime and justice statistics, that are
important signals to society of the moral state of the nation and need to be modernised
to take account of these developments in the forms of crime. Let us briefly set out the
interests affected by different sorts of financial crime in the context of reactions to
them.
CRIMINALISATION AND DOMESTIC AND INTERNATIONAL

POLITICAL PRESSURES
The link between globalisation and crime often lacks clarity (Karstedt, 2012), nor is
internationalisation of trade or crime as new as is sometimes claimed. However, one of
its consequences is to call into question the autonomy of national law-making. Crimes
of any kind are the product of a political process, but the politics of crime creation and
enforcement in the ‘new crimes of globalisation’ raise particularly interesting issues.
Other countries apply pressure – as they have always done militarily and politically – to
accommodate to their interests and their legal protections. After the Robber Baron era
of the 19th century in the US, there have been sustained pressures to criminalise
transnational bribery and cartels in the interest of market cleanliness and fair com-
petition. Yet different legal traditions, cultural/ideological forces and constellations of
interests play themselves out in different ways. The US criminalised cartels in the
Sherman Act 1890; it took over a century for the UK government to be persuaded that
transactions between the bank and Mexican currency-exchange houses. Details of the agreement
are given at http://www.justice.gov/usao/fls/PressReleases/100317-02.html. The rhetoric of the
press release of this agreement is interesting. US Attorney Jeffrey H. Sloman stated, ‘On the
heels of the UBS international banking case, in which we held accountable the largest bank in
Switzerland, today we announce the deferred prosecution of Wachovia, one of the largest banks
in the United States. Wachovia’s blatant disregard for our banking laws gave international
cocaine cartels a virtual carte blanche to finance their operations by laundering at least $110
million in drug proceeds. Corporate citizens, no matter how big or powerful, must be held
accountable for their actions. Today’s historic agreement makes it clear that such conduct will
not be tolerated and imposes the largest penalty in any BSA case prosecuted to date.’ For media
reports see, inter alia, http://www.guardian.co.uk/world/2011/apr/03/us-bank-mexico-drug-
gangs?CMP=twt_fd and http://articles.latimes.com/2011/nov/27/world/la-fg-mexico-money-
laundering-banks-20111128. In December 2011, Wachovia settled a further deferred prosecution
agreement with the anti-trust division of the Department of Justice in relation to bid-rigging
scams. ‘Fortunately’, the 12 month probationary period of the failure to institute proper AML
procedures agreement had lapsed by then, or the (ex) bank would have had to be prosecuted,
with consequences that it might have to be closed, certainly after conviction. A set of other
banks – including, most famously, HSBC – were later the subject of monitorships, settlements
and Deferred Prosecution Agreements.
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Foreword xxxiii
this offence against capitalist level playing field principles merited criminalisation, in
the Enterprise Act 2002, something that is still not an accepted approach in continental
Europe.5
Money laundering and insider trading were not criminal offences in Europe before
the late 20th century: again the US led the way, with the UK following, and other
countries came in their wake. The counterfeiting of Intellectual Property has become a
much more significant economic issue since the 1980s, with the rise of global brands
and the development of digital copying and mass production techniques, though some
countries have long prohibited false labelling in addition to currency counterfeiting.
However, the global criminalisation of such ‘piracy’ has been a more tentative and
controversial area, touching upon everyday activities such as file sharing that are not
seen as ‘truly criminal’, especially not by younger people.
In countries such as the UK (and indeed the EU as a whole), Regulatory Impact
Assessments have to be made when legislation is presented, and the public has to be
‘prepared’ by lobbying campaigns involving estimates of harm as well as appeals to
values. An important role is played in this struggle by data – however poorly evidence
based – about harmfulness of the activity, which gains media purchase and usually
gives an advantage to advocates of change. Thus, advocates of tough responses to
Intellectual Property violations seek to rebrand those activities as ‘copyright theft’ and
(like credit card issuers) to increase their perceived harm by associating them with
‘organised crime’ and ‘terrorist finance’. The music and film industries – as well as
heavy R & D sectors such as pharmaceuticals – have lobbied hard for the reprioritisa-
tion of such acts as ‘real crimes’, and both President Obama and UK ministers have
stressed the centrality of protecting Intellectual Property to the economic prosperity of
their countries.6 An industry and government-financed police unit has been set up
within the City of London police economic crime department. Similarly, with regard to
cybercrimes, a report by technology firm Detica, badged alongside the Office of Cyber
Security in the Cabinet Office, typically noted that its (in fact imaginatively high
guesstimated) data were at the low end of the probable range (Detica and Office of
Cyber Security and Information Assurance 2011):
In our most-likely scenario, we estimate the cost of cyber crime to the UK to be £27bn per
annum. … In all probability, and in line with our worst-case scenarios, the real impact of
cyber crime is likely to be much greater. Although our study shows that cyber crime has a
considerable impact on citizens and the Government, the main loser – at a total estimated cost
of £21bn – is UK business, which suffers from high levels of intellectual property theft and
espionage. Businesses bearing the brunt of cyber crime are providers of software and
computer services, financial services, the pharmaceutical and biotech industry, and electronic
and electrical equipment suppliers.
5
This criminalisation was encouraged by the US authorities, keen to find a route for
extradition to the US of UK residents involved in price-fixing and other business violations.
6
Though the Congressional debates in early 2012 over failed proposals in the Stop Online
Piracy Act and the PROTECT IP Act to penalise websites and Internet Service Providers that
allow Intellectual Property protected material to be downloaded revealed that the financial and
cultural power of the ‘new networked media’, combined with consumer hostility to high-priced
music and movies, could triumph over the traditional Hollywood and media pressure groups.
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xxxiv Research handbook on international financial crime
The cybercrime cost data did not impress the specialist computer press, but became
‘facts-by-repetition’ via their reuse in political speeches. A later study co-authored by
this writer heavily critiqued this effort (Anderson et al., 2012), but subsequent
cyber-attacks and revelations about their sources in China and Russia (as well as in
Western countries) have illustrated that the scale of risk is very high, whatever the
disputed figures in any one year.
The heightened political profile of fraud, scandal and allegations of conflicts of
interest played a much more prominent role in influencing legislation since the 1980s
than earlier in the 20th century in the UK, though not necessarily in the US, given New
Deal responses to the Wall Street Crash of 1929 and the subsequent economic crisis.
CONCLUSIONS
In a profound early study, Aubert (1952: 263) argued that the ambiguity of white-collar
crime and its control was a stimulant to be analysed rather than to be definitionally
resolved by fiat. He added:
One main obstacle to the development of a fruitful theoretical orientation is to be found in the
tendency to treat criminal behavior, on the one hand, and the system of legal sanctions, on the
other, as two separate problems. In our opinion, crime and punishment are most fruitfully
handled as two aspects of a group process or two links in a specific type of social interaction.
Despite their growing use as terms, it is not sensible to take ‘financial crimes’ or
‘economic crimes’ as a singular category for analytical or policy purposes, and we
might be better served by breaking them up into clearer areas of criminal activity. So
what purposes does the phrase serve? ‘Financial crime’ is largely a term of political and
bureaucratic convenience. The analysis above illustrates that there are a multitude of
political and economic pressures that lead to the criminalisation of various forms of
what might be termed white-collar and organised crimes that fall under this single
label. These pressures are often reactions to national scandals or international events
(like the Global Financial Crisis), or to national/international mobilisations of non-
governmental organisations and intergovernmental bodies, including constitutionally
informal ones like the FATF. The economic imperatives of competition between nations
for business and professional elites to locate there may have to be balanced against
efforts by political elites to shore up their legitimacy, for example after corruption or
egregious tax scandals such as those involving Luxembourg in 2014. These pressures
mean that the responses to various ‘financial crimes’ differ between jurisdictions.
To conclude, both in the forms of financial crime often labelled separately as
‘organised crime’ and ‘white-collar crime’, there are many overlaps and convergences
which are reflected in their policing, sometimes by accident and sometimes by design.
But it is important to look analytically at what forms of serious crime for gain are being
targeted, by whom and using what methodologies. So far, the convergence in methods
of policing fraud and policing organised crime targets principally the drift by ‘the usual
suspects’ into fraud and Intellectual Property crimes and their tracking by police using
financial investigations, data from AML Suspicious Activity Reports and other recent
techniques of data warehousing and network analysis. These changes do not represent a
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Foreword xxxv
radical shift towards reprioritising elite frauds and Grand Corruption over ‘the usual
crimes’, but they do represent varying attempts by modern governments and policing/
regulatory institutions to manage emerging public threats to individuals, business and
government without imperilling conventional law and order issues.
Professor Barry Rider, personally, and the annual gatherings at the Economic Crime
Symposium, some fruits of which are represented in this handbook, have played an
important role in identifying and managing these profound social risks. It is a
depressing fact that the conclusions of my study of problems in fraud trials for the
Commonwealth Law Ministers Conference in 1982, arising from discussions with
Professor Rider at the earliest Economic Crime Symposia, might still be applied today,
though with additional complications from electronic and mobile phone evidence that
(like those products themselves) did not exist in 1982. One of the effects of the AML
and anti-corruption movement has been to generate far more similarity in national
legislation and mutual legal assistance than would have occurred otherwise, but the
impact of this on international asset freezing and recovery remains a work in (slow)
progress. Quo vadis? Predicting the past is far easier than predicting the future! But this
volume reflects the worthy efforts of some in the international community to grapple
with Global Bads, which it would be more realistic to see as aiming to reduce harm
than to eliminate it altogether. But first, we need to work harder on how we can judge
whether things are truly improving or getting worse, and that requires both collective
action and collective thought. This handbook represents a stage along that long road.
REFERENCES
Anderson, R., Barton, C., Bohme, R., Clayton, R., van Eeten, M. Levi, M., Moore, T. and Savage, S. (2012)
‘Measuring the cost of cybercrime’, http://weis2012.econinfosec.org/papers/Anderson_WEIS2012.pdf.
Aubert, V. (1952) ‘White-collar crime and social structure’, American Journal of Sociology, 58 (3):
263–271.
Detica and Office of Cyber Security and Information Assurance (2011) The Cost of Cyber Crime: A Detica
and Cabinet Office Report in Partnership with the Office of Cyber Security and Information Assurance in
the Cabinet Office, http://www.baesystemsDetica and Cabinet Office.com/uploads/resources/THE_
COST_OF_CYBER_CRIME_SUMMARY_FINAL_14_February_2011.pdf.
FATF (2012) International Standards on Combating Money Laundering and the Financing of Terrorism and
Proliferation: The FATF Recommendations, Paris: Financial Action Task Force.
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iveness of AML/CTF Systems, Paris: Financial Action Task Force.
Favarel-Garrigues, G., Godefroy, T. and Lascoumes, P. (2011) ‘Reluctant partners? Banks in the fight
against money laundering and terrorism financing in France’, Security Dialogue, 42 (2): 179–196.
Gannon, R. and Doig, A. (2010) ‘Ducking the answer? Fraud strategies and police resources’, Policing and
Society, 20 (1): 39–60.
Gilmore, B. (2011) Dirty Money, Strasbourg: Council of Europe Press.
Halliday, T., Levi, M. and Reuter, P. (2014) Global Surveillance of Dirty Money: Assessing Assessments of
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IMF (2001) Financial System Abuse, Financial Crime and Money Laundering – Background Paper,
Washington DC: International Monetary Fund.
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Levi, M. (2010) ‘Combating the financing of terrorism: A history and assessment of the control of “threat
finance”’, British Journal of Criminology Special Issue Terrorism: Criminological Perspectives, 50 (4):
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de Willebois, E., Halter, E., Harrison, R., Park, J. and Sharman, J. (2011) The Puppet Masters: How the
Corrupt Use Legal Structures to Hide Stolen Assets and What to Do about It, Washington DC: The
International Bank for Reconstruction and Development/The World Bank.
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Introduction
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The academy has been slow, if not reluctant, to recognise the importance of studies
related to the commission and consequences of economically motivated crime. Of
course, the significance of misconduct in regard to economic activity has long been
recognised by those concerned with promoting prosperity and stability. Some of the
earliest legal systems have rules that relate to conduct which today we might
characterise as economic crime. Bribery is often condemned in early legal systems, and
as soon as markets develop we find examples of laws designed to ensure the proper
flow of goods to market and that other manipulative practices are forbidden. However,
there has always been a potentially difficult relationship between the laudable wish to
see business and trade expand, driven by the desire for profit, and the distaste of
unmitigated greed. It has taken societies a very long time to resolve the boundaries of
what is acceptable and what might damage the longer term public interest. We also find
a tension in some cases between the proper role of law in curbing conduct which is
regarded as so damaging that the public interest justifies the use of the mechanisms of
the criminal justice system and other situations, where there is proper concern for the
expectations of those engaged in the relevant transaction. A good example of this is the
attitude of English law to what we would today have little difficulty in stigmatising as
the abuse of insider dealing.
The use for one’s own or another’s advancement of information obtained in
privileged circumstances is not always condemned. Indeed, there are arguments that
those who have a responsibility to protect the economic interests of another, such as a
trustee, should not allow their possession of such information to operate to the
detriment of those whose interests they are required to advance. None the less, for
reasons largely associated with the need, in the public interest, to promote and maintain
confidence in the integrity and, thus, the fairness of financial markets, insider dealing
has been a specific and serious criminal offence in the UK since 1980. However, in the
civil law the mere fact that one party to a transaction has superior knowledge, even if
this is improperly obtained, does not necessarily have implications for the transaction
in hand. Hence, the reluctance in most common law systems to accord the ‘victim’ of
insider dealing a remedy. Indeed, it may be argued that in the context of a market
transaction the ‘innocent’ party was a willing trader at the relevant market price and, if
we are looking for victims, it is really the market itself or the person – usually a
company – that ‘owned’ the relevant information or at least had the right to expect that
it would not be misused. Perhaps, given the complexities of law, it is understandable
that the main criminologists, economists and social and business scientists have tended
to steer clear from such issues.
The study of a body of law relating to economically motivated misconduct has still
to be recognised as a discrete subject area by the academy. The fact that it involves a
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mix of civil and criminal law, with an ever increasing contribution from regulatory law
and practice, has not helped within the context of traditional law schools. This is sadly
illustrated by the surprisingly small number of academicians that attend the annual
symposium on economic crime in Cambridge, which to some extent is the inspiration
for this book. The symposium, now in its thirty-third year, attracts well over 1,600
specialists from around the world. As we have already hinted, given the topic is seen as
a difficult one for traditional lawyers, with very few exceptions the criminologists have
fought shy of it. Indeed, a few years ago one of the world’s leading institutes in
Cambridge went on record as saying that it was not interested in economic crime as a
topic for research and development. Even more surprisingly, given the implications that
attempts to control financial misconduct have in terms of legal, regulatory and
reputation risk for those who run businesses, the business schools have also been most
diffident in regarding economic crime as a subject worthy of their attention. Given the
impact that, in particular, regulatory sanctions have had on financial institutions, this is
indefensible. None the less, those that do attempt to consider from an intellectual
standpoint the various issues relating to the incidence, prevention and control of
economically motivated crime, and especially financial crime, are few in number
seemingly in every jurisdiction.
This is not to say that those who practise law, accountancy and compliance, or who
are more directly involved in enforcement and/or supervision, cannot and do not make
a very real contribution to the discussion and study of these issues. Indeed, it is
arguable that their contribution is all the more significant because it is based on real
experience and incorporates practical relevance. Hence, it should not surprise those
who open the covers of this work to find that almost every contributor, no matter what
their academic credentials might indicate, are or have been privileged to work in the
real world. It is the hope of many of us that bringing together what some might
consider an eclectic collection of material will further stimulate thought and perhaps
aid those who wish to spend more time on the intellectual analysis and development of
this topic. Whether the academy will welcome this remains to be seen! What is
increasingly clear is that those who make, develop and implement policy relating to
these issues will welcome more thought and discussion, and perhaps even constructive
criticism.
This work is not about economic crime as such, but rather a sub-category, namely
financial crime. In practice, little hangs on definition, possibly apart from designing
university courses and the order of material in books such as the present. It is
reasonably accurate to say that all financial crimes are economic crimes in so far as
they will be motivated by the prospect of economic advantage, but not all economic
crimes could sensibly be described as financial crimes. It is always possible to find the
exception – the computer hacker who violates a computer simply as a game, or the
employee who destroys the value of proprietary information out of vengeance – but by
and large most financial crimes will be committed to gain or protect an economic
advantage. This is so even in the case of terrorist related finance. In the context of this
work on financial crime, in a rather inexact manner, we attempt to refer to those
economically motivated abuses and crimes which occur primarily in a financial setting.
Of course, in placing such activity in its usual context, and in particular when
considering its control and interdiction, then it is often that we return, inevitably, to a
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Introduction xxxix
wider view. Therefore, we make no apology for the fact that a proportion of this work
would be equally at home in a collection of material devoted to the discussion of
economic crime.
We have attempted to be as catholic as possible in the range of offences and forms of
misconduct that we discuss and to do this as widely as possible in terms of different
legal systems and traditions. Economic crime does impact on the security and stability
of all states, but its implications can, in different ways, be more serious for developing,
transition and especially small states. Therefore, we have included material which
relates to developmental issues and, in particular, to vulnerable states. We have also
placed emphasis on financial crimes that are essentially facilitative of other criminal
conduct. Corruption is not an end in itself. Officials are bribed to advance an illicit or
improper interest. Those who engage in money laundering do so to hide the proceeds of
other crime or facilitate the continuation of a criminal enterprise. These facilitative
financial crimes are treated in some depth and breadth given their practical significance
in terms of risk and control.
Mention has already been made of the role played in fighting misconduct through
regulatory intervention by non-traditional law enforcement agencies and, in particular,
financial regulators. Possibly, this aspect to the control of financial crime has the
highest profile given the dramatic fines and penalties that are being imposed by
regulators, especially in the USA and UK, for misconduct in relation to the observance
of economic sanctions and failures in their compliance systems on banks and other
financial institutions. However, the use of essentially injunctive civil enforcement
actions against those engaged in other forms of financial crime and fraud has a long
history in the USA and has proved to be relatively effective. We consider the use of
civil enforcement, particularly in the context of issues such as market abuse, not only as
an alternative to traditional law enforcement action, but also in aid of it. For similar
reasons, we also include material relevant to the role of the civil law in cases of fraud
and other types of misconduct where a compensatory or restitution remedy is
appropriate. Too many discussions relating to the control of fraud and financial crime
fail to give proper attention to the significance of both civil enforcement and civil
liability. In terms of risk exposure, those running financial institutions are more likely
to be concerned about these issues than about the often-unlikely prospect of a criminal
prosecution. For similar reasons, we also include a significant amount of material on
governance, compliance and audit. Systems designed to prevent financial crime, or at
least minimise its consequences, are of perhaps even greater importance than attempt-
ing to shut the stable door after the horse has bolted.
In advising on the selection of material for this book, I would like to express
appreciation to Mr Saul Froomkin OBE, QC, Sir Kenneth Warren and Dr Ye Feng. Saul
is a former Director of Criminal Law of Canada and Attorney General of Bermuda and,
perhaps for our present purposes, more importantly, the chairman of the annual
Cambridge symposium on economic crime for 32 of the last 33 years. Sir Kenneth
Warren, as one of the most influential chairmen of the House of Common’s Select
Committee on Trade and Industry, focused on a number of issues relating to the dark
side of business and the City and in the deliberations of his committee raised, often for
the first time, many of the issues addressed in this work. Dr Ye Feng was until very
recently Director General of the Supreme Peoples Procuratorate of China and Secretary
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xl Research handbook on international financial crime
General of the International Association of Anti-Corruption Authorities and Vice

Chairman of the International Association of Prosecutors. More than any other official,
Ye Feng has opened the legal door to China and has laid the foundations for a level of
international co-operation and mutual assistance that even ten years ago would have
been thought impossible. We would also like to express deep appreciation for all the
help and assistance given to us in the planning and editing of this work by Ms Ingrida
Kerusauskaite, of the Centre for Development Studies of the University of Cambridge,
and Ms Li Hong Xing, of BPP University. Without their constant advice and support,
the many diverse strands of this book would never have been brought to the order that
they have.
Given the diversity of material in this work and the number of jurisdictions that are
covered, it would be very brave to assert the law in all respects is accurate as of a
certain date. All that I can say is that we have attempted to ensure that the law and its
analysis are as accurate and timely as is practicable in a publication of this nature.
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Table of cases
EUROPEAN COURT OF HUMAN RIGHTS

Al-Saadoon and Mufdhi v UK .................................................................................................... 652
Michaud v France ....................................................................................................................... 534
Saccoccia v Austria ..................................................................................................................... 538
Saunders v UK (1997) .................................................................................................................557
INTERNATIONAL CRIMINAL COURT

Lubanga................................................................................................................................... 677–8
NATIONAL CASES
Australia
ACCC v Boral ..................................................................................................................... 131, 135

ACCC v Visy Industries Holdings ............................................................................................... 143
Alexander v Perpetual Trustees (WA) Ltd................................................................................... 331
APRA v Ceridale Pty Ltd ............................................................................................................ 135
Australian Financial Services and Leasing Ltd v Hills Industries Ltd...................................... 335
Chan v Zachariah........................................................................................................................ 329
Darvall v North Sydney Brick & Tile Co Ltd ............................................................................. 108
Re Dawson .................................................................................................................................. 331
DPP v Camara, Georges, Donka & Anania............................................................................... 373
Farah Constructions Pty Ltd v Say-Dee Pty Ltd................................................................ 333, 335
Gambotto v WCP Ltd .................................................................................................................. 111
Giumelli v Giumelli..................................................................................................................... 334
Grimaldi v Chameleon Mining NL (No 2) ................................................................................. 334
Holmes v Jones............................................................................................................................ 316
Kennison v Daire......................................................................................................................... 373
Re Ling ........................................................................................................................................ 330
Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd...................................................................... 135
Melway ........................................................................................................................................ 135
Pacific Acceptance Corporation Ltd v Forsyth .................................................................. 614, 615
Petty v Penfold Wines Pty Ltd ..................................................................................................... 135
Queensland Wire Industries Pty Ltd v BHP ............................................................................... 135
Rigg v Sheridan........................................................................................................................... 332
Stirling Harbour Services Pty Ltd v Bunbury Port Authority .................................................... 135
Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd.......................................... 135
United Dominions Corporation Ltd v Brian Pty Ltd ................................................................. 329
WA Chip and Pulp Pty Ltd v Arthur Young & Co...................................................................... 615
Westpac Banking Corporation v The Bell Corporation ............................................................. 333
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Canada
Abousfian Abdelrazik v Minister of Foreign Affairs ................................................................... 540

Canson Enterprises Ltd v Boughton........................................................................................... 332
Chatterjee v Ontario (Attorney General).................................................................................... 537
Citadel General Assurance Co v Lloyds Bank Canada ............................................................. 335
Federation of Law Societies of Canada v Canada (Attorney General)............................. 533, 534
Hodgkinson v Simms........................................................................................................... 329, 332
LAC Minerals Ltd v International Corona Resources Ltd ......................................................... 329
Lai Changxing ............................................................................................................................. 664
Law Society of British Columbia v Canada ............................................................................... 533
Rocking Chair Plaza v Brampton ............................................................................................... 339
Cayman Islands
Corporacion Nacional del Cobre de Chile v Interglobal......................................................... 96–7
China
Bo Xilai corruption case .....................................................................................................428, 430

Chen Liangyu corruption case 433–4
Chen Xitong ................................................. corruption case .................................................433–4
Gaochun Taoci............................................................................................................................. 276
GlaxoSmithKine (GSK) corruption case .....................................................................................432
Huang Guangyu .......................................................................................................................... 276
Ji Minbo ...................................................................................................................................... 276
Jiang Jiemin corruption case ......................................................................................................426
Lei Zhengfu indecency case ........................................................................................................430
Li Xugang .................................................................................................................................... 276
Liu Zhijun corruption case ......................................................................................................427–8
Luo Yingguo corruption case .......................................................................................................427
Qin Xuan ..................................................................................................................................... 276
Shenshen Fang............................................................................................................................. 276
Xu Caihou corruption case ..........................................................................................................430
Zhang Shuguang corruption case ................................................................................................427
Democratic Republic of Congo
Argor........................................................................................................................................ 676–7
France
Barilla ..................................................................................................................... 345–6, 351, 352

Bujon et autres v Journal Le Midi Libre .................................................................................... 351
Caron v Odell.............................................................................................................................. 348
LMO v SIIHP .............................................................................................................................. 351
Princess de Bauffremont ............................................................................................................. 346
Société Central Ambulances v Société Ambulances Auxerroises ............................................... 353
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Hong Kong
HKSAR v Boma ........................................................................................................................... 124

HKSAR v Ewan Quayle Launder................................................................................................ 122
HKSAR v Li Kwok Cheung................................................................................... 116, 117, 120–21
HKSAR v Pang Hung Fai........................................................................................................ 122–3
HKSAR v Wong PingShui............................................................................................................ 115
HKSAR v Xu Xia Li & Anor ............................................................................................... 113, 116
HKSAR v Yan Suiling .................................................................................................................. 123
Li Defan v HKSAR .................................................................................................................. 121–2
Libertarian Investments Ltd v Hall............................................................................................. 332
Moulin Global Eyecare Trading Ltd v Olivia Lee Sin Mei........................................................ 110
Nanus Asia Co v Standard Chartered Bank ............................................................................... 740
Oei Hengky Wiryo ....................................................................................................................... 115
Seng Yuet Fong v HKSAR............................................................................................................ 123
Ireland
CAB v Kelly ................................................................................................................. 469
Netherlands
Prosecutor v Van Anraat ............................................................................................. 675
New Zealand
Amaltal Corp Ltd v Maruha Corp.............................................................................. 332

Trevor Ivory Ltd v Anderson ....................................................................................................... 195
Westpac New Zealand Ltd v MAP & Associates Ltd ................................................................. 333
Nigeria
SERAP v Nigeria ......................................................................................................... 673
Rwanda
Kabuga ........................................................................................................................................ 674

Musema ....................................................................................................................................... 675
Singapore
BNP Paribas v Jurong Shipyard Pte Ltd .................................................................................... 109

Re Great Eastern Hotel (Pte) Ltd ............................................................................................... 109
Intraco Ltd v Multi-Pak Singapore Pte Ltd ................................................................................ 108
Sumitomo Bank Ltd v Karitika Ratna Thahir............................................................................. 741
Wu Yang Construction Group Ltd v Mao Yong Hui.................................................................... 108
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South Africa
Barkett v S. A. Mutual Trust & Assurance Co. Ltd .................................................................... 202

F v Minister of Safety and Security ............................................................................................ 198
Feldman (Pty) Ltd v Mall........................................................................................................ 195–6
Fourie v First Rand Bank Ltd ..................................................................................................... 203
K v Minister of Safety and Security............................................................................................ 197
Minister of Defence v Leon Marius von Benecke................................................................... 196–8
National Director of Public Prosecution v RO Cook Properties ............................................... 537
S v Blue Platinum Ventures(Pty) Ltd and Matome Samuel Maponya........................................ 203
S v Coetzee .................................................................................................................. 200–202, 203
UK
A v C............................................................................................................................................ 707
Aberdeen Ry v Blaikie................................................................................................................. 187
Abou Rahmah v Abacha.............................................................................................................. 329
Aerostar Maintenance International Ltd v Wilson ............................................................. 328, 334
AG for Hong Kong v Reid .................................................................................................... 96, 736
Agip v Jackson .................................................................................................................... 318, 742
AIB Group (UK) v Mark Redler & Co ....................................................................................... 332
Re Amaron ................................................................................................................................... 725
American Cyanamid............................................................................................................ 705, 710
Angus v United Kingdom Border Agency................................................................................... 481
Anton Piller KG v Manufacturing Processes ............................................................................. 710
Antonio Gramsci and Alliance Bank JSC v Lembergs............................................................... 104
Armitage v Brewere and Knott.................................................................................................... 614
Armstrong DLW v Winnington Networks.................................................................................... 741
Armstrong v Strain ...................................................................................................................... 354
Arthur v Att-Gen Turks & Caicos ............................................................................................... 334
Attorney General for Hong Kong v Reid............................................................................ 736, 741
Re Austinsuite Furniture Ltd....................................................................................................... 720
Aveling Barford Ltd v Period Ltd ............................................................................................... 107
Aylesford (Earl of) v Morris ......................................................................................................... 23
Bairstow v Queen’s Moat House ................................................................................................ 331
Baker v The Queen...................................................................................................................... 335
Bank of Credit and Commerce International (Overseas) Ltd v Akindele.......................... 334, 335
Bank Mellat v HM Treasury........................................................................................................ 603
Bank of Scotland v A................................................................................................................... 741
Banque Financiere v Westgate Insurance ................................................................................... 317
Re Barings ................................................................................................................................... 720
Barlow Clowes International Ltd (In Liquidation) v Vaughan .................................................. 320
Barlowe Clowes International Ltd v Eurotrust International Ltd ............................. 328, 333, 334
Bartlett v Barclays Bank Trust Co (No 2) .................................................................................. 332
Re Bath Glass Ltd ....................................................................................................................... 721
Bayer AG v Winter ...................................................................................................................... 710
BCCI v Akindele............................................................................................................................ 91
Bishop of Winchester v Knight.................................................................................................... 181
Bisset v Wilkinson........................................................................................................................ 316
Re Blackspur Group .................................................................................................................... 723
BNY Corporate Trustee Services Ltd v Eurosail-UK ........................................................... 109–10
Boscawen v Baywa...................................................................................................................... 319
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Bradford Third Equitable Benefit Building Society v Boarders................................................. 316

Bray v Ford.................................................................................................................................. 182
Brinks Ltd v Abu-Saleh (No 3).................................................................................................... 329
Brinks MAT v Elcombe ............................................................................................................... 707
Bristol & West BS v Mothew....................................................................................................... 329
British Airways Board v Taylor .................................................................................................. 316
Brook v Brook.............................................................................................................................. 346
Brown v Government of Rwanda ................................................................................................ 653
Caffrey v Darby ........................................................................................................................... 332
Car & Universal Finance Ltd v Caldwell .................................................................................. 336
Carpenter v Heriot ........................................................................................................................ 23
Carriers ......................................................................................................................................... 25
Casio Computer Co v Sayo......................................................................................................... 333
Caterpillar Logistic Services Ltd v Huesca de Crean................................................................ 329
Chandler v Lopus .......................................................................................................................... 24
Charitable Corporation v Sutton ................................................................................................ 181
Charter plc v City Index Ltd....................................................................................................... 334
Chaston v SWP Group ................................................................................................................ 108
Chesterfield (Earl of) v Janssen.................................................................................................... 23
Citizens Life Assurance Co. v Brown ......................................................................................... 195
Re City Equitable Fire Assurance Company ........................................................................ 614–15
Re City Pram & Toy Co .............................................................................................................. 721
Clough v Bond............................................................................................................................. 332
Re Copecrest................................................................................................................................ 721
Craven v Knight .......................................................................................................................... 104
Crédit Agricicole Corporation v Papadimitriou ................................................................ 334, 335
Credit Suisse Fide Trust v Cuoghi .............................................................................................. 712
Crown Dilmum v Sutton.............................................................................................................. 333
Crown Prosecution Service v Eastenders Group.................................................................... 456–7
Re Crystal Palace Football Club (1986), Secretary of State for Trade and Industry v
Golberg ............................................................................................................................... 719
Dahabshiil v Barclays................................................................................................... 517–18, 519
Dallison v Caffrey ....................................................................................................................... 556
Re Dawes & Henderson.............................................................................................................. 725
DC, HS and AD v UK ................................................................................................................. 719
De Beers Consolidated Mines Ltd v Howe................................................................................. 194
Derkson v Pillar .......................................................................................................................... 319
Derry v Peek ................................................................................................. 24, 316, 317, 339, 354
Dewani v South Africa ................................................................................................................ 651
D’Hoker v Tritan Enterprises ..................................................................................................... 708
Director of Public Prosecutions v Kent and Sussex Contractors............................................... 202
Doige ............................................................................................................................................. 24
Dutton v Louth Corp ................................................................................................................... 354
Eaves v Hickson .......................................................................................................................... 333
Eclairs Group Ltd v JKX Oil and Gas Ltd............................................................................. 106–7
EDC v United Kingdom .............................................................................................................. 719
El-Ajou v Dollar Land Holdings .......................................................................................... 318–19
Estate Kootcher v Commissioner of Inland Revenue ................................................................. 194
Re Esteem Settlement .................................................................................................................. 335
Federal Republic of Brazil and Sao Paulo v Durant International Corp.................................. 336
Fermor ........................................................................................................................................... 24
FHR European Ventures LLP v Cedar Capital Partners ................................................... 336, 741
FHR European Ventures LLP v Mankarious .............................................................................. 336
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xlvi Research handbook on international financial crime
Re Finelist Ltd, Secretary of State for Trade and Industry v Swan ........................................... 719
Finers v Miro............................................................................................................................... 742
Fiona Trust and Holding Corp v Privalov ................................................................................. 333
Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co. Ltd................................................... 614
Foskett v McKeown ..................................................................................................................... 336
Fourie v Le Roux ......................................................................................................................... 705
Franses v Somar Al Assad .......................................................................................................... 707
Re Funtime .................................................................................................................................. 721
Gale v SOCA....................................................................................................................... 465, 537
Re Gibson Davies........................................................................................................................ 725
Goldtrail Travel Ltd v Aydin ....................................................................................................... 333
Gomes v Republic of Trinidad and Tobago ................................................................................ 649
Gorunova v Berezovsky............................................................................................................... 706
Gray v Smith................................................................................................................................ 334
Re Grayan Building Services...................................................................................... 718, 719, 721
Haiti v Duvalier .......................................................................................................................... 713
Halifax v Chandler...................................................................................................................... 707
Re Halt Garages.......................................................................................................................... 107
Harkins and Edwards v UK ........................................................................................................ 652
Hedley Byrne & Co Ltd v Heller & Partners Ltd ...................................................................... 317
Re Hennelly’s Utilities ................................................................................................................ 725
Her Majesty’s Commissioners of Customs and Excise v Barclays Bank................................... 709
Her Majesty’s Treasury v Mohammed Jabar Ahmed ................................................................. 540
HH v The Deputy Prosecutor...................................................................................................... 653
HIH Casualty & General Insurance Ltd v Chase Manhattan Bank.......................................... 354
Hilali v Central Court of Criminal Proceedings Number 5....................................................... 649
Hill v Secretary of State for the Environment, Food and Rural Affairs..................................... 724
Hornal v Neuberger Products Ltd .............................................................................................. 316
Howard Marine and Dredging v A Ogden & Sons (Excavations)............................................. 317
Ibori ........................................................................................................ 449, 451–2, 454, 455, 460
Industrial Development Consultants v Cooley ........................................................................... 330
Iraqi Ministry of Defence v Arcepey Shipping ........................................................................... 330
IRC v Duke of Westminster ........................................................................................................... 97
JD Wetherspoon v Van de Berg & Co Ltd .................................................................................. 316
Jennings v Crown Prosecution Service ........................................................................ 118–19, 120
JJ Harrison (Properties) Ltd v Harrison.................................................................................... 318
JSC BTA Bank v Ablyazov .................................................................................................. 709, 710
Jubilee Cotton Mills Ltd v Lewis ................................................................................................ 329
K Ltd v National Westminster Bank.................................................................................... 492, 516
Kadi v Council ............................................................................................................................ 540
Kakis v Government of the Republic of Cyprus ......................................................................... 649
Kay Review of UK Equity Markets ............................................................................................. 111
Keech v Sandford .................................................................................................. 180–81, 182, 185
Kelly v Cooper............................................................................................................................. 329
Re Kingston Cotton Mill Co. (No.2)........................................................................................... 614
Knowles v Government of USA .......................................................................................... 647, 649
Leeds Estate Building and Investment Company v Shepherd .............................................. 613–14
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd ................................................... 195, 202
Re Linvale Ltd ............................................................................................................................. 720
Lloyd and Cheyham v Littlejohn................................................................................................. 615
Re Lo-Line Electric Motors Ltd.................................................................................................. 718
Lock International plc v Beswick................................................................................................ 710
Re London and General Bank (No.2) ......................................................................................... 614
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Table of cases xlvii
London Oil Storage Co. Ltd v Sear Hasluck & Co.................................................................... 614
Lonrho v Al Fayed (No 2) ........................................................................................................... 317
MacDonald v Polaine & Hill Publishing ............................................................................. 316–17
McKinnon v Secretary of State for the Home Department ........................................................ 652
Mareva Compania Naviera v International Bulk Carriers........................................ 330, 705, 709
Re Melcast (Wolverhampton) Ltd ............................................................................................... 720
Memory Corporation v Sidhu ..................................................................................................... 707
Meridian Global Funds Management Asia v Securities Commission ....................................... 748
Re Migration Services Ltd .......................................................................................................... 720
Mobil v Petroleos de Venezuela .......................................................................................... 712, 713
Re Montagu’s Settlement Trusts.................................................................................................. 318
Re Morija .................................................................................................................................... 725
Motorola Credit Corporation v Uzan ......................................................................................... 713
Mutual Life v Rank...................................................................................................................... 187
National Crime Agency v Amir Azam (No. 2) ...................................................................... 459–61
National Enterprises Ltd v Racal Communications Ltd ............................................................ 335
Nationwide BS v Balmer Radmore (No 3).................................................................................. 332
Nestle v National Westminster Bank ........................................................................................... 332
New Bridge Holdings & Enjien Ltd v Barclays Bank................................................................ 492
Nocton v Lord Ashburton ............................................................................................................ 329
Norris v USA (No.2).................................................................................................................... 653
Norwich Pharmacal Co v Customs and Excise Commissioners................................................ 704
Novoship (UK) Ltd v Nikitin............................................................................................... 333, 334
Nugent v Nugent.......................................................................................................................... 329
O’Donnell v Shanahan................................................................................................................ 187
Oliver v Court ......................................................................................................................... 181–2
Osman v UK ................................................................................................................................ 652
Othman v UK .............................................................................................................................. 653
Otkritie International Investment Management Ltd v Urumov .......................................... 333, 334
Re Overnight Ltd......................................................................................................................... 207
Re Pantmaenog Timber Co Ltd........................................................................................... 717, 718
Paragon Finance plc v DB Thakerar & Co................................................................................ 318
Parsons v The Queen................................................................................................................... 373
Parvalorem v Oliveira ................................................................................................................. 708
Pasley v Freeman ...................................................................................................... 24, 25, 28, 316
Plazoo Pipe Systems ................................................................................................................... 721
Prest v Petrodel Resources Ltd ....................................................................................... 104–5, 112
Re Prestige Grindings Ltd, Sharma v Yardley ............................................................................ 724
Progress Property Company Limited v Moorgarth Group Limited ........................................... 107
R (Bagdanavicius) v Secretary of State for the Home Department ........................................... 652
R (Ramda) v Secretary of State for the Home Department ....................................................... 653
R (Ullah) v Special Adjudicator ................................................................................................. 652
R v Adams.................................................................................................................................... 581
R v Allen ...................................................................................................................................... 719
R v Allsop .................................................................................................................................... 324
R v Anderson (Malcolm John) .................................................................................................... 390
R v Angela Pennock, Richard John Pennock .............................................................................. 323
R v Anwoir................................................................................................................................... 480
R v Banks..................................................................................................................................... 466
R v Basra..................................................................................................................................... 124
R v Bennet Co (Pty) Ltd.............................................................................................................. 199
R v Briggs-Price.......................................................................................................................... 465
R v Brockley................................................................................................................................. 724
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xlviii Research handbook on international financial crime
R v Caywood ................................................................................................................................. 38
R v Clarke.................................................................................................................................... 719
R v Clowes................................................................................................................................... 328
R v Cohen .................................................................................................................................... 558
R v Corbett .................................................................................................................................. 327
R v Directorof the SFO ex parte Smith....................................................................................... 557
R v DPP ex parte Hallas ............................................................................................................ 322
R v Farooqi.................................................................................................................................. 573
R v Francis Hurell....................................................................................................................... 390
R v George, Crawley and Others (BA case)....................................................................... 576, 578
R v Ghosh ............................................................................................... 15, 27, 323, 324, 328, 556
R v Grantham .............................................................................................................................. 207
R v Harvey (Jack)........................................................................................................................ 451
R v HM Treasury and Other Actions .......................................................................................... 540
R v Horseferry Road Magistrates Court ex parte Bennett......................................................... 665
R v Innospec........................................................................................................................ 451, 750
R v Jatvinder Singh ..................................................................................................................... 467
R v Keane .................................................................................................................................... 557
R v Latif and Shahzad................................................................................................................. 578
R v Lees & Birch......................................................................................................................... 208
R v M ........................................................................................................................................... 656
R v Mackle (Patrick) ............................................................................................................. 119–20
R v McQuoid ......................................................................................................................... 29, 251
R v Martinez-Tobon..................................................................................................................... 122
R v May (Raymond George) ............................................................................................... 118, 120
R v Moses and Ansbro ................................................................................................................ 323
R v O’Brien ............................................................................................................................. 653–7
R v Olivier ................................................................................................................................... 578
R v Osei Gertrude ....................................................................................................................... 120
R v Pamela Jane Moss ................................................................................................................ 323
R v Patel (Munir Yakub).............................................................................................................. 389
R v Pear ......................................................................................................................................... 26
R v Preddy........................................................................................................................... 373, 680
R v Rice ....................................................................................................................................... 575
R v Rigby and Bailey................................................................................................................... 323
R v Rollins ................................................................................................................................... 251
R v Ruth Louise Turner ............................................................................................................... 323
R v Sale (Peter) ........................................................................................................................... 451
R v Seager ................................................................................................................................... 724
R v Seddon................................................................................................................................... 654
R v Shama ................................................................................................................................... 324
R v Smith (David Cadman)......................................................................................................... 481
R v Steed.................................................................................................................................. 466–7
R v Thompson.............................................................................................................................. 373
R v Vincent Clipston.................................................................................................................... 656
R v Waya (Terry) ......................................................................................................... 119, 455, 535
R v Xu (David Kai) ..................................................................................................................... 451
R v Zinga ..................................................................................................................................... 456
Rapisarda v Colladon ................................................................................................................. 347
Regal (Hastings) Ltd v Gulliver.......................................................................................... 329, 741
Relfo Ltd v Varsani.............................................................................................................. 335, 336
Rosen v Rosen ............................................................................................................................. 706
Roswell v Vaughan ........................................................................................................................ 24
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Table of cases xlix
Royal Bank of Scotland v FAL Oil Company ............................................................................. 713

Re the Royal British Bank (Nicol’s case) ................................................................................... 613
Royal Brunei Airlines v Tan................................................................. 91, 232, 319, 328, 333, 709
Royscot Trust Ltd v Rogerson ..................................................................................................... 317
Rugby Football Union v Consolidated Information Services..................................................... 704
Saik .............................................................................................................................................. 478
Salomon v A Salomon & Co Ltd................................................................................................. 191
Scott v Commissioner of Police of the Metropolis ..................................................................... 324
Scott v Metropolitan Police Commissioner ............................................................................ 323–4
Scroggs v Scroggs.......................................................................................................................... 23
Secretary of State for Trade and Industry v Rosenfield ............................................................. 725
SEGI v Council ........................................................................................................................... 540
Selangor United Rubber Estates Ltd v Craddock (No 3)........................................................... 741
Re Servaccomm Redhall.............................................................................................................. 725
Re Sevenoaks Stationers ............................................................................................. 720, 721, 722
Shabir v R................................................................................................................................ 467–8
Shah v HSBC .............................................................................................................. 516, 632, 742
Shalson v Russo .................................................................................................................. 335, 337
Shaw v Gould .............................................................................................................................. 346
Sinclair Investments (UK) Ltd v Versailles Trade and Finance ......................................... 336, 741
Singleton v Bolton ......................................................................................................................... 23
Smith v Chadwick........................................................................................................................ 316
Somerton........................................................................................................................................ 24
Spice Girls Ltd v Aprilia World Service ..................................................................................... 316
Starglade Properties Ltd v Nash......................................................................................... 328, 334
Steblins v Government of Latvia................................................................................................. 650
Re Streamhaven........................................................................................................................... 725
Stronghold Ins v Overseas Union ............................................................................................... 706
Sumal & Sons (Properties) Ltd v Newham LBC ........................................................................ 456
Re Supply of Ready Mixed Concrete .......................................................................................... 748
Re Swift 736 Ltd.......................................................................................................................... 721
Swindle v Harrison ..................................................................................................................... 332
Target Holdings Ltd v Redferns .............................................................................................. 331–2
Tchenguiz v Serious Fraud Office........................................................................................... 565–6
Re Tech Textiles ........................................................................................................................... 725
Tesco Supermarkets Ltd v Nattrass............................................................................................. 556
Thane Investments Ltd v Tomlinson ............................................................................................ 706
Re Thorncliffe Finance Ltd ......................................................................................................... 720
Tito v Waddell (No 2) .................................................................................................................. 329
Re TLL Realisations .................................................................................................................... 725
Tournier v National Provincial and Union Bank of England .................................................... 533
Re Transtec .................................................................................................................................. 721
TSB Private Bank International v Chabra ................................................................................. 709
Twinscetra v Yardley.................................................................................................................... 319
Ultraframe (UK) Ltd v Fielding.................................................................................................. 333
UMBS Online Ltd. v SOCA........................................................................................................... 89
Vestergaard Frandsen v Bestnet Europe Ltd .............................................................................. 334
Re Vintage Hallmark ........................................................................................................... 719, 721
Vivendi SA v Richards ................................................................................................................. 329
Webb & co Ltd v Northern Rifles, Hobson & Sons v Northern Rifles ...................................... 191
Welch v UK.......................................................................................................................... 465, 535
Welham v DPP ............................................................................................................................ 324
Re Westmid Packing Services...................................................................................................... 722
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l Research handbook on international financial crime
Re Westminster Property Management Ltd (No 2)..................................................................... 725

WGS and MSLS v UK ................................................................................................................. 719
Williams v Central Bank of Nigeria ................................................................................... 330, 337
Wilson v UK ................................................................................................................................ 719
Woodcock v Government of New Zealand .................................................................................. 649
Woodhouse v Meredith ................................................................................................................ 181
Re World of Leather .................................................................................................................... 721
Worldcom International v Home Communications Ltd.............................................................. 707
Young v Clerk ................................................................................................................................ 26
US
Alexander v United States........................................................................................................... 535

Americas Mining Corp. v Theriault........................................................................................ 187–8
Aronson v Lewis .......................................................................................................................... 178
Aspen Skiing Co v Aspen Highland Skiing Corp ....................................................................... 136
Austin v US.................................................................................................................................. 537
Bayer v Beren...................................................................................................................... 185, 188
Bennis v Michigan....................................................................................................................... 503
Caplin & Drysdale v US............................................................................................................. 497
Cede & Co. v Technicolor .................................................................................................. 178, 186
Chen v Howard-Anderson........................................................................................................... 186
Chiarella v US............................................................................................................................. 252
Christy Sports LLC v Deer Valley Resort Co ............................................................................. 136
City of Portland v 1985 Porsche 944.......................................................................................... 459
Consultants & Designers v Butler Service Group...................................................................... 136
Continental TV v GTE Sylvania.................................................................................................. 136
Cumberland Coal and Iron Co. v Sherman................................................................................ 182
Dirks v SEC............................................................................................................................. 633–4
Dura Pharmaceutical v Broudo.............................................................................................. 257–8
Facebook v Maxbounty ............................................................................................................... 369
FINRA v Brown Brothers Harriman & Co................................................................................. 701
FINRA v David Lerner Associates.......................................................................................... 697–8
FINRA v Rubin ............................................................................................................................ 697
Freese v Regions Bank .......................................................................................................... 549–50
General Industrial Corp v Hartz Mountain Corp ...................................................................... 136
Geneva Pharms. Tech. Corp v Barr Labs................................................................................... 134
Gesoff v IIC Indus............................................................................................................... 187, 188
Gregory v Helvering...................................................................................................................... 97
Grupo Mexicano de Desarrollo v Alliance Bond Fund ............................................................. 711
Guth v Loft .............................................................................................................................. 184–5
Guttman v Huang ........................................................................................................................ 190
Hofe v US .................................................................................................................................... 497
Item Software Ltd. v Fassihi ....................................................................................................... 178
Jacobellis v Ohio........................................................................................................................... 33
JPMorganChase deferred prosecution ........................................................................................701
Kahn v Lynch Commc’n Sys. ...................................................................................................... 188
Kaley v United States.......................................................................................................... 497, 505
Kamin v American Express Co. .................................................................................................. 178
Landers v Heritage Bank ............................................................................................................ 549
LePage’s v 3M ............................................................................................................................. 136
Libretti v US ................................................................................................................................ 498
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Table of cases li
Lopez v First Union National Bank...................................................................................... 509–10

Loral Space & Communs. Consol. Litig..................................................................................... 186
Meinhard v Salmon ............................................................................................................. 183, 185
MFW S’holders Litig................................................................................................................... 186
Monsanto Co v Spray–Rite Service Corp................................................................................... 134
Morissette v US ....................................................................................................................... 141–2
Morris Communication Corp v PGA Tour ................................................................................. 136
One 1990 Beechcraft................................................................................................................... 503
One Lot Emerald Cut Stones & One Ring v US ................................................................ 499, 536
Orman v Cullman........................................................................................................................ 186
Rales v Blasband......................................................................................................................... 186
Reis v Hazelett Strip-Casting Corp. ........................................................................................... 188
S v Ford Motor Co. ................................................................................................................. 192–3
SEC v Cuban ........................................................................................................................... 695–6
SEC v Goldman Sachs & Co ...................................................................................................... 695
SEC v Hewlett-Packard ............................................................................................................... 696
SEC v MacDonald .............................................................................................................. 256, 258
SEC v TD Bank ........................................................................................................................... 701
SEC v Texas Gulf Sulphur Co..................................................................................................... 252
SEC v Theodore W. Urban .......................................................................................................... 632
SEC v Tourre ............................................................................................................................... 695
Stone ex rel. AmSouth Bancorporation v Ritter ......................................................................... 190
Stonemets v Head .......................................................................................................................... 15
Sum of $70, 990, 605 .................................................................................................................. 501
Taylor v Taintor ........................................................................................................................... 604
Transkaryotic Therapies.............................................................................................................. 186
United States Football League v National Football League ...................................................... 136
US v $196, 969.00 in U.S. Currency .......................................................................................... 499
US v Apple see unfair competition and crime, US v Apple and price fixing (in main index)
US v Bajakajian .................................................................................................................. 504, 535
US v Bauer .................................................................................................................................. 254
US v Berger ................................................................................................................................. 258
US v Blackman ............................................................................................................................ 498
US v Booker ................................................................................................................ 253, 254, 258
US v Coop. Theatres of Ohio...................................................................................................... 138
US v Dusenbery........................................................................................................................... 504
US v Eastman .............................................................................................................................. 480
US v Farmer ................................................................................................................................ 505
US v Gellene ............................................................................................................................... 210
US v Gillen .................................................................................................................................. 138
US v Gorshkov............................................................................................................................. 644
US v Gupta .................................................................................................................................. 254
US v Hardwell ............................................................................................................................. 480
US v HSBC Bank USA.......................................................................................... 630–31, 700–701
US v Jackson ............................................................................................................................... 480
US v Koppers Co......................................................................................................................... 138
US v Loe ...................................................................................................................................... 480
US v Mankarious......................................................................................................................... 480
US v Metro. Enters...................................................................................................................... 132
US v Mobile Materials................................................................................................................ 132
US v Monsanto ............................................................................................................................ 505
US v Mooney ........................................................................................................................... 255–6
US v Nacchio .............................................................................................................. 251, 256, 257
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lii Research handbook on international financial crime
US v O’Hagan............................................................................................................................. 252
US v Olis ..................................................................................................................................... 258
US v One Assortment of 89 Firearms................................................................................. 499, 536
US v Rajaratnam ............................................................................................ 256–7, 258, 284, 560
US v Reicher................................................................................................................................ 132
US v Rivera ................................................................................................................................. 459
US v Rutkoske.............................................................................................................................. 258
US v Santos ................................................................................................................................. 538
US v Shafer ................................................................................................................................. 480
US v Smith Grading & Paving.................................................................................................... 138
US v Society of Independent Gasoline Marketers of America ................................................... 138
US v Souffrant ............................................................................................................................. 480
US v Taylor.................................................................................................................................. 480
US v Union Bank of Jordan ....................................................................... 543, 545, 546, 547, 548
US v Ursery......................................................................................................................... 497, 536
US v US Gypsum Co.......................................................................... 131, 132, 138, 139, 142, 143
US v Vampire Nation................................................................................................................... 498
Verizon Communications v Law Offices of Curtis Trinko LLP (“Trinko”) ............................... 140
Wal-Mart Stores v Dukes ............................................................................................................ 605
In re Walt Disney Co. Derivative Litigation ......................................................................... 189–90
Weinberger v UOP .............................................................................................................. 187, 188
Wendt v Fischer ........................................................................................................................... 183
Whitney Nat’l Bank v Karam ...................................................................................................... 509
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PART I
THE NATURE AND

CHARACTERISTICS OF
ECONOMIC AND FINANCIAL
CRIME
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1. The characteristics of economic crime and

criminals
William Tupman
INTRODUCTION
Economic crime is a relatively loose term, covering a wide variety of phenomena. All
property crime and acquisitive crime is economic crime in the sense that it is crime
aimed at making the perpetrator wealthier, but robbery and burglary are not normally
included in the concept. Barry Rider’s overview of 1988 reviews the problems in a way
that could be republished today with very little change.1 Looking at contemporary
practitioners, the Economic Crime Command of the National Crime Agency include
fraud, intellectual property crime, identity theft and counterfeit currency in their remit.2
But a list does not amount to a definition. The City of London Economic Crime
Directorate, policing lead for fraud investigation in the UK, has fraud teams that target
boiler room frauds, mortgage fraud, insider and illegal trading, ticketing fraud and
identity crimes.3 The Federal Bureau of Investigation (FBI) white collar crime website
pulls no punches in defining white collar crime as “Lying, cheating and stealing”.4 It
goes on to say, more calmly, that “the term is now applied to the full range of frauds
committed by business and government professionals”. The list of crimes that follow,
however, widens the focus beyond this group. The Swedish Economic Crime Authority
concentrates on accounting crime, tax crime, bankruptcy related crime, crime under the
Swedish Companies Act, market abuse crime and crime against the EU’s financial
interests.5 In Sweden, fraud is dealt with by the police and corruption by the National
Anti-Corruption Unit.6 So economic crime means different things to different investi-
gators. The remit of the Guardia di Finanza in Italy, for example, includes smuggling,
as did the remit of the UK Customs until recent reforms. These transferred some
powers and personnel to the Border Agency, which has now been abolished and
replaced by the Border Force, which presumably deals with smuggling, with the
1
Barry AK Rider “Policing the City – Combating Fraud and Other Abuses in the Corporate
Securities Industry” Current Legal Problems 1988 Vol 41 pp47–68 pp48–53 passim.
2
National Crime Agency website http://www.nationalcrimeagency.gov.uk/about-us/what-
we-do/economic-crime accessed 2nd December 2014.
3
City of London Police website https://www.cityoflondon.police.uk/advice-and-support/
fraud-and-economic-crime/fraudsquads/Pages/Fraud-teams.aspx accessed 2nd December 2014.
4
FBI website http://www.fbi.gov/about-us/investigate/white_collar/whitecollarcrime accessed
2nd December 2014.
5
Swedish Economic Crimes Authority website http://www.ekobrottsmyndigheten.se/en/our-
work/ accessed 2nd December 2014.
6
Ibid.
3
Barry Rider - 9781783475780
4 Research handbook on international financial crime
exception of people, and the Immigration Service. Other powers have been transferred
to the Serious and Organised Crime Agency, now the National Crime Agency.
“Financial crime”, “white collar crime”, “corporate crime”, “crimes of the powerful”,
“smuggling” and even “organised crime” are all concepts associated with economic
crime. Crime against the economy itself – crime against the market and against a level
playing field – is almost the ultimate crime in the neo-liberal playbook, but there is a
contradiction in this approach as equally it should be impossible for there to be crime
in a perfectly working market, so crime is a sign that states are impeding those perfect
workings rather than that the offender is doing anything wrong. Unless, of course, a
perfect market is an abstract concept, unobtainable in the real world.
The “USLegal” website defines economic crime as “illegal acts committed by an
individual or group of individuals to obtain a financial or professional advantage”.7
This definition includes robbery, making it so broad as to make the term useless. We
might as well fall back on the distinction between crimes against property and crimes
against the person. If the concept is to be operationalisable, it needs to be narrower.
Chizu Nakajima has reviewed international perspectives on financial crime and found
no clear agreed definition of the concept.8
Edwin Sutherland first used the term “white-collar crime” in a speech in 1939. He
returned to it in a monograph in 1949, defining it as “crime committed by a person of
high status and respectability in the course of his [sic] occupation”.9 The original text
was censored because corporations threatened to sue, and all reference to individual
corporations by name was removed by the publishers. The full text was only published
in 1983. The concept was expanded by other academics to imply a separate category of
crime to “blue-collar crime”, crime being traditionally seen as the preserve of the
“dangerous classes” and involving violence or the threat of violence. Sutherland
intended to point out that just as much crime was being committed by the well-to-do
and that even when caught they were unlikely to suffer imprisonment as the blue collar
criminal would. The definition has slipped over time to “financially motivated
non-violent crime committed by business and government professionals”. “Crimes of
the powerful” has become an alternative concept. David Nelkin provides the definitive
contemporary review of the concept in the Oxford Handbook and releases this author to
discuss individual issues in order to set the scene for the present volume.10
Hazel Croall has looked at white collar crime in a comparative context.11 She argues
that we can define by type of crime, by type of offender, by place of offences, or we
7
USLegal website http://definitions.uslegal.com/e/economic-crime%20/ accessed 2nd Decem-
ber 2014.
8
Chizu Nakajima “Editorial: Issues in Fighting Financial Crime” IEA Economic Affairs
March 2007 http://www.iea.org.uk/sites/default/files/publications/files/upldeconomicAffairs331
pdf.pdf accessed 2nd December 2014.
9
Edwin H Sutherland White Collar Crime Holt Reinhart & Winston, New York 1949.
10
David Nelken “White-Collar and Corporate Crime” Chapter 21 in Mike Maguire, Rod
Morgan and Robert Reiner The Oxford Handbook of Criminology 5th edition Oxford University
Press, Oxford 2012 pp623–659.
11
Hazel Croall “Transnational White Collar Crime” Chapter 10 in James Sheptycki and Ali
Wardak Transnational and Comparative Criminology Glasshouse Press, London 2005 pp227–
246.
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The characteristics of economic crime and criminals 5
can characterise it by ambiguous criminal status, low rates of prosecution and lenient
punishment, but if we do, is it really crime? Croall also looks at white collar crime in
the global context. She argues that there is a great deal of “harm” done by businesses,
but that often this harm is neither technically nor legally a crime. It is easy for high
status individuals and organisations to avoid prosecution. “Too big to fail”, “in the
national interest” and “if the President does it, it can’t be wrong” are three phrases that
have been used by high status individuals in the past as a defence of their actions.
These issues will be further discussed in the sections that follow.
Following Croall, this chapter is structured by looking first at the types of crime
listed under the headings “white collar crime”, “economic crime” and/or “financial
crime”. It does this because there is no clear agreement on definitions of these
concepts, and there is even disagreement as to what concepts to include. It then adds a
category “types of victim” in order to introduce a discussion of the ambiguity of
criminal status and the consequences for deterrence and rational choice, partly because
of the way these have been raised in Sittlington’s PhD thesis, which discusses whether
anti-money laundering legislation works, but has implications for policies against
economic crime more generally.12 Finally, the chapter discusses types of offender.
CATEGORIES OF ECONOMIC CRIMES

Theft: Robbery and Burglary
Robbery and Burglary are definitely not white collar crimes, but possibly economic
crimes. These are classic blue collar crime activities, but more complex in motivation in
contemporary society. There are offenders who aim at short-term gain, stealing other
people’s property to fund a lifestyle of hedonism, particularly at the weekend. There are
more sophisticated “professional” criminals, who hold onto their “ill-gotten gains” to
avoid detection and who are now vulnerable to the more recent approach of investiga-
tors who search out their assets and demand that they prove their provenance.
Theft from domestic premises transferred to theft from vehicles as stereos, GPS
systems and other high-tech goods became part of motoring. Insurance companies
began to develop ways to make this more difficult along with making the theft of the
car itself harder. The response from offenders has been to develop a number of frauds:
making agreements with the car owner to steal the car for a fee, after which a new car
would be claimed on the insurance. More recently, claims for “whiplash” injuries have
been organised. The move is a classic transfer from blue collar to white collar crime,
but the perpetrators remain classically blue collar in background. There is also
organised trade in luxury vehicles, with the stolen car being taken out of the country
before it is even reported missing. As the divide between blue and white collar in the
classic sense is blurring, there remains a more relevant divide between opportunistic
and more organised crime.
12
Samuel Sittlington “What Are the Factors that Influence the Effectiveness of Anti-Money
Laundering Policy Implementation in the UK: Exploring Money Laundering Crime and Policy”
Unpublished PhD thesis, University of Northumbria 2014.
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Smuggling
This involves the transportation of commodities or people across borders illegally, the
people or commodities concerned either being excluded from entry, such as drugs or
immigrants without visas, or the commodity carrying an excise duty which the
smuggler intends to evade. As Kipling put it:
… Brandy for the Parson, ‘Baccy for the Clerk.

Laces for a lady; letters for a spy … 13
Duty evasion was historically the reason for smuggling, but drugs and people have
become more profitable in recent years.The previous section, though, suggests that
smuggling out of a country is becoming as important as smuggling in. Stealing
something and moving it abroad can make detection and prosecution more difficult.
Fraud
The UK Serious Fraud Office (SFO) defines fraud as “abuse of position or false
representation, or prejudicing someone’s rights for personal gain”.14 Fraudsters operate
through all the communications media: the telephone, snail mail, email, social
networking sites; anywhere they can communicate with people. They still use doorstep
tactics, as well as places where people meet, such as bars and clubs. Growth in recent
years has been in the area known as cybercrime. A high proportion of cybercrime is
traditional fraud taking advantage of the communication possibilities offered by the
internet.
The SFO website offers a “taxonomy of fraud”.15 This distinguishes seven types of
fraud, or, more correctly, seven arenas where fraud occurs: individuals, corporate,
charities and non-profit, market abuse, fiscal, public sector and supporting activities. It
subdivides individual fraud into advance fee payments, investment frauds, non-
investment and abuse of position of trust. It lists 14 different types of advance fee
fraud, including the infamous “419” scams originating in West Africa, illustrating the
cross-border nature of contemporary fraud.
This chapter is not the place to go through all the different types of fraud listed by
the SFO. A similar list can be found on the FBI site, although not so artistically
presented.16 Fraud as a category has expanded to be almost synonymous with economic
crime. Investigative units are simply listing their areas of responsibility and struggling
with how to subdivide them. There is a high degree of overlap between perpetrators and
a need for more appropriate definitions of separate phenomena, so that appropriate
legal and investigative frameworks can be put in place. Concepts are being stretched
13
Rudyard Kipling “A Smugglers Song” in Puck of Pook’s Hill http://www.kiplingsociety.
co.uk/poems_smuggler.htm accessed 3rd December 2014.
14
Serious Fraud Office website http://www.sfo.gov.uk/fraud/what-is-fraud.aspx accessed 3rd
December 2014.
15
http://www.sfo.gov.uk/taxonomy.swf accessed 2nd December 2014.
16
http://www.fbi.gov/scams-safety/fraud accessed 2nd December 2014.
Barry Rider - 9781783475780

beyond the point of utility. This is, unfortunately, not unusual in criminology, where the
media, self-proclaimed experts and law enforcement all seek to broaden definitions for
their own purposes.
As an example, a quick examination of the taxonomy diagram will discover that
corruption is hidden under the category of “supporting activities”. This may reflect a
UK failure to engage with corruption on the basis that it isn’t a problem for the UK,
which may have a Bribery Act, but has not engaged legislatively with corruption in all
its forms.
The SFO taxonomy raises an interesting aside: more attention is given to the
professional criminal frauds than to the white collar frauds. If a financial value were to
be allocated to each category, the market frauds, market-fixing, insider trading, bribery
to obtain overseas contracts and probably even procurement fraud would almost
certainly be much more profitable than the 14 advance fee frauds and much more
damaging to the economy. Not much has changed since Sutherland’s day.
Corruption
The majority of this subsection originates from a piece on corruption by the present
author, starting from the idea that corruption can be summed up as the abuse of public
position for personal gain.17 As with white collar crime in general, the people involved
may be powerful, the offences they commit are poorly defined in law, they do not
consider what they are doing to be illegal and their “crimes” are often considered
“victimless”. When they are brought to court, prosecution frequently fails because of
the complexity of the cases and the judicial process. The offenders may have good
financial resources and so can retain effective defence lawyers.18
Corruption can also be considered an element of many crimes rather than as a
separate phenomenon in itself, which may account for the SFO approach above. It may
be subsumed under fraud, nepotism and bribery, or indeed white collar crime itself, or
organised and political crime. In the EU it is seen as lying at the far end of a continuum
running from mismanagement, via waste, to fraud. Corruption can thus be seen as a
precursor of other crimes, almost as a mirror image of money laundering, which can be
seen as requiring a precursor crime to make the activity itself criminal.
The concept of corruption is based on the idea of “some ‘naturally sound condition’
from which corrupt acts deviate”.19 Transnational companies and politically exposed
persons (PEPs) conspire to assert: “Your corruption is my normal business practice;
your bribe is my mark of respect.” It can be difficult to draw a clear line between
nepotism or insider dealing, on the one hand, and networking on the other. A contract
in Nigeria may involve the overseas contractor paying the same amount as the price bid
for the contract by an “agent”. Is it unfair to compare this to “full economic costing”,
17
Bill Tupman “Transnationalisation and Corruption: Some Theoretical and Practical
Implications” Chapter 11 in James Sheptycki and Ali Wardak Transnational and Comparative
Criminology Glasshouse Press, London 2005 pp247–268.
18
Ibid p247.
19
Mark Philip “Defining Political Corruption” Political Studies 1997 Vol 45 No 3
pp436–462.
Barry Rider - 9781783475780

where a research funder can be charged over 100 per cent “overhead”? Career building
in both the West and the East has long been characterised by patron–client relations.
Equally, joining freemasons’ lodges, the Rotarians or golf clubs may take place in order
to make contacts rather than to engage in the primary activities of these organisations.
In China, without guanxi, nothing could be achieved.
Tupman has argued that it is useful to distinguish between “old” and “new”
corruption. Before the creation of world trade, business practices varied from country
to country. These were a response to the way in which internal trade developed and
reflect each society’s differing cultural mores. When private companies began trading
in countries other than those in which they originated, initially they had to adapt to the
existing business practices of the country in which they wished to operate. As other
external competitors came into the same market, the original traders used their
knowledge of these practices to maintain their market position. This could be
considered “old” corruption and reflects a world of barter in the absence of convertible
currencies. Britain even went to war with China over its insistence on paying for luxury
goods in opium rather than the silver demanded by the Chinese.
“New” corruption arises in the era of multi- and trans-national corporations when
“external” companies seek to corrupt government officials to obtain a monopoly
position, either as a supplier of goods and services or as a purchaser of a primary
product. A global economy means that cash can be paid into the overseas bank account
of a PEP to gain a contract at the expense of a competitor transnational corporation. So
corruption involves “corporate crime” in this new context and probably money
laundering too.
Money Laundering
“Follow the money” became the cry of governments seeking to pursue the “war on
drugs”, and money laundering took centre stage. Like many of the concepts making up
economic crime, this began with a narrow meaning: the process whereby criminals
sought to bring the profits of their criminal activities into the legitimate financial world.
Partly because of the inclusion of terrorist funding, partly because of empire building
by special investigative units, partly because the profits of drug trafficking made crime
groups so cash heavy that they invested in new criminal businesses rather than making
their money appear legitimate, “money laundering” has become a synonym for the
movement of funds and assets from one jurisdiction to another. It now effectively
overlaps with an earlier concept, “hot money”, the rapid movement of capital for
speculative reasons, which is often not illegal, except when it originates in a country
with legal restrictions on the removal of capital.
The Financial Action Task Force (FATF) has produced a framework of recommenda-
tions for the combatting of money laundering and terrorist financing.20 These effect-
ively define the phenomenon.
20
FATF website http://www.fatf-gafi.org/topics/fatfrecommendations/documents/fatf-
recommendations.html accessed 3rd December 2014.
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Cybercrime
As discussed above, a great deal of cybercrime involves the use of the internet as a
means of communication in order to perpetrate classical frauds. Increasingly, the
internet is becoming a medium for the purchase of goods, for banking, and is in the
process of becoming “the internet of things” where even household appliances can be
communicated with remotely. Other possibilities will emerge as this progresses.
There are other areas though where crime is growing: phishing, Trojan horses,
worms and compound programs like Stuxnet. The placing of malware on computers to
create botnets, which can be used to crash commercial and government websites in
“denial of service” attacks, is a development of something that is new in cybercrime.
Not all of these offences fall within the remit of economic crime. Many come closer to
sabotage and even terrorism.
The increasing use of algorithms by investment brokers and financial players has
already led to one “flash crash”. Increasingly, Flare and Stuxnet derivatives will be
used by organised crime groups to reconnoitre financial systems and make money out
of knowing that they are going to provoke changes in market prices. Bankers have
already interfered with market prices and fixed foreign exchange rates. Criminals will
have learnt that such things are possible and will be planning how to carry such
operations out themselves for their own enrichment.
As further discussed below, cybercrime is now operating within the knowledge
economy. Governments are stealing trade secrets from each other and placing surveil-
lance malware deep within the computer systems of competitor states and states with
which they are in conflict. The use of non-state actors in order to provide deniability
has meant the spread of skills into organised crime networks, with the result that police
organisations are concerned that they are falling behind the game. It has become a
truism that it can take five years to discover exactly what crimes are being committed
today. The Onion Router (TOR) or the “deep web” exists to protect anonymity, which
assists criminals as well as intelligence services and dissidents.21 It was originally
developed by the US Navy, but is now used by paedophile networks, drug traffickers
and who knows whom. Its partner currency, Bitcoin, opens up new areas of potential
financial crime, although it is a mistake to be alarmist about anything new. Most of
these creations are neutral. It is those who use them who can be forces for good or evil.
Counterfeit Products
An area that has expanded in recent years is the trade in copies of manufactured goods.
Fake Guccis, fake Rolexes, fake perfume, all do a roaring trade in tourist resorts around
the Mediterranean and further afield. Designer goods are easy to fake and profit from
because the price of manufacture is so much lower than the price at which they are
sold. The same goes for music CDs and computer software, and manufacturers have
had to work hard convincing police forces around the world to pursue traders and
manufacturers of fake goods. As the trade moved onto the internet, efforts have become
21
Guardian website http://www.theguardian.com/technology/2013/nov/05/tor-beginners-
guide-nsa-browser accessed 3rd December 2014.
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more strenuous, with prosecutions of music download sites and threats to prosecute
individual downloaders.
There is a more dangerous side to counterfeiting though. The trade in counterfeit
drugs and medical equipment that do not work, counterfeit aeroplane parts, counterfeit
car parts, all threaten life.
CATEGORIES OF VICTIM
The idea of categorising by victim, as Croall does, is in order to examine whether it is
the nature of the perpetrator or of the victim that makes criminal prosecution and
punishment more or less likely. She distinguishes between occupational white collar
crime, where the perpetrator benefits at the expense of the employer, and corporate
crime, where the corporation benefits but to the detriment of safety, the quality of
goods or services, society and/or the environment. Perhaps a continuum could be
created, she suggests, between legitimate and illegitimate, licit and illicit businesses.
Individual Members of the Public
Where the offence, such as fraud, is committed against individual members of the
public, the individual amounts involved are likely to be too small to be worth
investigating. There is little kudos to be had, although it should be noted that certain
vulnerable individuals, such as elderly ladies, fall into a different category as a result of
media interest. The Swedish Economic Crimes Agency makes great play of the fact that
it investigates all economic crime and doesn’t “cherry-pick” unlike investigators
elsewhere, using the SFO as an example.22 This is slightly odd, since the same site says
that it leaves investigation of fraud to the police. There is a problem here: if national
units concentrate on major crimes because of the expense of prosecution, who will deal
with the smaller crimes, where the same problem of expense exists? Without prosecu-
tion, what happens to deterrence?
This may become different where the crime targets several to all members of the
public, but again, the true picture may not emerge because victims feel stupid, so often
do not report relatively small frauds. The police do run preventative campaigns, but
again, prosecutions are rare, and this is not always because of the status of the
perpetrator. Another factor is that a good fraudster builds up the trust of the victim, who
is often not aware of being tricked out of money or assets.
The Employer
Where the employer is the victim and the employee the perpetrator, the employer may
be wary of reporting an offence to the police because of the danger to consumer and/or
market confidence. The damage done by publicity may be greater than that done by the
original offence. Equally, the employer has all sorts of disciplinary sanctions available
if the employee’s skills are seen as worth keeping and the possibility is there of
22
Swedish Economic Crimes Authority website op cit.
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stopping losses from wages until the money taken has been paid back. There is a
suspicion that where a high profile case is prosecuted, the employee is being used as a
scapegoat for the failings of the employer. Indeed, this is often part of the defence case.
The State
Theft of state property has been a serious crime in Communist countries from the
outset. In capitalist countries, investigation is more likely where the state is the victim,
but not necessarily in the procurement process. Outsourcing of government and public
services has led to an ideological obsession with awarding contracts to private firms
and not being too rigorous about regulating either the process of the award or the
conduct of the contract. Private Eye now sells more copies on the strength of its
investigative journalism into such behaviour than it does on the strength of its jokes.
There does appear to be a line between what is considered to be an offence and what is
considered to be “teething problems”.
The Market Itself
The thinking behind the identification of there being a threat to the market itself is well
exemplified by a memo from the European Commission to the European Council and
the European Parliament on the need for a policy on corruption. Five aspects of the
interests of the Union are defined as being affected by corruption, and are primarily
economic:
the interests of the Union as being affected by corruption in that it
a) undermines sound decision making,

b) distorts competition and challenges principles of open and free markets, in particular the
proper functioning of the internal market,
c) it damages the financial interests of the European communities,
d) it had various effects upon external policies in respect of a number of states receiving the
systems, and
e) it is at variance with the transparent and open conduct of International Trade.23
There is a different moral emphasis from that found in traditional definitions of

corruption that stress the dangers of immoral bureaucratic behaviour. Here, open
markets, financial interests and trade are central. However, although both the corrupter
and the corruptee are recognised, much of the legislation is aimed at the corrupter
rather than at the set of relationships facilitating corruption in the countries where it
occurs. Nevertheless, the EU document represents a movement in the definition of
corruption towards the areas referred to above as “new” corruption.24
23
Com (97) 192 final Brussels 21 May 1997 – Communication from the Commission to the
Council and the European Parliament on a Union Policy against corruption.
24
Taken from Tupman op cit.
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ECONOMIC CRIMINALS
The essential question here is to what degree are those who commit economic crime
still persons of high status and respectability? Have organised crime networks recog-
nised the opportunities of fraud and moved in? There have always been confidence
tricksters in ports and market towns trying to separate sailors from their wages and
farmers from their cash. Have these people moved into the world of white collar crime
on the back of the internet.
If we take the West African 419ers, the emails originate from individual fraudsters
trying to obtain a fee for access to unlikely sums of money. If the victim persists, then
more organised gangs may become involved if they can be persuaded to visit the
country where the funds are supposed to be. This is a crime committed by educated
people, certainly, who are both literate and computer competent, but hardly high status.
They are unlikely to attract police attention unless they are very careless.
Similarly, there is an argument that professional or career criminals move up the food
chain as they achieve success. They may start off running a chain of prostitutes or street
dealing, or even engaging in armed robbery, but once they have capital, they will move
into drug trafficking and from there into white collar crime, because as the profits rise,
the risk of being caught diminishes. Increasingly, professional criminals who survive
and accumulate assets and wealth need accountants, lawyers and managers to run their
financial affairs and conceal their assets. Once they are involved with professionals
with a dubious sense of ethics, it becomes easy to set up shell companies and look to
commit frauds in the procurement process or to sell counterfeit products and even move
up to insider trading and market manipulation.
So the white collar/blue collar distinction has become blurred with the availability of
investment cash from the drugs trade, the development of the internet, the lowering of
ethical standards and a recent decline in economic rewards for some professions. It is
worth noting that the distinction will continue to exist for the vast majority, but that
there is a significant overlap, which was exacerbated by the “Big Bang” in the City.
Corporate
The corporate category covers deliberate wrongdoing by companies. In recent years,

banks have entered into deferred prosecution agreements with US prosecutors for
moving money in defiance of sanctions and falsifying SWIFT codes, for money
laundering for drug dealers, for fixing foreign exchange rates, and a variety of other
offences. Fines have been imposed, but there is a sense that this is not an appropriate
approach as the cost is simply transferred to customers. Most banks are covered by the
“too big to fail” mantra, so it is difficult to impose appropriate penalties and create a
regime to deter future offending.
The attitude of states towards bribery on the part of transnational companies has been
ambivalent. There has been an attempt within the EU to ban tax exemptions for bribery
as part of an overseas contract, but individual states still permit it, which in effect
makes it legal.
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PEPs
A PEP is someone who is seen as representing a higher risk for bribery, terrorist
financing or money laundering by virtue of their position within a state. The term was
coined following the Abacha affair, and FATF makes recommendations for enhanced
monitoring of any accounts held by a financial institution on behalf of such a person.
There are two major areas of concern: politicians and their families who siphon off a
country’s aid budget into accounts held in overseas banks and individuals who expect a
premium to be paid to them for the award of a particular contract, such as weaponry by
a transnational company, thereby removing any sense of a level playing field in
government procurement. Of increasing interest is the payment of large sums to
terrorist organisations by wealthy individuals.
Rogue Insiders: Major and Petty
There have been a number of market traders recently who have allegedly gambled on
particular trades and lost. In some cases they have bankrupted the company or bank in
the process, in others the bank has been able to cope with the losses but has sacked the
individual and called in the police claiming fraud, in contradiction to the point made
above in the section on victims. Although each case has raised questions about internal
oversight of employees, several have gone to prison. So there are cases where criminal
sanctions have been used against white collar criminals, but only where the victim is
the employer, not where the victim is the taxpayer, the government, a foreign
government or the market itself. Nevertheless, these are not cases of exceptions proving
the rule, but examples of situations where employers agree that imprisonment is an
appropriate form of punishment and that deterrence is a good idea. The distinction
between blue and white collar crime is not totally clear-cut.
There are now a series of red flags suggested for identifying potential minor
fraudsters within companies, most of which seem to suggest that companies should
look at their own employees in the same way that countries need to look at PEPs.
Transparency of income and expenditure patterns are obvious mechanisms for the
prevention of fraud and financial crime, although this obviously raises privacy issues.
Organised Crime Groups
Increasingly, the literature refers to networks of criminals rather than organised crime
groups. The Camorra, ‘Ndragheta and the Sicilian mafia still exist, however, and have
profited from the recent economic crash by being the only institutions in Italian society
prepared to advance funds to struggling businesses. Research may one day show that
they have been operating in similar ways in other parts of Europe. These networks are
cash heavy, and putting companies in their debt with an eye to taking them over can
begin as a form of money laundering. Money loaned becomes money used for purchase
and eventually the previous owner becomes the manager. In the process the loan
sharkers have made their “dirty money” respectable.
Organised crime networks are also moving into cybercrime and are being joined by
governments in the form of their electronic intelligence departments. Governments
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happily pass on the trade secrets of other governments to their multinational and
transnational corporations, maintaining electronic surveillance in the name of “counter-
terrorism” but actually quite happily undermining the free operation of the markets by
providing commercially sensitive information to select companies. Cybercrime ultim-
ately is about the acquisition of information in the “knowledge economy” that exists
in the 21st century. The relationship between governments, corporations and cyber-
criminals is murky as cybercriminals are employed in order to conceal the ultimate
origin of malware, denial of service attacks, “spoilers” that release films, music or even
political announcements prematurely. Internet fraud appears as the tip of the iceberg,
but yesterday’s criminals today own banks, oil refineries and goodness knows what else
since the 2008 crash. If anyone has scruples about acquiring information about
competitor planning for the future, it certainly isn’t them.
CONCLUSION
The listing of crimes, offences and perpetrators is hardly definitive. The overall
conclusion of this overview is that categories are becoming blurred as corporations
themselves become victims of insiders and organised crime networks. When corpor-
ations are demanding punishment for white collar criminals indulging in very similar
behaviour to themselves, such as market manipulation, corruption of insiders, insider
trading, interference with the existence of a level playing field, it becomes harder for
them to also demand the right to engage in the same form of behaviour without penalty.
The line between blue collar and white collar crime has become increasingly blurred.
As Sittlington has shown, regulators, law enforcement and prosecutors agree that
criminal sanctions are necessary to deter further wrongdoing.25 The only problem is to
discover what would deter the offender – Bosworth-Davies would argue for “porridge,
and lots of it”.26 Sittlington’s research shows, however, that it is the loss of assets that
has a chance of deterring the professional criminal.27 He also shows that a division still
exists between the criminal who steals to fund a lifestyle, consuming his or her
ill-gotten gains as fast as they are obtained, and the professional who wishes to
preserve his or her assets for an imagined future retirement. These comments on
deterrence and rational choice apart, returning to the opening of this chapter, Rider’s
warnings of the inadequacies of a hands-off regulatory approach back in 1988 are still
relevant a quarter of a century later.28
25
Sittlington op cit.
26
Rowan Bosworth-Davies “Rowan’s Blog” http://rowans-blog.blogspot.co.uk/ passim
accessed 3rd June 2015.
27
Sittlington op cit.
28
Rider op cit.
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2. The concept of fraud: a comparative analysis

Gilbert Crentsil
INTRODUCTION
The quest to postulate a general definition of fraud may seem utopian. Therefore, when
McGrath states that fraud is ‘notoriously difficult to define’ he is expressing pervading
sentiment in the literature.1 One reason is that fraud has tentacles in both civil and
criminal jurisdictions under English law, thus making it difficult to couch an all-
embracive definition. The evolution of the concept has also been coarse. Although
essentially a criminal concept, the Court of Equity principally administered fraud.
Moreover, prior to the passing of the Fraud Act 2006 ‘fraud’ was not an offence
in England.2 Thus there was no categorical statutory or judicial definition of fraud in
either the criminal or the civil jurisdictions. The preponderance of synonyms in
describing fraud is another feature that makes it difficult to define it. Fraud has, among
others, been described as ‘white collar crime’,3 ‘financial crime’, ‘economic crime’,4
‘deceit’,5 ‘forgery’,6 ‘dishonesty’.7 Some in the judiciary recognised this difficulty and
suggested that courts were not to ‘cramp themselves … with a hard and fast
definition’.8 The connection between definition and practical application has been
encapsulated in the statement that fraud9 ‘… is the elephant easy to recognise, but
1
Paul McGrath, Commercial Fraud in Civil Practice (Oxford University Press 2014) 5.
2
Anthony Arlidge QC, Alexander Milne QC and Jacques Parry, Arlidge and Parry on
Fraud (4th edn, Sweet and Maxwell 2013).
3
Edwin H Sutherland, ‘White-Collar Criminality’, White-Collar Criminal: The Offender in
Business and the Professions (1st edn, Atherton Press 1968) 40. See John Braithwaite, ‘White
Collar Crime’ (1985) 11 Annual Review Sociology 1 for a review of relevant literature on white
collar crime.
4
Professor Barry Rider uses this term in The Cambridge International Symposium on
Economic Crime which takes place annually at Jesus College, Cambridge University.
5
Sir James Fitzjames Stephen, A History of the Criminal Law of England, vol II
(MacMillan and Co 1883) 121–122. See Peter MacDonald Eggers, Deceit: The Lie of the Law
(Informa Law from Routledge 2009).
6
Michael Gale, Sarah Gale and Gary Scanlan, Fraud and the Plc (LexisNexis UK 1999) 2.
7
R v Ghosh [1982] QB 1053. See also Gale, Gale and Scanlan (n 6) 1–5. See also ‘Fraud:
Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965’ (2002) LAW
COM No 276, Cm 5560 <http://lawcommission.justice.gov.uk/docs/lc276fraud.pdf> accessed 27
May 2015.
8
Stonemets v Head [1913] Mo Supreme Court Rep 243 Southwest Report 108 114. This
case is cited by Sheridan in LA Sheridan, Fraud in Equity: A Study in English and Irish Law (1st
edn, Sir Isaac Pitman and Sons Ltd 1957). Sheridan cited it from Green, Jude and Jury, 311–312.
9
In the sense of dishonesty.
15
Barry Rider - 9781783475780
difficult to define, and a jury is well able to recognise it, even though they could not
define it’.10
Fraud is a universal phenomenon: it is found across nations and cultures. This
chapter presents a brief comparative overview of the concept. The reader is thus
referred to relevant sources for detailed discussions. The relationship between fraud and
morality is examined and further explored with particular reference to Judeo-Christian
and Islamic religions. The chapter also gives brief historical accounts of the develop-
ment and administration of fraud under the civil and criminal jurisdictions in early
Roman and English jurisdictions. It concludes by examining the relation between
commercial and consumer fraud in England.
FRAUD AND MORALITY

Morality is a natural limb to examining fraud.11 Morality in this sense is a supra-legal
ethical concept to which one subscribes. So defined, it is arguable that it has a strong
connection to fraud. Rider has expressed surprise at the extent to which governments
and international organisations are ‘influenced, subverted and penetrated’ by those for
whom he describes as ‘having different values to those’ he hoped most people
espouse.12 The courts have similarly maintained this relation in several cases.13
Succinctly put, ‘a nation is born stoic but dies epicurean’,14 rendered in fraud terms
‘that self-indulgent, exploitative and unprincipled behaviour ultimately dooms a
society’.15
If the lack of morality has a direct bearing on fraud, then it would be expected that
the greater the sense of a person’s morality, the less likely the person would commit
fraud. While some contend that people with a greater sense of morality are unlikely to
commit fraud,16 others argue that other factors, rather, influence decision making in the
financial sector.17 However, morality arguably has a strong bearing on the susceptibility
to commit crime generally and fraud in particular.
Since fraud is regulated by law, an examination of the relationship between morality
and fraud forms part of the broad subject of morality and criminal law. An aspect to
examining this relationship is legal moralism, which is the extent to which law vis-à-vis
morality regulates conduct. Morality can be distinguished from law in that the former is
10
Gale, Gale and Scanlan (n 6) 5.
11
Sheridan (n 8) 184–205.
12
Barry Rider, ‘The Enemy Within’ [2010] Quantum Finance in Perspective 25, 28–29.
13
See Eggers (n 5) for a detailed discussion on fraud and morality and references to various
caselaw.
14
Gilbert Geis, White-Collar Criminal: The Offender in Business and the Professions
(Atherton Press 1968) 259.
15
Ibid 11–12.
16
Sidney C Suffrin, ‘How Moral Can a Business Be?’ <http://www.religion-online.org/
showarticle.asp?title=1688> accessed 25 February 2014.
17
Robert Jackall, ‘Moral Mazes: The World of Corporate Managers’ (1988) 1 Politics,
Culture and Society 598. See also Damian Grace, ‘A Summary of Robert Jackall’s Moral Mazes’
2005.
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The concept of fraud: a comparative analysis 17
not obligatory.18 While both admittedly regulate conduct, the strength of law consists,
among others, in sanction enforcement, cheaper expense in establishment, and flexibil-
ity both in terms of changing the rules and finding information for application.19
Morality on the other hand is less costly to impose and less expensive to enforce where
the person subscribes to the moral code.20
From a public policy point of view, what principles should guide the extent to which
morality or law or both are used to regulate human conduct? Shavell propounds the
idea of optimal domains of law and morality to represent these three possibilities and
argues that, in respect of fraud, the combination of the two is important because the law
is imperfect.21 This deficiency is however complemented by morality, which has vital
information that can help the law. Moreover, morality is inexpensive to enforce.22
It is argued that the criminal institution discriminates against the poor and favours the
rich and powerful in society.23 It is further suggested that, in stigmatising criminals,
there should be no bias between those convicted in the criminal courts and those
exposed by non-criminal courts.24 Green has suggested that where a conduct is
essentially immoral, it should be criminalised.25 In response, critics have posited that
crime can only be defined by the criminal law of a particular jurisdiction, and morality
and crime are not the same.26 However, morality and law share reciprocal influence.
The law can change people’s morality. Conversely, morality can influence change in the
law.27
In response to the degree to which the sphere of an immoral conduct coincides with
the sphere of conduct defined as criminal, Fuller suggests that it is dependent on the
‘relative homogeneity of moral values within the society represented in any political
jurisdiction’, indicating further that the more complex a society, the less there would be
of homogeneity and vice versa.28 The question may be asked at what point does
conduct considered immoral reach the fraud threshold. Fuller propounds the idea of
moral minimum, which is the elevation to the protection by the criminal law of values
18
John Gardner, ‘Law and Morality’ <http://papers.ssrn.com/sol3/papers.cfm?abstractid
=2344794> accessed 27 May 2015.
19
Steven Shavell, ‘Law versus Morality as Regulators of Conduct’ (2002) 4 American Law
and Economics Association 227.
20
Ibid.
21
Ibid.
22
Ibid.
23
Robert G Caldwell, ‘A Re-Examination of the Concept of White-Collar Crime’, White-
Collar Criminal: The Offender in Business and the Professions (1st edn, Therton Press
Incorporated 1968) 378.
24
Ibid.
25
Stuart P Green, ‘Lying, Misleading, and Falsely Denying: How Moral Concepts Inform
the Law of Perjury, Fraud, and False Statements’ (2001) 53 Hastings Law Journal 157. See also
Stuart P Green, ‘Moral Ambiguity in White Collar Criminal Law’ (2004) 18 Notre Dame Journal
of Law, Ethics and Public Policy 501. See also Mitchell N Berman, ‘On the Moral Structure of
White Collar Crime’ (2007) 5 Ohio State Journal of Criminal Law 301.
26
Berman (n 25). Caldwell (n 23) 378–379.
27
Shavell (n 19).
28
Richard C Fuller, ‘Morals and the Criminal Law’ (1941) 32 Journal of Criminal Law and
Criminology 624.
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considered sacred.29 He suggests that the regulation of frauds go beyond the moral
minimum in regulating various forms of conduct, for which reason more people have to
be won over in order to criminalise such conducts.30
THE CONCEPT OF FRAUD IN JUDEO-CHRISTIAN RELIGION

Although disputed by some,31 religion, as a possible source of morality, impacts on
personal and societal values.32 Judeo-Christian religion has influenced all facets of
English history, including its law and morality.33 For instance, the establishment of the
Ecclesiastical courts in England had an impact on the administration of law.34
Judeo-Christian religion generally prohibits fraudulent conduct. It is certainly not
suggested, even in the Bible, that those who publicly profess Christianity necessarily
exhibit moral conduct. Sir Holdsworth refers to many acts of forgery by priests in
earlier times.35
There are two principal approaches to the study of fraud in the Judeo-Christian
religion.36 Fraud can be approached from the position on the subject as revealed in
the Holy Bible. Fraud in the Bible is referred to as ‘honoyah’ which emanates from the
root word ‘honah’.37 ‘Honoyah’ is essentially about commercial fraud, denoting ‘the
act of committing fraud at the expense of someone else, particularly in cases of
exploitation of those weaker than oneself’.38 The warning in Exodus 22:2139 against
engaging in ‘wrongdoing’ refers to fraud or deception in daily financial transactions.40
The sages’ concept of fraud is the other approach to fraud in Judeo-Christian
religion.41 The sages put the Biblical concept into practical application by relying on
29
Ibid.
30
Ibid.
31
Michael J Perry, ‘The Morality of Human Rights: A Nonreligious Ground?’ (2005) 27
Dublin University Law Journal 28.
32
John Inge, ‘Theological Reflections on the Place of the Sacred in Society’ (2004) 7
Ecclesiastical Law Journal 380. See also Hershey H Friedman and William D Adler, ‘Moral
Capitalism: A Biblical Perspective’ (2011) 70 American Journal of Economics and Sociology
1014, where the authors argue how four basic principles of the Hebrew Bible and Talmud could
be used to create a more moral economic system.
33
WS Holdsworth, A History of English Law, vol 3 (3rd edn, Methuen & Co Ltd 1922) 14.
34
Ibid 21–25.
35
Ibid 28–31.
36
Ben-Zion Rosenfield and Joseph Menirav, ‘Fraud: From the Biblical Basis to General
Commercial Law in Roman Palestine’ (2006) XXXVII Journal for the Study of Judaism 594.
Equally, see Arthur Gross Schaefer and Beverly Bickel, ‘Morality in the Marketplace: Consumer
Protection, Regulatory Policy and Jewish Law’ (1994) 17 Loyola of Los Angeles International
Internaional and Comparative Law Journal 85.
37
Rosenfield and Menirav (n 36).
38
Ibid.
39
The Amplified Bible (The Lockman Foundation 1954) <https://www.biblegateway.com/
passage/?search=exodus+22&version=AMP> accessed 27 May 2015.
40
Rosenfield and Menirav (n 36). See also Schaefer and Bickel (n 36).
41
Rosenfield and Menirav (n 36). See also Schaefer and Bickel (n 36).
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the Mishna,42 which provides that ‘fraud [overreaching] is an overcharge of four pieces
of silver out of twenty-four pieces of silver to the sela …’.43 Thus the general law is
one-sixth of the purchase price. The provision of remedy under the sages’ law involved
correcting the price while the defrauded party is paid the difference.44 This was
applicable only to the situation where the fraud rate is one-sixth. The second option
involves the annulment of the transaction, and the goods returned to seller and money
to purchaser. The overwhelming preference is for the second remedy.
There are differences in the Biblical and sages’ approach to fraud.45 First, the sages
set a ‘defined rate of deviation from the just price’. Second, while the Biblical position
has no prescribed form of remedy, fraud assessed under the sages could be annulled.
Furthermore, Biblical fraud is applicable to real estate while the sages’ law referred to
products and movables.46
THE CONCEPT OF FRAUD IN ISLAM

The influence of religion on morality can equally be explored by considering Islamic
teachings on fraud. Muslims are strongly committed to the teachings of Shariah
including those on Islamic financial investments.47 With the rising interest in Islamic
financial investments,48 it is imperative to examine Shariah’s position on fraud.49
Islam encourages full and frank disclosure in financial dealings. The Prophet
Muhammed (PBUH) has stated that ‘he who deceives us is not of us’.50 Fraudulent
misleading statements in negotiations are also prohibited in Islam. Allah says ‘make
your utterances straightforward’.51 Real estate fraud is equally prohibited in Islam. It is
said that ‘whoever takes a piece of land of others unjustly, he will sink down the seven
earths on the day of resurrection’.52
42
A codification of oral law compiled by Rabbi Judah the Patriarch. See Schaefer and
Bickel (n 36).
43
44
Ibid.
45
Ibid.
46
Ibid.
47
Lu’Ayy Minwer Al-Rimawi, ‘Arab Regulations of Fraud, Insider Dealing, Market
Manipulation and Possible Contractual Remedies’ (1999) 303 Journal of Financial Crime
<Westlaw> accessed 18 December 2013. See also Abd El-Rehim Mohamed Al-Kashif,
‘Shari’ah’s Normative Framework as to Financial and Abuse’ (2009) 86 Journal of Financial
Crime <Westlaw> accessed 18 December 2013. See also KVS Nathan, ‘Who Is Afraid of
Sharia?: Islamic Law and International Commercial Arbitration’ (1993) 59 Arbitration 125.
48
Barry Rider, ‘The Virtue of Certainty’ (2009) 30 Company Lawyer 225.
49
M Chene, ‘Islamic Approaches to Corruption’ [2007] U4 Anti-Corruption Resources
Centre <http://www.u4.no/publications/islamic-approaches-to-corruption/> accessed 27 May
2015.
50
Al-Kashif (n 47) citing Sahieh Muslim ‘Sharh Al–Nawauwe’, part 1, p. 309, Hadith No.
101.
51
As cited by ibid.
52
As cited by ibid.
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A key feature in the fight against fraud is the reporting obligations placed on
individuals and financial institutions. Islam admonishes Muslims to report offences.
The reporting obligation however appears unclear as the Prophet (PBUH) has stated
that ‘whoever sees wrong being committed let him rectify with his hand, if he is
unable, then with his tongue, and if he is unable to, then with his heart, and this is the
weakest of faith’.
Islam requires a high standard of proof akin to beyond all reasonable doubts in
English law.53 However, the exact punishment meted to a person guilty of dishonest
gain in Islam is unclear. Meanwhile, Rider, while acknowledging the stability and
resilience of Islamic financial products, has, among others, questioned whether one can
recognise fiduciary law in Shariah or indeed the extent to which the principle of
conflict of interest guides a Shariah adviser.54
Has the West sought to impose the Judeo-Christian position on fraud on South Asian
countries? Bosworth-Davies has suggested that the Western position on the fight
against financial fraud has been influenced by robust Judeo-Christian moral positivism
expressed most forcefully by the Bible Belt’s Republican Right in the United States and
the emergent non-conformist ‘New Puritanism’ of the British Labour Establishment.55
The argument is nevertheless weakened by the limited evidence put forward especially
in respect of the United Kingdom. It is submitted that the contention, if sustainable, is
only true at the political level at a particular point in history.
EARLY HISTORY OF FRAUD

The history of fraud dates back into Biblical times as well as into Greek and Roman
times. The story is told of Hegestratos, a ship owner, and his accomplice, Xenothemis,
persuading the purchaser of corn to make advance payment but subsequently making
the shift to sail empty.56 Another report concerns a prominent Greek family who
employed inferior materials in the building of a temple.57 Roman law, apart from
preceding English law, similarly had a major impact on the latter’s development of the
law.58 As early as 1195, the University of Oxford had an established law programme.59
A history of fraud in Roman jurisdiction may perhaps be instructive to the understand-
ing of fraud in England.
53
Al-Kashif (n 47).
54
Rider, ‘The Virtue of Certainty’ (n 48).
55
Rowan Bosworth-Davies, ‘The Influence of Christian Model Ideology in the Develop-
ment of Anti-Money Laundering Compliance in the West and Its Impact, Post 9-11, upon the
South Asian Market: An Independent Evaluation of a Modern Phenomenon’ (2008) 11 Journal of
Money Laundering Control 179.
56
Peter Johnstone, ‘Serious White Collar Fraud: Historical and Contemporary Perspectives’
(1999) 30 Crime, Law and Social Change 107, citing M Clarke, Business Crime. Its Nature and
Control (St Martin’s Press 1990).
57
Geis, White-Collar Criminal: The Offender in Business and the Professions (n 14) 11.
See also Johnstone (n 56).
58
Holdsworth, A History of English Law (n 33) 3–14.
59
Ibid 148.
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Early Roman regulation of fraud-like cases concerned forgery or falsum.60 This did
not recognise any specific concept of fraud. The regulation of fraud in early law codes
and medieval legal practice was variegated according to the specific codes.61 It is
similarly apparent that local laws also differed.62 Dolus malus or fraus were regulated
as criminal offences but other cases of a similar nature were regulated under the civil
law.63 Criminal cases later dominated civil cases by regulating legal relations as theft.64
The above classifications were maintained in the Canon and ancient Italian doctrines.65
Falsum and stellionatus were confusingly interpreted.66 However, a distinction was
made when falsum was interpreted as deception, broadly, and other cases of guileful
misrepresentation. Punishments were determined by what the Lex Cornelia or any law
claimed criminal, by statute and by discretion, even though non-statutory punishment
was the usual.67
JEWISH AND ROMAN CONCEPT OF FRAUD

The comparison between the Jewish and Roman conception of fraud entails comparing
honoyah against fraus and dolus.68 Fraus is similar to the ‘sages’ concept of fraud
because it is used in mainly commercial transactions.69 Dolus however may be used in
the same context.
Fraud in Roman law refers to ‘misleading representation of produce on sale, or the
exploitation of a third party to avoid the obligations placed on one of the other
parties’.70 A key feature is that the claimant must prove premeditated intent on the part
of the deceiving party. Although it has been argued that it is more difficult to apply
Roman law in a commercial context than Jewish law, some local laws on fraud are
similar to sages’ laws.71
Under Roman law the right to annul was generally given only to the buyer.72 Even
so, evidence exists in some local communities during the Roman period where the right
to annul was given to both purchaser and seller in the context of receiving a better
price.73 This shows that different laws were applicable in different locations. In the
third century, where the sale was due to duress the purchaser could annul the
60
Stanley N Katz, The Oxford International Encyclopaedia of Legal History, vol III (VI,
Oxford University Press 2009) 102.
61
Ibid.
62
63
Katz (n 60) 102.
64
Ibid.
65
Ibid.
66
Ibid.
67
Ibid.
68
69
Ibid.
70
Ibid.
71
Ibid.
72
Ibid.
73
Ibid.
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transaction.74 However, there was no limitation on profit as there was in Jewish law as
legislators were wealthy classes and ensured this was so. It appears that Jewish law
provided fewer opportunities for defrauding the consumer than Roman law.
HISTORY OF FRAUD UNDER ENGLISH LAW

An enquiry into the history of fraud in England is linked to the history of the English
people, which began from about 449 when the Angles, Saxons and Jutes settled in
bands in the country.75 In early times, citizens sought justice by self-help before the
state intervened to regulate, at different times in English history, conducts considered
obnoxious. Consistent with the historical development of the law on fraud, this section
is chronologically divided into fraud at equity, fraud under the common law and fraud
under the criminal law.
Fraud at Equity
Controversy surrounds the exact date when regulation of fraud began in England and
whether it began first under equity or common law.76 It is stated that ‘through a strange
quirk in history, the evolution of the law of fraud began about five hundred years ago in
the English common law …’.77 On the contrary, it was the deficiencies associated with
the common law that gave birth to the equitable jurisdiction of fraud.78 The Courts of
Equity, Requests and the Star Chamber had jurisdiction over cases of fraud in
England.79 Coke, writing to the Chancery, stated: ‘For this Court of Equity the ancient
rule is good. Three things are to be judged in the Court of Conscience, Covin,
Accident, and breach of confidence. All covins, frauds, and deceits, for the which there
is no remedy by the ordinary course of law.’80 Indeed, it was not until the development
of the doctrine of deceit in the late eighteenth century that the common law began
regulating fraudulent conduct in England.81
74
Ibid.
75
76
See Andrew Burrows, ‘We Do This at Common Law but That in Equity’ (2002) 22
Oxford Journal of Legal Studies 1 for a general discussion on the difference between the two
jurisdictions.
77
Johnstone (n 56) citing J Bologna, Corporate Fraud: The Basics of Prevention and
Detection (Butterworths 1984).
78
‘Equity’, Halsbury’s Law of England (2nd edn, Butterworths Lexis Nexis).
79
Sheridan (n 8) 5.
80
Ibid. See also Sir WS Holdsworth, ‘The Relation of the Equity Administered by the
Common Law Judges to the Equity Administered by the Chancellor’ (1916) XXVI Yale Law
Journal <Heinonline> accessed 2 May 2014.
81
Holdsworth, A History of English Law (n 33) 292–293. See also Flora Page, ‘Defining
Fraud: An Argument in Favour of a General Offence of Fraud’ (1997) 4 Journal of Financial
Crime 287.
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Regulation of fraud in equity may have begun during the reign of Edward II or
earlier.82 Evidence of equitable relief against fraud exists from about Henry V
onwards.83 This is where the earliest recorded case emerges.84 In the Earl of
Chesterfield v Janssen,85 the Chancellor Lord Hardwicke classified equitable fraud into
about five different categories and emphasised the fact that the Court of Conscience
had jurisdiction to deal with all cases of fraud where it is fraud on the public. Several
other cases followed the Earl of Chesterfield case including the Carpenter v Heriot 86
and Earl of Aylesford v Morris87 cases.
Subsequently, the width of the equitable fraud extended to intellectual property cases,
where it was held that where a manufacturer has protected his intellectual property,
being a trademark in a product, it was fraud if another adopted the same trademark and
markets it as if it was his own.88 In Scroggs v Scroggs,89 equity was applied to prevent
the fraudulent execution of a power.
Post eighteenth century equity predominantly concerned contractual disputes.90 The
examination of contracts is reflected in the way equity dealt with cases involving
the statute of frauds.91 This investigation went beyond the normal to exploring the
intentions behind contracts. This is reflected mainly in undue influence cases and
misrepresentation.92
In summary, the Court of Equity dealt with all cases of fraud before the common law
began to exercise jurisdiction on matters of fraud. Since 1875, however, the Court of
Equity and the common law have exercised concurrent jurisdiction.93 Frauds under
equity today include knowing receipt, unconscionable dealing as a vitiating factor,
equitable undue influence, conspiracy and dishonest assistance.94
82
‘Equity’ (n 78).
83
Sheridan (n 8) 5.
84
Ibid.
85
Chesterfield (Earl of) v Janssen [1751] 2 Ves Sen 125.
86
Carpenter v Heriot (1759) 1 Ed 338.
87
Aylesford (Earl of) v Morris (1873) LR 8 Ch App 484.
88
Singleton v Bolton [1783] 3 Douglas 293.
89
Scroggs v Scroggs [1755] Ambler 272 (Court of Chancery).
90
Michael Lobban, ‘Contractual Fraud in Law and Equity, c1750–c1850’ (1997) 17 Oxford
Journal of Legal Studies 441.
91
Ibid.
92
Ibid.
93
Stephen Waddams, ‘Protection of Weaker Parties in English Law’, Unconscionability in
European Private Financial Transactions: Protecting the Vulnerable (Cambridge University
Press 2010) <http://ebooks.cambridge.org/> accessed 25 January 2014.
94
Janet Ulph, Sir Michael Tugendhat and James Glister, Commercial Fraud: Civil Liability,
Human Rights and Money Laundering (Oxford University Press 2006). See also Nelson
Enonchong, Duress, Undue Influence and Unconscionable Dealing (Sweet and Maxwell 2006).
See also McGrath (n 1).
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Fraud at Common Law
The history of the regulation of fraud under the common law is linked to the history of
the action in deceit.95 Deceit had three causes of action, which became actionable when
they came to the notice of the court during litigation.96 Forgery was similarly at the
time punishable, as was reliance on a false document in a court of law.97 The
opportunity for committing fraud during litigation was great because there were
intricate procedures involved in litigation.98 The doctrine of deceit was extended to
substantive actions in the contracts of sale where there had been inducements by
deliberate misleading.99
Somerton’s case shows civil liability for fraud focused on the acts and damage
caused to the claimant but ignored the defendant’s intentions.100 In this regard it was
considered similar to breach of warranty. In Doige’s case,101 a buyer accepted the
purchase price but refused to convey the land. The writ stated that he was ‘craftily
scheming to defraud the plaintiff’ and thus ‘false and fraudulent’. Fermor’s case102
reflects the established doctrine that false representation was actionable when the
plaintiff could prove that the defendant had been intentionally deceitful. In Chandler v
Lopus,103 the Court of Exchequer held that ‘the bare affirmation that it was a bezoar
stone, without warranting it to be so, is no cause of action’. This reasoning was pursued
in Roswell v Vaughan.104 The first reported case under the common law where a
claimant who was induced to do anything other than contract with the defendant was
allowed to recover damages is the 1789 case of Pasley v Freeman.105 Finally, breach of
warranty was distinguished from an action for false representation. By 1889 Derry v
Peek106 had established that intention to defraud must form a component of the deceit.
The common law now developed its own modern rules on rescission of contracts on the
ground of fraud.
Fraud under the common law in the eighteenth century gave relatively little scope for
the exercise of discretion outside the strict terms of the agreement by juries.107 Juries
principally focused on terms of agreement made by the parties and it was crucial that
the evidence showed an agreement between the parties.108 In the nineteenth century, the
95
Holdsworth, A History of English Law (n 33) 366.
96
The late WW Buckland, Arnold D McNair and FH Lawson, Roman Law and Common
Law: A Comparison in Outline (2nd edn, Cambridge University Press 1965) 383. See also
Sheridan (n 8) 5–7.
97
98
99
Ibid 623–626.
100
Somerton’s case [1433] B 11 Hen 6 Hil Pl 1.
101
Doige’s Case B Hill 9 Hy VI.
102
Sir Edward Coke, Institutes of the Laws of England: The First Part, vol 2 (J & W T
Clarke; R Pheney; and S Brooke 1823).
103
Chandler v Lopus [1603] Cro Jac 4.
104
Roswell v Vaughan [1607] Cro Jac 196.
105
Pasley v Freeman 3 TR 51.
106
Derry and others v Peek (1886) 1 ER Rep 1 (House of Lords).
107
Lobban, ‘Contractual Fraud in Law and Equity, c1750–c1850’ (n 90).
108
Ibid.
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trend moved away from liberalism towards a more complete examination of the
contract to ensure fairness.109 This was achieved, among other approaches, through
interpreting contracts to achieve fairness and public expectation.110 Judges also took
care of fraud by putting forward doctrines to prevent it.111 Cases in point are the
development of the doctrine of estoppel and extension of the doctrine of deceit in
Pasley v Freeman. Today, common law fraud conducts include misrepresentation,
mistake, undue influence, duress, deceit, unjust enrichment and conversion.112
Fraud under the Criminal Law
English society had always considered theft inexorable and made it a capital crime.113
By Edward I’s time the distinction between grand and petty larceny (theft) had been
established, and it continued till 1827.114 However, breach of warranty of title was
norm in cases where individuals sought remedies for acts of fraud and different reasons
have been given to explain this situation.115 Meanwhile, early signals of regulating
criminal fraud began around the thirteenth century when laws were enacted to deal with
forestalling.116 It is understood that there are surviving records in Norwich in 1278 and
in Bury St Edmunds ‘reporting court leet fines against local citizens for … selling
defective merchandise and charging excessive prices’.117
In the 1474 Carriers case,118 both the Court of Star Chamber and the Exchequer
Chamber examined in the criminal context fraud effected by the abuse of trust and
ruled that ‘though a man cannot steal goods bailed to him … yet, if the bailee does an
act which determines the bailment, he may steal the goods’.119 In 1483 a statute making
bale breaking a felonious act was enacted followed in 1529 by one making it an offence
for servants to take their master’s property.120 Between 1542 to around 1543, reference
is made to ‘… divers and sundry persons, craftily obtaining into their hands great
109
Ibid.
110
Ibid.
111
Ibid.
112
McGrath (n 1). See also Ulph, Tugendhat and Glister (n 94).
113
Sir James Fitzjames Stephen, A History of the Criminal Law of England, vol III
(MacMillan and Co 1883) 129. See also John Hostettler, A History of Criminal Justice in
England and Wales (Waterside Press 2009).
114
Stephen, A History of the Criminal Law of England (n 113) 129. See also Gilbert Geis,
‘From Deuteronomy to Deniability: A Historical Perlustration on White-Collar Crime’ (1988) 5
Justice Quarterly 7.
115
Page (n 81).
116
Stephen, A History of the Criminal Law of England (n 113) 199–202. The laws on
forestalling were repealed in 1777. See Geis, ‘From Deuteronomy to Deniability: A Historical
Perlustration on White-Collar Crime’ (n 114).
117
Geis, ‘From Deuteronomy to Deniability: A Historical Perlustration on White-Collar
Crime’ (n 114).
118
The Carrier’s case [1474] 13 Edwa 4 P9 No 5. As reported in Stephen, A History of the
Criminal Law of England (n 113) 139.
119
Stephen, A History of the Criminal Law of England (n 113) 139.
120
Page (n 81).
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substance of other men’s goods’.121 It is also reported that where metal dealers used
uncorrected weighted balances they were excommunicated, while the sale of under-
weight foods resulted in a fine and banishment. Sir Coke stated in 1602 that ‘fraud and
deceit abound these days more than in former times’.122
Sector-specific criminal efforts at regulating fraud emerged in the financial sector
triggered essentially by the South Sea Bubble. The offence of scandal was created in
1720, and in 1734 St Barnard’s Act passed to prevent stockjobbing.123 In 1757 the
statute for the offense of obtaining by false pretences was enacted with the object of
dealing with intent to cheat or defraud. However, due to the development of the
doctrine of constructive taking in R v Pear, this legislation was used sparingly.124 In
applying the 1757 Act in Young,125 Asthurst J stated that ‘all men were not equally
prudent, and this statute was passed to the weaker part of mankind’.126
The legislature enacted a plethora of legislations127 in the Victorian era, determined
to deal with fraud from the criminal perspective.128 However, the inadequacy of these
provisions in confronting fraud led to the enactment of a consolidating Act in 1861
later described as ‘haphazard’.129 The Larceny Act 1916 was thus enacted as a
simplified code. From the perspective of fraud the Act was, among others, not
appropriate in dealing with cases of deception and dishonesty. Consequently, the Law
Commission proposed reforms.130
The Theft Act 1968 sought to address the issues identified with the 1916 Larceny
Act. Meanwhile, the offence of conspiracy to defraud, crucial in fighting multiparty
fraud, was given a statutory footing in the 1977 Criminal Law Act.131 Pursuant to the
1987 Criminal Justice Act, the Serious Fraud Office was established to combat fraud.
Even so, the Law Commission’s report on fraud132 raised, among others, the issue of
multiplicity of charges in serious fraud trials even though none of them adequately
encapsulated the meaning of fraud.133 Moreover, it opined that the law on fraud had not
caught up with the pace of technological advancements.134
Consequently, the Fraud Act 2006 was born. Fraud under the criminal law is defined
in section 1 (1) of the Act which provides that a person is guilty of fraud if he is in
121
Johnstone (n 56). Citing (34, 35 Henry VIII C. 4. Coke. Fourth Institute. 2777, 278
Vol I).
122
Johnstone (n 56).
123
7 George II C.8. and 1736 (10 Geo.2) Chapter 8. Stockjobbing. R. 23-4. V. C. 28.
124
The King v Pear [1779] 1 Leach 212 (Old Bailey). See also Page (n 81).
125
Young v Clerk [1720] 24 ER 241 (Court of Chancery).
126
Ibid.
127
128
Page (n 81).
129
Ibid.
130
Roy Stuart, ‘Law Reform and the Reform of the Law of Theft’ (1967) 30 The Modern
Law Review 609. See also Page (n 81).
131
S (1) Criminal Justice Act 1987. Meanwhile, s (5) abolished all conspiracy related
offences.
132
‘Fraud: Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965’
(n 7).
133
Ibid 2.
134
Ibid 57.
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breach of any sections listed in subsection (2). The sections listed in s 1 (2) are: frauds
by false representation, failing to disclose information and abuse of position. Although
clearly a huge leap forward the Act is not infallible.135 Frauds under the criminal law
also include theft, conspiracy to defraud,136 and fraudulent trading, among others.137
Fraud under Criminal and Civil Law
Dishonesty is one of the hinges upon which fraud revolves, particularly so in the
criminal context where it is the mens rea for the fraud offences.138 Following Ghosh,
most people appreciate the objective and subjective senses of dishonesty. However,
there are extended notions of dishonesty under English civil law, for instance dishonest
assistance in equity. The Fraud Act 2006 has stirred debate about the relationship
between the civil and criminal senses of dishonesty.139 Some of the issues140 are: what
is the relationship in law between concepts such as silence, concealment, breach of
trust and dishonesty? Can you conceal where there is no duty to disclose? Does
dishonesty plus concealment amount to fraud? Detailed examination of these is beyond
the scope of this chapter.
ROMAN LAW AND COMMON LAW FRAUD

Although actio doli and deceit are the same because they lie against fraudulent
conducts, there are some differences.141 First, in English common law fraud must have
induced the act causing the damage, but this is not express in Roman law, though
deception must have occurred and must have been serious.142 Second, fraud in common
law covered a much broader field than actio doli where there is subsidiary action
‘aimed at restoring the status quo ante’.143 In another respect, actio doli did not lie
where false representation was made to a wide class like in a prospectus where anyone
misled and damaged could bring action.144 Furthermore, actio doli must have a
135
See Carol Withey, ‘The Fraud Act 2006: Some Early Observations and Comparisons with
the Former Law’ Journal of Criminal Law 220. See also Andrew Ashworth, Principles of
Criminal Law (6th edn, Oxford University Press 2009) 398–402. See also Barry Rider and
others, Market Abuse and Insider Dealing (2nd edn, Tottel Publishing 2009).
136
For the ongoing debate to abolish conspiracy to defraud see ‘Fraud: Report on a
Reference under Section 3(1)(e) of the Law Commissions Act 1965’ (n 7).
137
See Simon Farrell QC, Nicholas Yeo and Guy Ladenberg, Blackstone’s Guide to The
Fraud Act 2006 (Oxford University Press 2007) and Arlidge QC, Milne QC and Parry (n 2) for
detailed discussion on criminal frauds.
138
Fraud Act 2006.
139
Rider and others (n 135) 71–144.
140
Ibid 97–144.
141
Buckland, McNair and Lawson (n 96) 383–391.
142
Ibid 384.
143
Ibid.
144
Ibid 385.
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‘definitely dishonest intent’ to cause harm to another. However, actio doli was wider
where it referred to simple dishonesty.145
FRAUD IN EQUITY AND UNDER COMMON LAW

One issue worthy of note is the proper approach to fraud post Pasley v Freeman. The
two jurisdictions appeared to be applying different tests.146 Although Lord Tenterden’s
Act resolved some of the issues raised in Pasley,147 the debate148 raged on until it was
settled in section 2 (1) of the Misrepresentation Act 1967. Equitable fraud is thus no
longer necessary. Another critical issue is the extent to which equity jurisprudence has
survived since the implementation of the Judicature Act 1875. Waddams has argued
that equity jurisprudence, which was supposed to prevail over the law in cases of
conflict, has ironically been marginalised, partly caused by works of persons such as
Pollock and Anson, thus confirming the gloomy prophecy made before fusion of the
jurisdictions.149
FRAUD: OTHER ASPECTS

The concept of fraud extends into other areas of law. One can examine fraud laws in
the area of debt and insolvency. Cadwallader aptly puts it when he states that ‘when
anyone enters the realm of debt enforcement, there enter also without bidding two
spectres, fraud and good faith. This is in effect their world, their comparative
dominance see-sawing with man’s changing attitude towards insolvency.’150 Provisions
on insolvency are thus relevant in this regard.151 The money laundering and proceeds of
crime provisions provide another window to examining fraud in the modern era.152 It is
similarly possible to explore the relationship between combating fraud and not only
data protection and privacy legislation but also human rights provisions where the First
Protocol, Articles 6 and 8 are particularly relevant.153 Indeed, state efforts at fighting
social security fraud have come under scrutiny with respect to infringement on data
145
Ibid.
146
James Edelman, ‘Nocton v. Lord Ashburton (1914)’, Landmark Cases in Equity (Hart
Publishing 2012) 473–498.
147
Ibid 478–479. This made misrepresentations about credit unactionable unless they were
in writing.
148
Michael Lobban, ‘Nineteenth Century Frauds in Company Formation: Derry v. Peek in
Context’ (1996) 112 Law Quarterly Review 287. See also Edelman (n 146) 473–498.
149
Stephen Waddams, ‘Equity in English Contract Law: The Impact of the Judicature Acts
(1873–75)’ (2012) 33 Journal of Legal History 185.
150
Francis John James Cadwallader, ‘In Pursuit of the Merchant Debtor and Bankrupt:
1066–1732’ (Thesis submitted for the Degree of Doctor of Philosophy in the Faculty of Law,
University of London 1965) 1.
151
Ulph, Tugendhat and Glister (n 94) 234–323. See also McGrath (n 1).
152
Ulph, Tugendhat and Glister (n 94) 124–234.
153
Ibid 36–121.
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protection legislation as well as Articles 6 and 8 of the human rights act.154 It is also
argued that placing dishonesty at the heart of the fraud offences breaches the principle
of certainty and human rights provisions.155 Meanwhile, the Court of Appeal has
indicated that market abuse and insider dealing are frauds.156
COMMERCIAL AND CONSUMER FRAUD

Generically conceived, fraud occurs when a person becomes the victim of conduct
described as fraud and prohibited by the criminal or civil fraud laws in any society.157
A distinction is drawn between commercial fraud and consumer fraud,158 which
distinction is made unstable due to confusingly varied definitions in the literature.
Moreover, in the latter phrase, the noun ‘consumer’ functions as an adjective modifying
the noun ‘fraud’.159 Both phrases are however adopted as convenient shorthand to mean
frauds as they affect businesses and vulnerable consumers respectively. Rothschild and
Throne define criminal consumer fraud as ‘an intentional act of lying to, cheating or
stealing from a consumer (or attempting to do so), which is punishable as a crime in
any jurisdiction’.160 This definition erroneously assumes that fraud has an identical
definition in any jurisdiction.
A critical question is how to distinguish between frauds which affect consumers and
businesses. A possible indicator is whether the applicable laws of the jurisdiction make
that distinction.161 To the present author, the fundamental question is whether the
conduct complained of is one for which a consumer or his lawful representative can use
as a cause of action to bring a civil claim against the defendant or to bring criminal
154
Grainne McKeever, ‘Balancing Rights and Responsibilities: The Case of Social Security
Fraud’ (2009) 16 Journal of Social Security Law 139.
155
Ashworth (n 135) 398–402.
156
R v McQuoid [2009] EWCA Crim 1301.
157
In Stephen, A History of the Criminal Law of England (n 5) 121–122. Sir Stephen said in
relation to fraud that ‘he shall not attempt to construct a definition which will meet every case in
which might be suggested …’. The present author’s conception of fraud is partly influenced by
this submission. See also McGrath (n 1) 5.
158
Consumers International (CI), ‘A Guide to Developing Consumer Protection Law’
<http://www.consumersinternational.org/media/715456/a-guide-to-developing-consumer-protection-
law.pdf> accessed 27 May 2015.
159
In practice, it appears that commercial fraud is less susceptible to confusion than
consumer fraud. Consumer fraud seems to have sharp opposing meanings in the literature both
in the sense where the consumer is the ‘culprit’ and ‘victim’. See Claudia Isabel Marues de
Abreu Lopes, ‘From Description to Explanation in Cross-National Research: The Case of
Economic Morality’ (PhD Dissertation, London School of Economics 2011). It is the present
author’s submission that where a business is the ‘victim’ it is better classified as commercial
fraud.
160
Donald P Rothschild and Bruce C Throne, ‘Criminal Consumer Fraud: A Victim-
Oriented Analysis’ (1976) 74 Michigan Law Review 661. The authors use chapters 1 and 2 of
the book of Micah as the Biblical origin of consumer fraud but this appears unclear.
161
See, for example, Consumer Protection from Unfair Trading Regulations 2008 and Unfair
Contract Terms Act 1977.
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proceedings as the case may be. For instance, the conduct may be considered
unconscionable162 or dishonest or unlawful within the civil or the criminal senses
within a particular jurisdiction.
Consumer fraud is also distinguished from commercial fraud in the sense that the
ambit of protection offered to the consumer is often broader.163 Indeed, the law has
often taken account of this in considering the bargaining power of the parties.164
Further, administrative bodies are often established to protect the consumer whereas
this may not necessarily be the case for businesses.165 Moreover, while the basis of
liability in commercial fraud is principally contractual, and legal action is normally
between the parties in the transaction, protecting the vulnerable consumer against fraud
may sometimes involve the state bringing criminal proceedings against the defend-
ant.166 Cases in point are commercial torts, for example where a manufacturer produces
inherently dangerous products such as exploding ovens, defective automobiles and
harmful pharmaceutical products.167
PLATFORM FOR FRAUD

If the stage is the setting for a theatrical play, then the transaction is the primary
platform for the commercial interaction between businesses and between businesses
and consumers.168 Generally, the transaction between parties commences by means of a
contract.169 Fraud may take place in the contract process. Transactions fall into two
broad phases: pre-contract and post contract. Cartwright has provided a useful
taxonomy in the context of protecting vulnerable consumers.170 These are information,
impact, pressure, supply and redress vulnerabilities.171 This taxonomy can be incorpor-
ated into the pre-contract and post contract phases of a transaction to assess fraudulent
conduct. However, detailed consideration is beyond the scope of this chapter.
162
Waddams, ‘Unconscionability in European Private Financial Transactions’ (n 93).
163
Consumers International (CI) (n 158).
164
See s (12) UCTA.
165
For example, The Office of Fair Trading (OFT).
166
Peter Cartwright, Consumer Protection and the Criminal Law: Law, Theory, and Policy
in the UK (Cambridge University Press 2001). See also Consumers International (CI) (n 158).
See also OFT, ‘Criminal Enforcement of the Consumer Protection from Unfair Trading
Regulations 2008 – OFT Policy OFT1273’ <http://webarchive.nationalarchives.gov.uk/
20140402142426/http://www.oft.gov.uk/shared_oft/policy/OFT1273.pdf> accessed 20 May
2015.
167
168
This is commonly referred to as Business to Business (B2B) and Business to Consumer
(B2C) transactions.
169
170
Peter Cartwright, ‘The Vulnerable Consumer of Financial Services: Law, Policy and
Regulation’ <http://www.nottingham.ac.uk/business/businesscentres/crbfs/documents/research
reports/paper78.pdf> accessed 20 May 2015.
171
Ibid.
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CONCLUSION
Fraud has been on an interesting journey, perhaps to an uncertain destination.172
Technology is influencing this uncertainty.173 Man’s quest to commit fraud is infinite
and to so suggest is no mark of metaphysical omniscience. Laws are thus necessary
tools to combat fraud. Nevertheless, in view of its acknowledged limitations, reliance
on law alone amounts to complacent optimism. Consequently, promoting moral values
must form part of the plethora of approaches in combating fraud.174 It is similarly
prudent to draw lessons from history and other jurisdictions. English equitable rules
evolved in the Chancery, which became crucial in regulating fraud partly emanated
from canon law.175 This confirms the merits of the comparative approach to regulating
fraud. In this regard, Rider is a signpost. This chapter draws on history, morality and
law and advances the merits of the comparative approach to regulating fraud.
172
See Barry Rider, ‘Dealing with the Dark Side of Business – the Way Ahead!’
<www.fiurmalta.org/library/PDF/Prof%20Barry%20Rider%20(1).pdf> accessed 20 June 2013.
173
See the high technology fraud in Michael Lewis, Flashboys: Cracking the Money Code
(Allen Lane 2014). The BBC has reported that Barclays Bank is being sued by US authorities
for this ‘dark pool’ fraud – see ‘Barclays Accused of “Dark Pool” Fraud’ (The British
Broadcasting Corporation (BBC) 2014) <www.bbc.co.uk/news/28030351> accessed 26 June
2014.
174
Schaefer and Bickel (n 36).
175
Holdsworth, ‘The Relation of the Equity Administered by the Common Law Judges to
the Equity Administered by the Chancellor’ (n 80).
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3. Financial crime: a historical perspective

George Gilligan
INTRODUCTION
In recent decades the financial sectors of Australia, the UK, the US and indeed most
countries have not enjoyed great popularity with the broader community as the
repercussions of the Global Financial Crisis (GFC) continue to unwind and scandals
roll across the front pages of newspapers and television screens with depressing
regularity.1 For example in the UK, the mis-selling of pensions scandal in the 1980s
and early 1990s, when UK regulatory authorities acknowledged that as many as
1,500,000 people may have been wrongly advised to withdraw from company pension
schemes by insurance companies and financial advisers.2 And guess what? In eerily
similar contexts, through 2012 and 2013 it became increasingly clear that systematic
payment protection insurance mis-selling had been undertaken by UK banks for many
years, showing how little they had learnt (cared?) about the lessons of the pensions
mis-selling scandal twenty years earlier. Since the latest mis-selling scandal was
exposed, UK banks have set aside more than £12 billion to cover compensation to their
customers for mis-selling them payment protection insurance; Lloyds Banking Group
alone has set aside £5.3 billion.3
For a London based financial sector scandal which has global implications it is hard
to escape the ongoing investigations and potential future prosecutions by regulatory
authorities surrounding systematic manipulation of the London Interbank Offered Rate
(Libor).4 The enormous scale of the Libor scandal was acknowledged by then Assistant
1
For example, a November 2012 poll of more than 1,000 adults by US pollster Gallup
found that stockbrokers ranked 18 across a range of 22 professions in terms of perceived honesty
and ethical conduct. This placed them above advertising practitioners, Members of Congress and
car salespeople, but below many others including insurance salespeople, lawyers and business
executives. Obviously, this is not conclusive in any way but it is an indicator of low public
esteem. See: Gallup Politics, ‘Congress Retains Low Honesty Rating’, 2 December 2012,
http://www.gallup.com/poll/159035/congress-retains-low-honesty-rating.aspx.
2
See: Financial Services Authority, ‘The FSA Launch Final Reminder to Consumers
Mis-sold a Pension’, 7 February 2000, http://www.fsa.gov.uk/library/communication/pr/2000/
022.shtml.
3
See: D. Schafer and J. Thompson, ‘Lloyds Fined £4.3m for PPI Delays’, Financial Times,
19 February 2013, http://www.ft.com/intl/cms/s/0/506ce648-7a88-11e2-9c88-00144feabdc0.
html#axzz2M9rextmf; and Financial Services Authority, Payment Protection Insurance, 2013,
http:// www.fsa.gov.uk/consumerinformation/ product_news/ insurance/payment_protection_
insurance_.
4
See for example: Department of Justice, ‘UBS Securities Japan Co. Ltd. to Plead Guilty to
Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates’ (Press
Release, Washington, DC, 19 December 2012), http://www.justice.gov/opa/pr/2012/December/
32
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Financial crime: a historical perspective 33
Attorney General of the US Department of Justice (DOJ) Lanny A. Breuer in January

2013: ‘Libor will prove to be one of the largest, if not the largest white-collar case in
history.’5 Despite the proclivity of codes of conduct across various occupational groups,
sectors and jurisdictions to promote good behaviour and practice, as the Libor debacle
illustrates, there seem to be structural forces at work within the financial industry that
limit transparency and indeed may stimulate wrongdoing.
Media outlets and commentators may label scandals such as Libor and the mis-
selling of pensions as financial crime.6 However, are the Libor and mis-selling of
pensions scandals financial crimes? Indeed, what is financial crime? Justice Potter
Stewart of the US Supreme Court once famously said of obscene material that he might
not know precisely what it was, but ‘I know it when I see it’.7 There are similar issues
regarding financial crime when individuals and agencies are faced with the problem of
defining such activity.
Financial crime is a slippery concept, notably resistant to precise definition due to its
blurring of activities and structures. So, over the years there have been many definitions
put forward by government agencies and other commentators. For example, Wikipedia
defines financial crime as: ‘A crime against property, involving the unlawful conversion
of the ownership of property (belonging to one person) to one’s own personal use and
benefit. Financial crime often involves fraud.’8 This collapse into the category of fraud,
which is in many senses more familiar, is more readily acknowledged under legal codes
and by courts, and which therefore can be more easily delineated, is a feature of
debates about financial crime. For the International Monetary Fund (IMF): ‘Financial
crime can refer to any non-violent crime that generally results in a financial loss,
including financial fraud. It also includes a range of illegal activities such as money
laundering and tax evasion.’9
A generalisable definition proves elusive but the UK Financial Conduct Authority
(FCA) produces helpful publications with titles such as: Fighting Financial Crime, or
12-ag-1522.html; see also European Union Competition Directorate, ‘Antitrust: Commission

Fines Banks €1.71 Billion for Participating in Cartels in the Interest Rate Derivatives Industry’
(Press Release, Brussels, 7 December 2013); Australian Securities and Exchange Commission,
‘ASIC Accepts Enforceable Undertaking from BNP Paribas’ (Press Release, Sydney, 28 January
2014; ‘ASIC Accepts Enforceable Undertaking from UBS’ (Press Release, Sydney, 23 December
2013).
5
PBS Frontline, ‘Lanny Breuer: Financial Fraud Has Not Gone Unpunished’, 22 January
2013, http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/untouchables/
lanny-breuer-financial-fraud-has-not-gone-unpunished/.
6
See for example: D. Bond-Graham, ‘LIBOR: Viewing the Biggest Financial Crime in
History’, Counter Punch, 6 February 2013, http://www.counterpunch.org/2013/02/26/libor-
viewing-the-biggest-financial-crime-in-history/; R. Scheer, ‘Libor: The Crime of the Century’,
The Nation, 6 July 2012, http://www.thenation.com/article/168751/libor-crime-century#.
7
Jacobellis v Ohio, 84 S. Ct. 1676 [1964].
8
Wikipedia, ‘Financial Crimes’, 2012, http://en.wikipedia.org/wiki/Financial_crime.
9
International Monetary Fund, Financial System Abuse, Financial Crime and Money
Laundering – Background Paper, 2001, p. 3, http://www.internationalmonetaryfund.com/
external/np/ml/2001/eng/021201.pdf.
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Financial Crime: A Guide for Firms.10 The FCA’s predecessor, the Financial Services
Authority (FSA), previously stated that financial crime included any offence involving
money laundering, fraud or dishonesty, or market abuse.11 In the view of the
Government of Liechtenstein: ‘There is no generally valid definition of financial crime.
At a minimum, it includes money laundering, organized crime, and the financing of
terrorism.’12 So there seems to be underlying uncertainty globally regarding exactly
what financial crime is, a lack of specificity about financial crime offences per se, but
nevertheless nuanced understandings about what behaviours might be included under
the label. So, if we accept that a hermetic definition of financial crime may be a step
too far at the present time, how long has financial crime been around as a problem for
various societies?
FINANCIAL CRIME – NOT A NEW MENACE?

Financial crime may be infuriatingly difficult to define, but many of the harmful
behaviours that might be considered financial crimes have been acknowledged as social
problems for centuries. For example, forgery and counterfeiting posed regulatory
problems for Roman and Byzantine administrations almost two thousand years ago.13
There are long-established traditions to counter market manipulation that can be traced
back to the doctrine of just price, which was first adopted during the later Roman
Empire by the Emperor Diocletian.14 The doctrine of just price held that markets had to
be organised in certain ways in order to be just, and so it legitimised interference in the
institutional structures of markets to achieve that aim and was backed by the ideology
of Church Law.
The historical analysis in the remainder of this section is necessarily brief (due to
space constraints) and Anglocentric in its focus, but nonetheless it will have some
resonance regarding non-Anglo jurisdictions, how they regulate their financial markets
and how they seek to respond to financial crime. Financial regulation is concerned
mainly with capital resources and how those resources are raised, organised and
marketed in fair and efficient ways; financial crime is and always has been a threat to
achieving these objectives. The emphasis below is on highlighting some of the
important regulatory markers in British financial regulation (largely English in truth,
focused on the City of London – the City) that have so influenced current regulatory
10
Financial Conduct Authority, Financial Crime: A Guide for Firms, http://fshandbook.info/
FS/html/handbook/FC/link/PDF.
11
Financial Services Authority, Fighting Financial Crime, 2012, http://www.fsa.gov.uk/
about/what/financial_crime.
12
Portal of the Principality of Liechtenstein, What is Financial Crime, http://www.
liechtenstein.li/en/eliechtenstein_main_sites/portal_fuerstentum_liechtenstein/fl-wuf-wirtschaft_
finanzen/fl-wuf-finanzdienstleistungen/fl-wuf-finanzdienstleistungen-finanzkriminalitaet/fl-wuf-
finanzdienstleistungen-finanzkriminalitaet-was.htm.
13
H. Croall, White-Collar Crime, (Open University Press, 1992), 8.
14
B.M. Mitnick, The Political Economy of Regulation, (Columbia University Press, 1980),
243.
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praxis and approaches to financial regulation and financial crime not only in the UK,
but also in Australia, the US and elsewhere.
In England, from 400 to 1200 there was a change from tribalism, via feudalism, to
nationalism. State justice replaced feudal justice and common law emerged as the law
of the Crown available to all men. The principles of common law grew from the forms
of justice administered by the King’s courts.15 The common law helped shape
contemporary social structures and it promoted the belief that commercial transactions
were essentially private in nature. This idea was rooted in the practice of the late
Middle Ages when the Crown deferred to the professional expertise of the merchant
guilds and permitted them to develop rules governing trade. During the fourteenth
century the main commercial towns were granted Courts of Staple in which merchants
judged their own customs, and this law merchant was absorbed into the common law.
This process was accelerated by the eighteenth-century judiciary led by Lord Mans-
field, who empanelled special jurors from the City to determine crucial cases on the
import of financial, insurance and trading customs, and these activities helped to shape
contemporary understandings of what might be considered financial crime.16 Even as
late as the nineteenth century, in England many economic and political functions, as
well as the administration of the civil and criminal law itself, continued to operate in
many ways at a local rather than a centralised level. This strong local emphasis and
lack of central state interference heavily influenced the development of English markets
and industries. All English markets, and not just London’s financial markets, have firm,
long-held traditions of self-regulation. They are legally grounded in the law merchant
and common law, and have at their heart the belief that commerce is a domain of
private transactions. As the Anglo and, later, Anglo-American model of financial
capitalism have come to be so influential in shaping global financial markets, so have
these traditions been influential in shaping understandings of, and responses to,
financial crime.
Thus the regulation of securities in Britain derives from the theories of markets, with
the concept of barter markets being the earliest authority. In England, from AD 1000 a
sophisticated form of market regulation begins to emerge. Its central purpose was to
introduce more certainty into economic exchange by impacting upon the processes of
supply and demand. The contemporary concern about threats posed by financial crime
can be seen in the establishment of the ancient common law offences of engrossing
(e.g. buying large quantities of a commodity such as corn to gain market dominance,
forcing up prices and then selling on at inflated prices), forestalling (raising the price of
certain goods by holding up supplies of commodities) and regrating (e.g. buying corn
or other grains in any market so as to raise the price, and then selling it again in the
same place). All were rendered statutory offences in the fourteenth century.17 These
brief examples demonstrate that market manipulations such as the rigging of the Libor
rates are not exclusively modern phenomena and neither are regulatory efforts to
counter their effects. As is true of many contemporary regulatory initiatives, these
15
J.H. Baker, An Introduction to English Legal History, (Butterworths, 1990), 63.
16
W.R. Cornish and G. de Clark, Law and Society in England 1750–1950, (Sweet &
Maxwell, 1989).
17
Statutes of the Realm (1363) 37 Edw. III c8.
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statutes were a legislative response to the social and political pressures exerted by the
moral economy of English society at that time. These pressures often stimulated crowd
protest, and for several hundred years mass protest was a common response to grain
shortages.18 Also it is important to note that these common law offences of engrossing,
forestalling and regrating are indicators of a long tradition of state-legitimated
interference in markets, a tradition that it is fundamental to consider when examining
how financial crime has come to be recognised and countered under more modern legal
processes.
The earliest statutory instances of City regulation relate to brokers, and the most
significant early Acts were: 13 Edward I stat.5 [1284]; I James I c.21 [1604]; 8 & 9
William III c.32 [1697]; 6 Anne c.16 [1707]; 10 Anne c.19 [1711]; 6 George I c.18
[1720]; 3 George II c.31 [1730]; 7 George c.8 [1734].19 The 1284 statute authorised
the Court of Aldermen to license brokers (or broggers as they were then called) in the
City and also to prosecute unlicensed brokers.20 From one perspective this licensing
initiative can be seen as a direct regulatory initiative to improve industry operating
standards and counter financial crime. Viewed slightly differently, this statute can be
seen as firmly establishing the traditions of self-regulation and restrictive trade
practices in the City as reward for its financial and political support of the Crown.
As we have seen in recent times as first the GFC and then scandals such as Libor
have unfolded, public concerns about inappropriate market behaviours and their
regulation can intensify during periods of market crisis. This is not a new development
and neither are contemporary concerns about financial crime in financial markets. For
example, during the boom of 1693–1695 and the crisis that followed, a parliamentary
inquiry was appointed in November 1696 ‘to look after the Trade of England’ as a
response to widespread public disquiet about the rapacious nature of England’s early
capital markets. There were significant levels of public anger about market manipu-
lation and widespread accusations that brokers were manipulating rumours about
foreign wars and share prices in order to increase their volumes of trade.21 The Royal
Commissioners were alarmed by the promotion of frauds and manipulation of the
market; they complained that:
The pernicious Art of Stock-jobbing hath, of late, … wholly perverted the End and Design of
Companies and Corporations, erected for the introducing, or carrying on of Manafactures, …
by selling their shares for much more than they are really worth … Thus, … the Management
of that Trade and Stock comes to fall into unskilful Hands, whereby the Manafactures …
dwindle away to nothing.22
18
See for example: G. Rude, The Crowd in History: A Study of Popular Disturbances in
France and England 1730–1848, (Wiley, 1964); and E.P. Thompson, ‘The Moral Economy of
the English Crowd in the Eighteenth Century’, (1971) 50 Past and Present, 76.
19
F. Baily, The Rights of the Stock-Broker defended against the Attacks of the City of
London, (W.J. and J. Richardson, 1806), v.
20
L. Loss, Fundamentals of Securities Regulation, (Little Brown and Company, 1983), 1.
21
T. Mortimer, Every Man His Own Broker, (S. Hooper, 1791), 40.
22
House of Commons Journals, (London, 1696), 25 November 1696.
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As discussed earlier, in the twenty-first century stockbrokers do not seem to be highly

regarded in public opinion polls.23 Similarly, in the early eighteenth century the public
image of stock-jobbers was quite low and the fear of financial crime quite high, as
shown by an appeal in 1721 to the ‘noble instincts’ of Parliament to legislate against
those dealing in Share Contracts:
The Buyers for Ready Money are allowed to be the Gentry and Merchants, as well as the
Buyers for Trust, and the cunning Jewellers are the same in both Cases, viz, the late
Directors, their Agents, Confederates, Brokers and Stock Jobbers, who by a dismal reverse in
Affairs have, by Collusion and Fraud, raised Fortunes to themselves, too large for any
Subjects …
But as all honest Men will consider, that there are a great many of these Bargains, which
stand in the Names of these hidden and secret Villains.24
Much as there is widespread anxiety and frustration today about how few prosecutions
have emerged from the GFC, so three hundred years earlier there was fear and
resentment about perceived dishonesty and criminal behaviour in the markets of the
City. Entry to the great companies and guilds was through family links and apprentice-
ship. These arrangements created the conditions for the dictum meum pactum – ‘my
word is my bond’ – approach, which has influenced the development of commerce in
all countries, but has dominated the operational culture of the City. Transgressors of
this ‘club code’ rarely faced criminal proceedings. Instead they were merely shut out of
the City’s social and professional life by the actions of a remarkably effective peer
network. The threat of social ostracism generally ensured the security of transactions
on the London Stock Exchange. Over a prolonged period it was the most enduring and
powerful sanction in the regulation of the City. In effect it was this social dimension
that traditionally has been a significant defence against financial crime. That it could be
so was due to the sense of tightly knit community, which was one of the great strengths
of the City because it increased its capacity to provide high levels of certainty in the
social organisation of trust.
The structural properties of trust relationships have always underpinned the ideology
of commercial exchange, but their importance is accentuated in financial services.
Symbolic proxies such as share certificates, contracts, mortgages, letters of credit and
cheques are exchanged for other symbolic proxies that may or may not equate with
tangible goods. These structures of trust are vulnerable to violation or manipulation.
However, the tightly knit community of the City and its attendant organisational
structures allowed it for a long period of time to claim that it could offer a reasonable
degree of trustworthiness to contemporary investors. This was an important factor in
helping London secure its pre-eminent position as a financial centre and has helped to
entrench self-regulatory traditions in responding to perceived threats from financial
23
Gallup, above n1.
24
Anon, Some Considerations with respect to the Bill for preventing the infamous Practice
of Stock-Jobbing; being Remarks upon the Supplement to the Reasons for making void and
annulling those Fraudulent and Usurious Contracts, into which etc. and upon the Reply to a
modest Paper, etc. both delivered at the Door of the House of Commons on Friday last, (London,
1721).
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crime with, as is now well-known today, differing levels of success in responding to

those threats.
Some regulatory responses to financial crime threats have been more successful than
others. For example, returning to the regulatory chronology, the Bubble Act 6 Geo II
c.18, passed on 9 June 1720 in order to dampen the speculative fever of the South Sea
Bubble, was not a resounding success.25 The South Sea Company had been established
in 1711 by converting £900 million of unfunded national debt (a legacy of the War of
Spanish Succession) into shares of the new South Sea joint-stock company. Layers of
subsequent dubious promotions and other market manipulations created the infamous
speculative bubble resulting in the inevitable collapse of the South Sea Company and in
turn the Bubble Act itself. However, the Bubble Act was an ineffective statute whose
draconian penalties, including life imprisonment and forfeiture of all property, were
aimed at those operating non-chartered companies. These sanctions were little more
than a symbolic deterrent, and although the Act remained on the statute books until the
Bubble Repeal Act 1825, there was only one prosecution under its provisions.26 This
notion of symbolic deterrence rather than concerted and sustained pressure against
financial crime is a recurring theme in many jurisdictions, not just in the UK. It
partially explains ongoing widespread distrust of financial professionals, as well as
frustrations from investors and the broader community about ineffective regulatory
responses to financial crime.
Scandals are a recurring feature of financial services on a global scale, including the
UK, but they were probably more common in the 1840s than they are now. There is no
overwhelming evidence that general financial practice is less ethical than it was, and it
appears more likely that ethical standards have risen over time.27 They are certainly
higher than in the Victorian era in the UK, during which, for example, The Railway
Mania of 1845–1846 occurred, when hundreds of railway schemes were launched as a
source of enormous fees for promoters, lawyers, engineers and surveyors. Many were
never intended to be built, with some promoters (once they had accumulated substantial
funds from investors) actively lobbying for their Railway Bills to be rejected by
Parliament.28
Why has financial crime been so seemingly intractable for so long, and institutional
responses to counter financial crime so weak? A revealing historical insight into the
hegemony, power and relative autonomy of the City was provided with the passage of
Leeman’s Act 1867 which sought to stop the widespread practice of not recording
transactions individually (but instead recording them as house transactions) and also
aimed to reduce speculative dealing in banking securities (a feature in so many
contemporary financial crime scandals). The disregard of the City even for existing
statutory controls was clear in the evidence given in 1875 by Mr Samuel Herman de
Zoete, then the chairman of the London Stock Exchange, to a parliamentary committee:
25
See for example: J. Carswell, The South Sea Bubble, (Cresset Press, 1960).
26
R v Caywood 1 [1723] Stra 472 and 2 Ld Ray 1362.
27
J. Welby, ‘Do Business Ethics Matter?’(1992) 3 International Company and Commercial
Law Review, 45.
28
G. Robb, White-Collar Crime in Modern England: Financial Fraud and Business
Morality, 1845–1929, (Cambridge University Press, 1992), 11.
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‘Sirs, we disregarded for years Sir John Barnard’s Act and we are now disregarding in
the same measure Mr. Leeman’s Act.’29
It is difficult to imagine any other business interest group openly defying a
parliamentary committee and statutory instruments in such a manner, but it indicates
the confidence of a disparate arrangement of groups and individuals in the City with
shared economic interests in being able to tailor the discourse that constructs the
regulation of their activities. A key explanatory factor for this is that the City has been
tremendously successful in having its own interests widely identified as converging
with the public interest on matters of financial regulation. This ability to shape
perceptions of what entails the public interest has interacted with broader legal
developments to influence significantly the City’s financial markets and their regu-
lation, and these traditions have been exported to a significant degree to other finance
centres such as New York. Like other powerful actors, the City has been able to set
goals for the general interests of society. The utility that its regulatory authority has
held for the diverse interests that constitute the City is the fact that its cultural norms
and values were for many years adopted as conventional working practice in the UK
financial sector. Constellations of interests in the City have been successful in
projecting their preferred model of financial regulation and routinised social and
business practices as the natural social and economic order, thereby ensuring its
hegemony.30
Similar processes are at work today in London and in other finance centres around
the world, in the management of conflicts and with regard to many other issues that
may provide the space within which financial crime can occur. We should not be too
surprised by this because regulation can be viewed as a commodity, a raw material
which is subject to market forces and may be facilitative, inherently contradictory,
manipulative and complex. The twin pressures of special interest groups and market
forces remain extremely influential in shaping contemporary regulatory praxis in
financial services in the UK and elsewhere, just as they have done for centuries. In a
market society much power lies with capital resources, and those involved with the
raising, organisation and marketing of capital have great influence. Also, the complex-
ity of the financial services industry excludes most people from being able to evaluate
specifically its processes, and it is within this paradigm that the evolution of financial
crime and recent scandals such as Libor should be understood.
UNDERSTANDING FINANCIAL CRIME

The complexity of the financial services industry excludes most people from being able
to evaluate specifically its processes and operational cultures. Occasionally an insider
will leave a firm or the industry and shed light on these cultural processes. An example
is US Law Professor and former derivatives salesman Frank Partnoy’s account of the
working culture and attitudes of his contemporaries on Wall Street in the early 1990s,
29
House of Commons Journals, (London, 1875).
30
See: G. Gilligan, Regulating the Financial Services Sector, (Kluwer Law International,
1999).
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which highlights the operational culture of the firm and the industry at the time and
contains some graphic examples of the callous indifference of some traders to the
well-being of their clients. For example, in April 1994, the reaction of Morgan
Stanley’s leader John Mack to the increasing derivatives losses of some of Morgan
Stanley’s clients was allegedly: ‘There’s blood in the water. Let’s go kill someone.’31
Partnoy writes how a fellow salesman described his sale of a Principal Exchange Rate
Linked Security (PERLS) derivatives trade to a treasury officer of an insurance
company who did not understand the trade as ‘… ripping his face off’.32 The latitude
that derivatives traders received from their controllers was largely explained by the
enormous profits that they generated for their firm: ‘From 1993 to 1995 … the seventy
or so people … in the derivatives group at Morgan Stanley in New York, London, and
Tokyo generated total fees of about $1 billion – an average of almost $15 million …
arguably the most profitable group of people in the world.’33
This observation goes to one of the core issues that drives the culture of financial
firms and can stimulate some of the worst excesses of financial crime – the incentive
regimes for individuals within financial firms that are designed to generate fees and
profits for the firm. The short-termism orientation of incentive systems is a major
determinant of the culture within a particular firm and within the finance industry more
generally. Skewed short-term incentives structures can motivate individuals and organ-
isational units to commit financial crime even if simultaneously they may seek to
neutralise and thus internally legitimate such behaviour. Over the years it has been a
crucial factor stimulating tolerance of business misconduct as many financial profes-
sionals such as Partnoy and his colleagues at Morgan Stanley normalise these activities
as being relatively unexceptional. This is achieved through the same techniques of
neutralisation utilised by the juvenile delinquents studied by Sykes and Matza in the
1960s: i) denial of responsibility; ii) denial of injury; iii) denial of the victim; iv)
condemnation of the condemners; v) appeal to higher loyalties.34 These neutralisation
processes were apparent in the behaviours of many of those involved in the manipu-
lation of Libor and other financial scandals over the years. If the prevailing rapacious
culture of the finance industry is to improve for the better, then these neutralisation
tendencies and short-termism incentive structures need to be rolled back.
As we have seen, the regulatory traditions of a financial centre will also shape the
prevailing operational cultures of financial actors and financial markets, whether
centuries ago in the City or in contemporary interconnected but disintermediated
financial trading zones. This will directly impact upon levels, reach and intensity of
financial crime. Generally, firms and individuals are evaluated in terms of economic
performance, and in some situations regulatory compliance may inhibit their economic
success. Consequently, as was made clear as the GFC unwound, there can be
organisational tendencies towards regulatory deviance and behaviours that might come
31
F. Partnoy, F.I.A.S.C.O. – Blood in the Water on Wall Street, (W.W. Norton & Co., 1997),
15.
32
Ibid, 61.
33
Ibid, 13.
34
G.M. Sykes and D. Matza, ‘Techniques of Delinquency’, in M. Wolfgang, L. Savitz and
M. Johnston, (eds), The Sociology of Crime and Delinquency, (John Wiley, 1970), 295.
Barry Rider - 9781783475780

under the banner of financial crime even if not prosecuted as criminal offences.
However, it is extremely difficult to evaluate exactly how much financial crime is
systemic, calculated or due to individual self-interest. Intensive analysis of the
sociology of compliance can help build a picture of the relative influence of these
factors, thereby assisting regulators in their work and financial organisations in
strengthening their operational cultures to reduce financial crime.
The most significant element in regulatory compliance and avoiding financial crime
is the choice by people to comply. This occurs as part of their reflexive theoretical
understanding of their own personal standing within an organisation or industry and/or
in response to their own sets of normative values. This is perhaps the area of greatest
potential for crime prevention programmes in all business, not just finance – impacting
upon individuals within organisations and activating their own value systems to work
towards crime prevention, reducing and/or eliminating bad behaviour in organisations,
re-aligning incentive structures, improving organisational cultures and prioritisation of
the public interest.
Barry Rider - 9781783475780

4. Internationalization of crime and technology

Peter M. German1
In the space of a generation, the landscape of communications has been transformed by

the symbiotic combination of computers and the worldwide web. The computing power
which allowed man to reach the moon in 1969 is now available on every university
student’s laptop computer and to persons of virtually every social stratum.
The egalitarian nature of twenty-first century technology has ensured that criminals
also have the ability to harness its power and use it as a tool to commit crime. The
anonymity of the internet and its sheer volume make crime detection ever more
difficult. It is against this backdrop that the following pages offer some insight into the
internationalization and interrelationship of crime and technology.
In order to better understand these convergent and divergent issues, money launder-
ing will be used as a case study of both the threat and the cure. To begin, however, a
brief overview is required of both organized crime and the challenges of technology.
ORGANIZED CRIME
Professor Barry Rider has described the characteristics of organized criminal activity,
regardless of the illegal commodity involved. They include:2
1. profit being the primary characteristic, obtained through maximizing investments,

legal and illegal, in a continuing criminal enterprise;
2. employing ordinary techniques of business, in addition to corruption, to generate
exorbitant profits;
3. utilizing violence and extortion as tools of the trade;
4. being organized in various ways, although hierarchical organizations are com-
monplace, as are familial and other allegiances;
5. having leaders who are insulated from ongoing criminality; and
6. not being confined to national borders, but carrying on their activities inter-
nationally.
Although reflective of the foregoing characteristics, organized crime groups are

extremely varied in appearance depending on their origins. They extend from Chinese
1
The views expressed are those of the writer and do not necessarily reflect those of the
Government of Canada.
2
B.A.K. Rider, “Organized Economic Crime”, paper presented to the Richards Butler
Seminar on Economic Crime, 9 February 1990; quoted in B.V. Kumar, “Economic Crime and Its
Impact on Democracy”, Taxindiaonline.com, 2009, online at http://www.taxindiaonline.com/, at
p. 2.
42
Barry Rider - 9781783475780
Internationalization of crime and technology 43
Triads to the Yakuza of Japan, motorcycle gangs in Australia and Canada, the Mafia in
Italy and the United States, Russian organized crime in many parts of the world and
Central American drug cartels, to name but a very few.
They also differ depending on their commodity/commodities of choice. Whether they
operate drug trafficking rings, fraud syndicates, protection rackets, illegal prostitution
or gaming ventures, counterfeit rings – the common factors are that their activities are
illegal and for profit. Increasingly they are crossing borders and diversifying their
commodities of choice.
An interesting characteristic of sophisticated criminal organizations is their bi-
furcated nature. The targeting side of the operation is matched by a parallel money
laundering structure which spins and ultimately obfuscates the money trail, examples
being a South American drug cartel, the Hells Angels in Canada, the Italian Mafia,
Russian organized crime, and Mexican drug lords.
A good example of this characteristic is telemarketing fraud, which targets senior
citizens, either through phone calls or e-mail messages. Mini boiler rooms, easily
transportable, work out of Toronto, Montreal, and other cities, using “sucker” lists to
call persons in Canada, the United States, the United Kingdom, and other English-
speaking countries. This form of 419 or West African fraud is widespread. The truly
gullible are duped into meeting their callers in a relatively safe third country, such as
the Netherlands, whose citizens have not traditionally been targets of the scammers.
Millions of dollars are lost annually in this fashion. The money obtained by the
scammers follows an entirely different route to its eventual destination, either through
bulk smuggling or electronic transfer. Experts within the organized crime ring disguise
the money trail, ensuring that an invisible wall exists between the perpetrators of the
initial fraud and the money movers.
The upscale version of telemarketing fraud is phishing and all of its variants, in
which criminals mimic or clone financial websites, in the hope of duping persons
reading their e-mail into providing passwords and other personal information, which
can then be used, traded, or sold for identity theft purposes. These are really
rudimentary schemes, but are by their very nature international in scope and dealing
with them requires co-operation between authorities from multiple countries, often-
times involving different legal systems. Telemarketing fraud is perfectly quaint,
however, by comparison to what is on the horizon, and that horizon is bearing down on
us at a frightening speed.
Of greatest concern is the merger of organized crime and terrorist groups in many
parts of the world, particularly in drug producing and exporting countries and where
nations are in conflict. Examples include Mexico and various Central American and
Middle Eastern countries. Criminals with a religious or political agenda utilize the
profits of their criminality to fund terrorist activities. The result is that organized crime
has become an amorphous beast.
TECHNOLOGY
Developments in transportation and communications have revolutionized the way
humans travel and interrelate. Air travel has become the rail and boat travel of a
Barry Rider - 9781783475780

hundred years ago. The internet is today’s post office. Cellular phones, electronic
messaging, encryption, and satellites permit instant and relatively secure communica-
tions to those who succumb to the temptation and embrace what is available.
McLuhan’s global village is a reality.3 The world is no longer beyond one’s reach –
unless you are very poor.
For all the advantages that technology, transportation, and communications provide,
there are disadvantages. Criminal organizations have also embraced these mediums in
order to streamline, expand, and profit on a global basis. In the words of Canada’s
Minister of Justice, spoken over thirty years ago:4
Increasingly we are seeing the effects of criminal organizations operating both from within
and without this country that are totally dedicated to the commission of crime for profit.
These organizations take advantage of modern communications, transportation and corporate
structure to frustrate the reach of national legal systems to amass illicit and illegal wealth.
The sheer magnitude of the internet is hard to fathom. In 2012, James Josh wrote that
during every minute of the day, 205 million e-mail messages are sent, two million
Google queries are made, 685,000 information items are shared on Facebook, 571 new
websites are created, and 100,000 tweets occur.5 The understanding of our youth with
respect to technology is outstripping our ability to deliver in some learning environ-
ments, while the pace of technological advances is outstripping our ability to react to
emerging events.
A key example of this is the development of virtual currencies. Arising out of the
shadowy side of internet gaming, virtual currencies captured the media spotlight and
went mainstream in 2013, driven in large part by the success (and controversy)
surrounding Bitcoin, a digital currency without a physical presence, which is
exchanged through computer transactions. Users install a wallet on their computer or
mobile phone, which permits the sending and receiving of Bitcoin payments. From
there, the party’s Bitcoin address and Internet Protocol or IP address are transmitted to
a clearing site for verification. A number of other virtual currencies have followed suit.
In order to obtain Bitcoin, one must transfer national currency into Bitcoin. The
opening of the first automated teller machines for Bitcoin purchases fuelled media
interest. Stories were featured of individuals and small businesses which began
accepting Bitcoin as currency in trade for purchases and sales. In the murky
underworld, virtual currency is traded, gambled, and used to pay off debts.
Although there have been incidents of Bitcoin theft as a result of compromised
wallets or information, the controversy surrounding it is largely fuelled by the secretive
3
See Marshall McLuhan, The Gutenberg Galaxy: The Making of Typographic Man
(Toronto: University Press, 1962).
4
House of Commons Debates, 14 September 1987 at p. 8888. For a discussion of the
emergence of transnational crime and its impact on the criminal law, see United States of
America v. Cotroni [1989] 1 S.C.R. 1469.
5
James Josh, http://www.domo.com/blog/2012/06/how-much-data-is-created-every-minute/,
as referenced by John Sliter, “‘Techno-Risk – The Perils of Learning and Sharing Everything’
From a Criminal Information Sharing Perspective”, unpub. paper, Cambridge Symposium on
Economic Crime, 3 September 2012.
Barry Rider - 9781783475780

nature of its development, ownership, and distribution. Its “pseudo-anonymity” and the
lack of regulation surrounding virtual currency prompted Canada’s Department of
Finance to warn that it can prove to be “an attractive payment method for criminals”.
The combination of anonymity, the ability to purchase Bitcoin with currency, the ease
of movement across borders, and the lack of restrictions concerning deposits and
withdrawals all contributed to this concern.6
The brave new world of cyber-technology is evident for all to see, even if very few
understand its machinations. One need only read the local paper. In 2013, Target
Corporation, a huge North American retailer, was struck by hackers who made off with
40 million payment card numbers. They entered the Target computer system through a
weak external link, thanks to a ventilation contractor’s stolen password. In 2014, a
Canadian was arrested in Florida by U.S. federal agents carrying US$300,000 in online
currency in his laptop and electronic wallet. The currency was allegedly proceeds from
the Target credit card compromise.7
Also in 2014, JP Morgan’s network appears to have been breached through an
employee’s personal computer, tethered to its network by an external link. The attack,
using malicious computer code, may have affected other banks. Supervalu Inc., which
manages the technology for some 1,000 grocery stores, was also successfully hacked.
Cyber-attacks are classic examples of crimes which, for the purpose of investigation,
require the sharing of information and intelligence, on a priority basis, between public
and private entities.
In 2007, an international group of senior police chiefs, including from the UK, the
United States, the Netherlands, Australia, Hong Kong, and Singapore among others,
created scenarios in order to predict what the future held for policing.8 The chiefs
recognized that technology would radically change the way we communicate and that
society would soon exchange ideas via computers and handhelds. They recognized that
organized crime and terrorist groups would be able to communicate securely and could
mobilize adherents to a cause through the use of social networking. A video was
produced which quite dramatically portrayed the nightmarish scenario of an individual,
“a lone wolf”, who was able to incite riots in countries around the world simply by
harnessing what we now refer to as social media.
The chiefs of police predicted that this form of chaos would be possible by 2020.
Little did they realize that the world would witness an explosion of social media –
e-mail, Facebook, Twitter, wireless internet, cheap computers and cell phones, which
collectively helped to ignite the Arab Spring. The decade which they predicted turned
out to be less than four years.
During the uprisings in North Africa in 2011, the toppled dictatorships and
kleptocracies could not prevent the masses from communicating, and communicating
effectively, with a united purpose. When governments shut down their phone systems,
citizens turned to the internet. When governments shut down the internet service
providers, people moved to social networking.
6
The Canadian Press, “Bitcoin Crime Potential Flagged”, Victoria Times-Colonist, 29 July
2014, p. B4.
7
“Suspicious Finds”, CPA Magazine, August 2014, p. 35 at p. 37.
8
The “Pearls of Policing” initiative of the Dutch Federal Police.
Barry Rider - 9781783475780

There are numerous other examples of crowds mobilizing in a very short period of
time as a result of instant messaging – the G20 protests in Toronto in 2010 and the
Ferguson riots in Missouri in 2014 are but two of these.
The rise of the Islamic State movement, or ISIS, and its strange, radicalized form of
Muslim fundamentalism, like Al Qaida before it, has both frightened and outraged the
world. Its summary executions are reminiscent of similar efforts at ethnic cleansing,
practised by the Nazis in Germany, the Khmer Rouge in Cambodia, and by warring
factions in the former Yugoslavia and elsewhere. What is particularly troubling to the
Western world is the appeal of ISIS to native sons and daughters in Britain, Canada, the
United States, and elsewhere. How does an apparently ordinary youth from one of
those countries become an executioner wearing a mask in a foreign land?
ISIS is a master at harnessing social media. It urges youth to join the cause, making
the pitch that they have an obligation to join. Its media teams have not only created
videos of mass executions, designed to scare opponents into submission; but also
videos of an idyllic land, the Caliphate of Iraq and Syria, where devout Muslims can
live in harmony with fellow believers.
The ISIS media barrage surprised investigators, forcing the removal in early 2014, by
U.K. authorities, of over 1,100 pieces of content from the web for allegedly breaching
British terrorism laws. ISIS quickly redirected its barrage elsewhere. Social media
savvy wings of ISIS have posted material on Twitter, Facebook, You Tube and other
sites, published articles, translated jihadi material, and produced professional videos.
Mujatweets lob soft recruiting material at foreign youth, including postings from
foreign nationals who have embraced “the vision”. Battlefield updates, the glorification
of violence, and the subjugation of women are recurring themes. The use of hashtags in
front of the acronyms for Western mainstream media and events is intended to target
unsuspecting individuals with the ISIS rhetoric.
This is but a teaser of what is to come. Nanotechnology, CCTV, facial recognition
software, driverless automobiles, GPS tracking, and intelligent mapping are but a few
of the amazing new applications which already exist and are being moved into the
public domain. The flip side of the equation involves false social media accounts,
affinity fraud, profile cloning, information mining, spear phishing, and spam – lots
of it.
MONEY LAUNDERING
The phenomenon of money laundering captured headlines throughout Europe and
North America during the 1980s. Although integral to many forms of criminal activity,
drug trafficking unquestionably raised its international profile. Illegal drug use peaked
in the United States during the late 1970s and early 1980s, and was variously described
as both an epidemic and an emergency. The rise of transnational organized crime
groups exacerbated the concerns over drug use.
Similar in many ways to legitimate enterprises, criminal organizations are self-
sustaining, unaffected by the arrival or departure of individual members. Money has
often been described as the “golden thread” which ties syndicates together. With the
development of large drug cartels and the trans-border shipment of illegal drugs by all
Barry Rider - 9781783475780

manner of conveyance, the financial proceeds of the drug trade increased exponentially.
These proceeds crossed borders with relative impunity, in tangible or electronic form,
and often changed appearance many times before reaching a final destination.
Just as money is the golden thread, it has also been described as the “Achilles heel”
of organized crime. As a result, the United States, the United Kingdom, Canada, and
many other countries have joined in what can best be described as a two prong attack
on drugs and the profits from their sale.
Despite its recent notoriety, profit-oriented crime and the laundering of those profits
is by no means new. Many have attempted to trace the origins of money laundering,
without success. Barry Rider notes that the “objectives and essential modus operandi”
of modern money launderers are no different than those of “the gem carriers of India or
the Knights Templar”.9
The modern era of money laundering is often associated with the development of the
Cosa Nostra during America’s Prohibition in the 1920s and 1930s. Meyer Lansky was
the mob’s banker. In addition to being credited with developing Las Vegas into an
international gambling mecca, Lansky pioneered the use of private banking for criminal
purposes, and laundering assets through onshore and offshore havens, including Swiss
and Bahamian banks.10
Money laundering occurs in many forms and in most sectors of the economy. It
involves deposit-taking institutions, currency exchange houses, the securities industry,11
real estate, commercial trading, corporations, gold and precious gem merchants, cash
purchases of expensive items, gambling, the insurance industry, lawyer’s trust accounts,
and accounting firms.
Of all these conduits, deposit-taking institutions, which encompass chartered banks,
credit unions, building societies, caisses populaires, and trust companies, are of
greatest importance, as they “represent a perfect vehicle to provide the legitimization of
illicit money while maintaining anonymity for the criminal enterprise”.12
Through the process of placement, layering, and integration,13 the money launderer
will effectively accomplish three objectives: conversion of bulk proceeds of crime into
9
Barry A.K. Rider, “Law: The War on Terror and Crime and the Offshore Centres: The
‘New’ Perspective?” in Donato Masciandaro, ed. Global Financial Crime (Aldershot, Eng.:
Ashgate, 2004) at p. 63.
10
The term “offshore” havens or financial centres is commonly used in two ways; first, to
loosely describe any country outside the borders of one’s own country and, second, to describe
typically small, island jurisdictions which have acquired a reputation as tax havens. Stung by the
impact of international sanctions, many island nations have argued that they were unfairly
targeted while “onshore” financial centres, which provide similar services, were not. The
International Monetary Fund (IMF) recently ended its use of the word, “offshore” (Vanessa
Houlder, “IMF to Erase ‘Offshore’ Centre Stigma”, Financial Times, ed1, London, 15 July
2008).
11
Stock markets are an excellent vehicle for laundering large sums of money in electronic
form, through match trading and through the use of convertible debentures.
12
Margaret E. Beare and Stephen Schneider, Tracing of Illicit Funds: Money Laundering in
Canada No.1990-05 (Ottawa: Solicitor General Canada, 1990). An update can be found in
Beare, Criminal Conspiracies: Organized Crime in Canada (Toronto: Nelson, 1996) at p. 101.
13
For definitional purposes, the money laundering process is almost always divided into
three stages: placement of the dirty money in a financial vehicle, layering the money by moving
Barry Rider - 9781783475780

another form, concealment of its origin and ownership, and creation of an “alibi” for
the funds.14 It is in the layering stage where technology plays the greatest role.
Technology permits the instantaneous movement of money over many thousands of
miles. A classic money laundering typology is the “black market peso exchange”,
common among Colombian drug dealers over the past decades, as they trafficked their
product to the United States and Western Europe, while facing restrictive currency
controls and tax regimes at home. Ray Kelly, former Commissioner of the U.S.
Customs Service, described the scheme as “perhaps the largest, most insidious money
laundering system in the Western Hemisphere”. It allows the world of commerce to
mask money laundering, while also removing the risk to traffickers of dealing with
proceeds of crime.15
In the black market peso exchange, a drug trafficker sells his product and receives
U.S. dollars or Euros in exchange. These proceeds are then sold to a currency trader in
the United States or Europe, who exchanges pesos, which he controls in Colombia, for
the dollars or euros in the hands of the traffickers. At this point, the drug traffickers
obtain the pesos in Colombia and have accomplished their purpose. The broker then
launders the U.S. dollars or euros by selling them to a Colombian importer, or by
purchasing goods from manufacturers, on behalf of Colombia importers. These goods
enter Colombia illegally, avoiding the payment of tariffs and charges. The broker
replenishes his peso account in Colombia once the goods are delivered. He will
typically be paid a commission from both sides and will also benefit from fluctuating
exchange rates.
Governments, corporations, and individuals can disguise their financial books by
laundering the losses from risky or illegal ventures through offshore centres.16 Jeffrey
Robinson refers to this as the “Lansky Syllogism” – if money cannot be followed, it
cannot be found; and if it can’t be found, it can’t be taxed.17 Offshore centres vary from
those which studiously avoid receiving non-tax, criminal proceeds, to others which are
virtual funnels for flight capital. The impact of offshore centres on developed
economies is believed to have had a catalytic effect on financial crises in Asia during
the 1990s and on North American corporate scandals in the past decade.
it through other vehicles, and integration into the legitimate economy. Each stage can manifest
itself in many different ways. For example, the relative importance of cash and the decreased
availability of electronic banking in the developing world makes money laundering in those
countries appear quite different from that in developed nations. See, generally, B.V. Kumar,
“India: The Misuse and Abuse of Legal Provisions in Money Laundering”, (1997) Journal of
Financial Crime V4:3, p. 257.
14
Stephen Schneider, “The Incorporation and Operation of Criminally Controlled Com-
panies”, (2003) Journal of Money Laundering Control V7:2, p. 126. Schneider provides
numerous examples of money laundering vehicles and schemes.
15
Oriana Zill and Lowell Bergman, “The Black Peso Money Laundering System”, PBS
Frontline Drug Wars, p. 3, online at http://www.pbs.org/wgbh/pages/frontline/shows/drugs/
special/blackpeso.html.
16
Jeffrey Robinson, The Sink: Crime, Terror and Dirty Money in the Offshore World
(Toronto: McCelland & Stewart, 2003) at p. 8. For example, Canadian banks have the largest
presence of any nation in the Caribbean, offering various degrees of banking secrecy.
17
Ibid. at p. 15.
Barry Rider - 9781783475780

Money can be wired offshore in nanoseconds, frustrating audit trails, and allowing
hoarding in foreign countries. Trade barriers have been relaxed and borders seldom
present the difficulties which they did in past years. Nations become attractive to
money launderers for many reasons, some of which are similar or identical to the
reasons why offshore tax havens are attractive to persons wishing to avoid the payment
of taxes.
Bank secrecy legislation, nominee corporate ownership, the ability to issue bearer
securities, a stable currency and established banking system, branches of international
banks, efficient communication, transportation, and money transfer systems, all contrib-
ute to the right mix. Combining this cocktail with foreign legal systems and different
languages and cultures makes the job of law enforcement extremely difficult.18
Corruption, terrorism, and other criminal offences share responsibility with the drug
trade for this evolution. Terrorism is probably the most challenging. What changed
almost immediately after 9/11 was a recognition that the financing of terrorism was a
challenge which national governments had to meet. They are attempting to do so
through the existing mechanism of the Financial Action Task Force (FATF) and its
recommendations on money laundering, which were extended to include terrorist
financing. Domestic legislation was amended in countries around the world to
incorporate the FATF’s Special Recommendations. This was followed by various forms
of sanctions legislation, which have typically been employed in response to crisis in
different parts of the world, the Arab Spring being one example and, more recently,
Ukraine.
SUMMARY
In Canada, strong partnerships have developed between the police and the financial
services industry, in particular the Canadian Bankers Association. What used to be a
relationship aimed primarily at preventing armed bank robberies has developed into a
much broader partnership dealing with credit card fraud in its various, often high-tech
forms. Canada is not unique, as similar relationships are seen in the United States and
the United Kingdom.
In order to make the public–private sharing of information successful, however, it is
important to have an aggregator. That is the true role of national financial intelligence
units (FIUs). Their governing legislation imposes reporting requirements on the
financial industry in such a way that privacy interests are respected. It is crucial that
FIUs obtain timely information and that they aggregate and analyse the information in
an equally efficient manner, dispersing it to law enforcement and security agencies,
writ large.
Many national FIUs have come of age in recent years, shedding their earlier,
pubescent concerns over privacy and enforcement, leading to a maturing which now
18
John L. Evans, “International Money Laundering: Enforcement Challenges and Opportun-
ities” (Vancouver: International Centre for the Reform of Criminal Law at University of British
Columbia, 1995), p. 1.
Barry Rider - 9781783475780

sees timely information being disbursed to police and security agencies, combined with
enforcement action against those who fail to comply with legislation.
“Information out” is only as good as “information in”, however. It is incumbent on
the financial industry to recognize the public goal of the legislation governing financial
reporting, and not view it as simply a loss leader within the corporate structure.
Without a robust compliance programme, any corporation faces potential destruction
just around the corner, be it through regulatory action or when faced with an organized
crime or terrorist event that it unwittingly helped to perpetrate.
In summary, organized crime groups have embraced technology and are increasingly
morphing from traditional illegal commodities, such as drugs and human trafficking, to
new frontiers of crime. The ability to purchase identities on the dark side of the internet
makes it easy to become involved in such activity. The inability of law enforcement to
investigate more than a very small percentage of cybercrime cases makes the chances
of avoiding detection far greater than is the case with property and violent crime.
It is incumbent on law enforcement, the police, and prosecution services, to embrace
changes in technology and apply them in their fight against organized crime. This also
requires that they co-operate on an international level with corresponding agencies in
other countries. The sharing of information and intelligence becomes crucial to
successfully combatting organized criminals.
In many ways it is like the spread of virus. If action is not taken to contain a
dangerous virus in the country where it first takes root, one can almost guarantee that
the free flow of people across borders, combined with accessible and affordable air
transportation, will spread the virus far and wide. So it is with organized crime and
terrorism. Unless contained, these modern curses will inevitably spread. The financial
industry and government must play their respective parts to ensure that our borders are
not porous and that information and intelligence flow in a robust fashion.
Barry Rider - 9781783475780

5. Crimes of the powerful and legitimization

Leonid Fituni and Irina Abramova
The economic and socio-political developments of this century’s first decade have
turned the crimes of the powerful (CoP) into a major focus of criminological research,
legal practice and societal debate. By definition, the actual offences, summarily called
the “crimes of the powerful”,1 encompass a range of criminal or harmful activities
(primarily, but not exclusively, in the economic sphere) perpetrated by the individuals,
businesses and other organizations that exercise significant influence, power or
authority in a given society/state.
The basic idea behind the isolation of the CoP as a separate category within the
general body of economic crime is based on the assumption by some strands of
criminological science2 that the CoP reflect the unequal stance of different groups in
the society vis-à-vis the law and justice. Since in the real world laws and regulations
are structured and then implemented under the influence and, as a rule, in the interests
of powerful social groups, the privileged elements of the society are believed to be
better positioned to fulfil the dispositions of those norms. In cases where they
nevertheless violate the latter, thanks to their professional qualities or social position
they are less prone to being discovered and are relatively better protected in litigation.
Quite often, they may even escape justice. Those assumptions, though sounding
arguable, on the whole are confirmed by comparative statistics on investigations and
convictions respectively for the “white-” and “blue-collar” crimes practically in any
country.
THEORETICAL CONTROVERSIES AND CATEGORIZATION

A degree of controversy exists as to who coined the term “crimes of the powerful”.
Arguably, its introduction is attributed to Canadian sociologist cum criminologist Frank
Pearce, who in 1976 published a book under that title.3 Key theorists who have
conducted research or written about CoP include Stanley Cohen, Hazel Croall, Frank
Pearce, Edwin Sutherland, Steve Tombs, Dave Whyte and others. In Russia, in the
Soviet days, the concept was criticized as petit-bourgeois and opportunist, while today
1
Some authors prefer the term “crimes of privilege” (as in: Crimes of Privilege: Readings
in White-Collar Crime, 2000, edited by Neal Shover and John Paul Wright, OUP: New York or
in Criminology: A Contemporary Handbook, 2000, edited by Joseph F. Sheley, 3rd edition,
Belmont, CA: Wadsworth).
2
Namely, by the followers of critical, Marxist and post-modernist schools in criminology,
as well as of mixed and eclectic combinations thereof.
3
Frank Pearce (1976) Crimes of the Powerful: Marxism, Crime, and Deviance. London:
Pluto Press.
51
Barry Rider - 9781783475780
legal scientists of the Russian liberal mainstream shun it for being “Marxist” and
“communist”. For practical purposes of criminological research or practice, such
labelling is hardly helpful, since it deflects the attention of the society and, con-
sequently, of the law enforcement from the real causes and the role of powerful
perpetrators of economic and financial crimes in the country.
The opponents of the CoP concept in the West argue that many of the researchers of
the CoP are committed to an instrumentalist conception of the state that flaws the
analysis. Those critics find the concept internally inconsistent. This inconsistency, in
their view, stems from the contradictory relationship between political economy and
criminology present in the theory. Their particular displeasure is connected with the
fact that throughout CoP
there exists the presence of “big business”, a presence that somehow functions as the
ultimate, if not the proximate, explanation of events. For instance, big business was in
“control” of the major political parties, the federal legislature, the federal agencies, etc.
Implicit in this is the idea that the state apparatus was in some way controlled by big
business.4
Still, a significant proportion of criminal sociologists, while rejecting the literal

interpretation of the term, acknowledge the existence of a number or typologically
related offences, which by virtue of the corpus delicti require the perpetrators to
possess broader economic, social and/or political opportunities as well as necessary
professional knowledge, understanding and sophistication, in comparison with other
types of crime and groups of criminals. Hence, three criteria are used to delimitate CoP
as a separate sub-category within the general array of economic crimes: the type of
offender, the type of offence and the organizational character of the offence.
From the point view of the offender type, CoP may be perpetrated by legal and
natural persons, among them: corporate business and non-business entities, members of
corporate elites, state representatives and individuals of high socioeconomic status, of
positions of trust or profession, or of academic qualification. By the type of offence, as
stated above, CoP is mainly economic, financial and corporate crime; but some
theoreticians also include environmental or politically (ethnic, religious, etc.) motivated
crimes. The last modifier – the organizational character of the offence – indicates that
CoP requires a definite institutional or organizational environment for the offence to
take place. Thus, it is impossible to extort bribes without occupying a certain position
in an administrative hierarchy. Neither is it possible to be involved in marketing of
adulterated foodstuffs and not be connected with retail or wholesale chains, etc. In our
view, only when all three criteria are met is it possible to qualify a case as a CoP.
Those determinants clearly define the “borders” of the phenomenon, which thus
encompass such constituents as white-collar and corporate crime, fraud, corruption and
various offences stemming from irregularities in relations between the state/government
and the private initiative. However, for the sake of academic accuracy, it is important to
repeat that a number of offences not related to the economy and business, such as state
terrorism, hate crimes (e.g. racist or homophobic ideological assumptions) and even
4
Kelvin Jones (1979) “Crimes of the Powerful and Beyond: An Essay Review”, Con-
temporary Crises, vol. 3, p. 318.
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Crimes of the powerful and legitimization 53
family violence, especially when the last is related to traditional forms of the
organization of society, are regarded by critical criminology as part of CoP.
It is important to stress also that the global financial and, to a large extent, economic
architecture, including the internationally recognized and strictly observed regulation in
the spheres of finance and corporate law, fighting fraud and money laundering, rests
upon the capability of the powerful to legitimize the abidance by the rules on the part
of the less potent players on the international scale.5
The interests of the powerful are legitimized by justifying, either explicitly or
implicitly, actions and policies that enhance such interests through the established rules
of the game. Legitimization does not imply that it serves as a cynical cover for the
naked pursuit of self-interest. Rather, it carries power precisely because it allows the
belief that the powerful are acting properly while at the same time serving their own
interests. Legitimization, then, is directed more at the producer of the rules of the game
than at the consumer. Put another way, effective rules of the game enable action
because they help to avoid the cognitive dissonance that arises when the powerful
advocate something they know to be unjust or destructive simply to further their own
interests.6 This formula works both at the international level when applied to global
powerful players and locally in relation to the CoP at the domestic (national) or
regional level.
The theoretical wholeness of the CoP concept does not exclude the multiplicity of its
national manifestations. The singularity of each of the latter is determined by the social
and political conditions of a country’s development, by its historic heritage, its cultural
and civilizational traditions, and by the nation’s place in the hierarchies of the existing
world order.
That is why the generalized theoretical analysis of CoP presented above, in our view,
should be supplemented with an overview of a real-life national experience, which we
shall naturally provide from the perspective of the authors’ own jurisdiction, that is, the
Russian Federation. In accordance with the aims of this volume, in this chapter we
shall deal exclusively with economy- and finance-related crimes.
RUSSIA’S CRIMINAL LANDSCAPE AND THE LEGITIMACY

ISSUE
The fact that Russia has only recently (by historic measure) abandoned a planned
socialist economy in favour of market capitalism molds the nation’s current political,
economic and legal development. Strictly speaking, the nation’s capitalism has not
completed the phase of primary accumulation of capital. Russian capitalism is still
adolescent and the quality of Russian democracy corresponds to the adolescent state of
5
L. Fituni and I. Abramova (2012) “Zakonomernosti formirovania i smeny modeley
mirovogo economicheskogo razvitia” [Laws of formation and succession of global economic
development models] in Mirovaya ekonomika i mezhdunarodnye otnoshenia [World Economy
and International Relations], Moscow, no. 7, p. 3.
6
Jonathan Zasloff (2003) “Law and the Shaping of American Foreign Policy: From the
Gilded Age to the New Era”, New York University Law Review, vol. 48 (April), p. 248.
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early capitalism in any other country in world history. The concrete forms of initial
accumulation and formation of the powerful, like Britain’s privateering and slave trade,
or America’s robber-barons, may be different, but the rogue core of the process remains
invariable.
What makes the present Russian case unique is that, in contrast to the early modern
societies, the nation’s level of economic development and the social aspirations of the
majority of its population are that of an advanced contemporary civilization. The newly
created institutions of liberal democracy and of regulated market economy co-exist
with the violence and legal unscrupulousness typical of the nascent capitalism. The
obvious contradiction finds its reflection in the criminal landscape. Cognitive and
behavioural factors also leave their imprint. The population on the whole is well
educated and highly trained professionally. Still, through the years of market reforms
its real standard of living has dwindled, and the hopes for professional and social
growth have shrunk. The dissonance is heightened by the system’s legitimization of
enormous fortunes swiftly created under obscure circumstances by a few individuals,
who have assumed the status of the new powerful in the country.
The illegitimate and damaging character of the privatization of the 1990s has been
acknowledged. It has been confirmed by a number of investigations, including those by
the Accounting Chamber of the Russian Parliament (Duma), the highest financial
control body in the country.7 However, the authorities decided that a reversal of the
earlier decisions in the property sphere might be detrimental to Russian capitalism and
to the fate of the powerful themselves. No action was taken. But the rampant and
unlawful privatization of Yeltsin’s time, together with the mass pauperization of the
population, became the main cause of the unprecedented deterioration of the situation
with the rule of law in general and with sky-rocketing crime in particular.
In the view of the highest judicial official in Russia – Chairman of the Constitutional
Court, Valery Zorkin – the country lives through a continued crisis of the legal sphere.
This in its turn is the “consequence of the global crisis of social regulativity”, which he
understands as “the erosion and the attenuation of the legal regulators of individual,
social and international behaviour”.8 The crisis is also reflected in everyday behaviour,
the functioning of institutions, self-identification, culture, economy, politics and the
society in general.
New regulatory institutions are young and feeble. From the very beginning their
viability and the health of the legal system have been under question because of their
alien economic normativity. The new legal system exists under constant pressure for
further reformation and “improvement”, which comes both from within Russia (gov-
ernment, business circles, political opposition) and from abroad (world governance
institutions like the International Monetary Fund (IMF), World Bank, Council of
Europe, on the one hand, and Western democracies as a joint critical force, on the
other). The legal environment is constantly changing for the sake of “deeper reforms”.
7
Accounting Chamber of the Russian Federation (2004) Analiz processov privatizatsii
gosudarstevennoy sobstvennosti v Rossiyskoi Federatsii za period 1993–2003, Moscow: Olita (in
Russian).
8
Valery Zorkin (2014) “Ekonomika I Pravo: Novy Kontekst”, Rossiyskaya Gazeta, 21 May
2014 (in Russian).
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Suffice it to say that during only one year (2013) 516 new federal laws have been
adopted by the legislators, plus at least three times as many other normative regulations
have been introduced by other branches of power constitutionally authorized to do so.
Both the perpetual attempts of liberal reformers to improve the “economic climate” by
changing laws or by their opponents to do otherwise undermine the stability and
integrity of the system. The institutions become less reliable and legitimate in the eyes
of businesses and of ordinary citizens.9 What is more dangerous, the legal instability
(albeit it was created out of good intention) forms a public attitude to law as something
ephemeral.
The Russian experience shows that the hasty reformation of the institutional and
regulatory base of economic activity without due attention to enforcement issues and
with excessive willingness to relax the existing norms has been conducive to an
unprecedented surge in economic crime. The existence of abundant literature on this
issue allows us to limit the illustration to a very brief statistical description of the
current structure of economic crime in the country.
Corruption and fraud are the two main types of economic crime in present-day
Russia, both from the point of view of incidence and the economic damage incurred. In
2013, corruption-related offences accounted for 29.4 per cent of all registered cases of
economic crime, having thus for the first time exceeded the incidence of fraud cases.
The latter accounted for 24.6 per cent of the total. However, the drop in registered fraud
was not the result of an unexpected surge of honesty among the white-collar workers,
but the effect of a change in the methodology of statistical registration. Counterfeiting
was the third most important type of economic crime that year (11.9 per cent).
Embezzlement was the fourth with 10 per cent of cases. As to the afflicted spheres or
economic activity, 29.8 per cent of cases took place in the financial and banking sector;
16.9 per cent in the consumer goods and services markets, 6.2 per cent in real estate
and 0.9 per cent in the sphere of external economic activity.10
While offering these figures to the reader’s judgement, we feel obliged to make one
important reservation. One of the by-products of dismantling communism in Russia
was the disorganization of the system of registration, accounting and statistical control
of criminal offences. The old rigidly controlled vertical system had been destroyed but
a newly introduced “democratic” one was not able to fully balance its disappearance.
Even today, the new “capitalist” types of crime (in particular numerous types of
economic offences, corporate and financial crime) do not even figure in statistical
annuals on crime. Fully fledged, comprehensive registration, statistical control and
monitoring are hardly possible in conditions where this category of offences does not
even have a uniform naming. The Main Information and Analytical Centre of the
Russian Ministry for Internal Affairs group them under the heading of “economy-
oriented offences” (prestuplenia ekonomicheskoy napravlennosti), while the judicial
system in its registration and accounting system categorizes the same as “crime in the
area of economic activity”. However, the composition of the groups is not identical.
Some offences figure in one of them, but are absent from the other. In both cases, the
9
http://www.garant.ru/article/483075/ and http://www.garant.ru/infografika/516874/.
10
Calculations by the authors on the basis of Ministry of Internal Affairs statistics, available
at http://mvd.ru/Deljatelnost/statistics/reports/item/1609734/.
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system of registration and statistical coverage is not all-embracing. As a result,

according to a leading Russian criminologist, V. Luneev, it is serious and in particular
large-scale corporate crime that often remains under-reported. The largest multimillion
and even multi-billion business crimes happen to be absent from the coverage.11 We
developed the methodology proposed by Luneev to support that assumption using the
latest available statistics from the databases of the Russian Home Ministry and the
Judicial Department at the Supreme Court of the Russian Federation.
Table 5.1 The dynamics of economic crime in Russia (2008–2013)
2008 2009 2010 2011 2012 2013
Total number of 3,209,862 2,994,820 2,628,799 2,404,807 2,302,168 2,206,249

registered criminal cases
Number of registered 307,627 292,746 190,178 144,816 127,799 101,621
cases of economic crime
Their share in the total 9.6% 9.8% 7.2% 6.0% 5.6% 4.6%
number of registered
criminal cases
Number of persons 242,041 236,707 214,391 201,635 194,471 196,755
indicted for all criminal
offences
Number of persons 93,227 82,102 55,068 37,793 29,387 29,245
indicted for economic
offences
Share of indicted for 38.5% 34.7% 25.7% 18.7% 15.1% 14.9%
economic crime in the
total number of indicted
Number of convicted for 11,403 11,502 8,175 6,072 4,276 3,728
economic offences
Share of convicted 12.2% 14.0% 14.8% 16.1% 14.6% 12.7%
among those indicted
for economic offences
Share of economic 1.2% 1.3% 1.0% 0.8% 0.6% 0.5%
convicts in the total
number of convicted
Sources: Ministry of Internal Affairs (MVD) and Judicial Department at the Supreme Court of the
Russian Federation databases (2008–2014).
The figures above (Table 5.1) show a situation somewhat different from the customary
perceptions about economic crime in Russia. Surprisingly, economic offences occupy a
very modest share (4.6–9.8 per cent) within the overall structure of registered criminal
cases. Over the latest five years, for which the statistics are available, this indicator
invariably demonstrates a strong downward trend. The number of persons charged with
11
V.V. Luneev (2012) O kriminalizatsii ekonomicheskikh prestupleniy predprinimateley,
Moscow: IGPAN, p. 3 (in Russian).
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economic crimes has dramatically declined (nearly 3 times). The same is true about
their share within the overall numbers of indicted. Actual conviction rates amount to,
roughly, just a bit more than one in ten of the indicted – between 16.1 per cent and 12.2
per cent. The share of economic offenders within the total number of convicted has
been always negligible. In 2013, according to the official statistics it was just 0.5 per
cent! The latter figure reflects the efforts of the liberal wing within the Russian
government to minimize the potential burden of punishment for committed CoP.
In 2010, Dmitry Medvedev, then president of the Russian Federation, ordered his
administration to re-examine how strict laws against economic crime, and particularly
the laws on money laundering, were used against the representatives of the business
community. His idea was to improve the business climate by reducing the penalties for
economic crimes because of complaints from the powerful business community. During
his presidency, Medvedev introduced regulatory changes to allow more suspects in
economic crimes to be released on bail or their own recognizance. The Kremlin then
backed amendments that prohibited the combination of money-laundering charges with
illegal entrepreneurship, a charge that was filed in roughly a third of investigations
against the country’s entrepreneurs. Business leaders received Medvedev’s support in
fighting against the provisions in the Criminal Code intended to fight organized crime,
which were used against executives. Usually, investigators also name accountants or
chief financial officers as participants in an economic crime, meaning that the
company’s leadership acted as part of an organized group. He later submitted to
lawmakers a bill on corporate raiding that aimed at preventing competitors, and
sometimes law enforcement officials, from bankrupting and then taking over a business
of a jailed owner.12
However, though the statistics on economic crime significantly improved, the
practical benefits of those easings and relaxations were not obvious. The white-collar
crime and other CoP, particularly corruption-related offences and embezzlements,
overshadow Russia’s criminal landscape.
OFFENCES AND TYPOLOGIES

Fraud. The Russian law makes no distinction between corporate or business crime and
similar criminal offences outlawed by the Russian Criminal Code perpetrated by
non-corporate/non-business offenders. In other words, the borderline between white-
collar and corporate crimes sub-categories is nearly non-existent. However, it is
believed that in contemporary Russia the role of private business tends to be quite
prominent and particularly damaging in certain types of criminal offences, for example
in fraud. It is hard to substantiate this assumption with figures, since the Russian
criminal statistics provide no information to this effect.
Unlike the common law jurisdictions, where corporations are legally deemed to be
single entities, distinct and separate from all the individuals who compose them, where
legal personality means that corporations can sue and be sued, hold property and
12
Maria Antonova (2010) “Medvedev Pushes to Limit Jail for Execs”, The Moscow Times,
27 Feb. 2010.
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conduct transactions, the existing law in the Russian Federation does not allow
incurring criminal liability in the own name and on the own account of legal persons.
There are indications that the situation may change within the time horizon of five to
ten years, but at present, only natural persons fall under criminal liability. In Russia,
legal persons, while being liable to civil and administrative responsibility and sanctions,
are free from the criminal liability. That means that, irrespective of whether fraud or
any other economic crime was the result of corporate policy or just a one-off operation
conceived by a crooked employee, only the concrete person(s) who effectuated it will
be held responsible. That said, one has to acknowledge that law enforcement tends to
qualify the economic offences perpetrated by a number of persons as “collective” ones
and/or ones committed by an organized group (charges filed against “Yukos”). In order
to step up charges against executives, investigators are reporting the accountants or
chief financial officers as participants in an economic crime, meaning that the
company’s head acted as part of an organized group13 – a practice, which Medvedev
tried if not to reverse, then at least to limit.
In accordance with the current law, corporate or business fraud includes the offences
of fraud as a general crime, infliction of pecuniary damage (losses) by means of deceit
and abuse of trust, and embezzlement. Article 159 of the Russian Criminal Code
defines fraud as “misappropriation of, or acquisition of, rights to another’s property by
way of deceit or abuse of trust”.14 Sanctions for participating in corporate fraud include
administrative and criminal penalties. Criminal sanctions can only be applied against
natural persons. Corporate bodies are not liable to criminal sanctions or prosecution.
Sanctions for criminal liability (generally, without aggravating features) include fines
and imprisonment. A Russian court has extra-territorial jurisdiction (a) against a
Russian citizen who commits bribery or corruption outside the territory of the Russian
Federation provided that such crimes are directed against the interests protected under
the RCC and there is no final foreign court decision on the case and (b) against
non-residents of the Russian Federation who commit bribery or corruption outside the
territory of the Russian Federation provided that such crimes are directed against the
interests of the Russian Federation or against a citizen of the Russian Federation or a
stateless person permanently residing in the Russian Federation and there is no final
foreign court decision on the case.15
According to research ordered by the powerful Russian Union of Industrialists and
Entrepreneurs, corporate fraud constitutes a grave threat to Russian companies. Sixty
per cent of participants of the survey acknowledged that they had encountered
signs/cases of corporate crimes during the three-year period surveyed (2011–2013).
They also noted the steady character of their growth, though by and large the pace
had been slow. According to the survey, those cases of corporate fraud resulted in a
broad range of adverse consequences, sometimes even crucial. Those included (a)
13
Ibid.
14
Criminal Code of the Russian Federation No. 63-FZ, of 13 June 1996 (RCC); Criminal
Procedural Code No. 174-FZ, of 18 December 2001 (RCPC); Code on Administrative Offences
No. 195-FZ, dated 30 December 2001 (Administrative Code (AC)) – all three as amended.
15
Norton Rose (2013) “Corporate Crime, Fraud and Investigations, Russian Guide 2012:
Russian Federation”, Norton Rose: Moscow, pp. 5–6.
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considerable financial losses (16 per cent of respondents pointed out that the damages
had exceeded 1 million US dollars, while the maximum amount of the damages named
by the participants of the survey allegedly equalled 1 billion US dollars), (b) damage to
corporate integrity, its good name and brand, (c) slowdown of corporate growth and
development, (d) loss of business contacts with partners and (e) sacking of employees
and collapse in confidence among the workforce.16
Embezzlement. Among the CoP embezzlement arguably represents the most wide-
spread and possibly most damaging offence. In principle, the crime of embezzlement
may involve any kind of assets irrespective of the ownership type – private or public.
Though in Russia most of the investigated embezzlements are perceived to involve
public funds and the sphere of procurements, in reality the private sector may be even
more prone to them. However, the private owners are usually reluctant to bring the
topic to public. The more so since the lion’s share of embezzlements in corporations
are insiders’ jobs, perpetrated quite often by middle- and senior-level executives or, at
times, by the owners themselves. Such high-level embezzlements often happen in times
of crisis. The most frequent types of embezzlement in Russia include:
+ misappropriation of public funds in public procurement at the federal, regional

and municipal levels and of public funds in repair and construction works on
government contracts;
+ illegal VAT recovery from the budget;
+ fraudulent activities with loan and credit facilities extended by the foreign
countries and international financial institutions, by forgery of financial instru-
ments and reporting;
+ coverage of expenditures of third party legal entities and individuals out of the
budget funds.
According to some expert assessments, public companies tend to overpay their

suppliers by about 19 per cent above the market average. The experts assess the total
loss of the overall volume of public procurement at the federal, regional and municipal
levels as amounting to more than 300 billion roubles (8.7 billion US dollars) per year.
The typologies of embezzlement of public funds show that the major part involves
false procurement tenders; collusion on pricing of services provided to the state (i.e.
overpricing); provision of goods, works and services of inferior quality or in smaller
quantities than envisaged by the contract; overcharging for construction materials;
providing falsified documentations for completion of non-existent works; and using
front companies and proxies to obtain the procurement contracts. Thus, for example, in
some cases the formal winner of a government contract tender is only a nominal one
while, in fact, the true contractors are other agencies banned from participation in the
tender owing to their connections with organized criminal groups.
Among the common methods of stealing funds from the government the following
pattern should also be mentioned. The public funds (either purpose or investment loans)
16
VEGAS LEX (2014) Fighting Corporate Fraud. Nationwide Russian Survey. 2012–2013
Report. Moscow. pp. 6–9 available at http://www.vegaslex.ru/data/2014/04/16/1234640503/
VEGAS%20LEX_Antifraud%20survey%20report_03.2014.pdf.
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are deposited in the bank at an interest rate which is much lower than the market rate.
For the underrated deposit of funds with the bank the chief executive of the public
company receives a kickback in cash.
The criminal proceeds are then laundered through so-called one-day companies,
having performed several necessary transactions, and are closed for good within a time
shorter than the tax reporting period.
Corruption. In today’s Russia, embezzlement and fraud go hand in hand with
corruption. According to a PWC report, although the situation is gradually improving,
bribery and corruption are still issues for Russian businesses. For instance, in 2014, 41
per cent of respondents to a PWC questionnaire admitted that their organization had
been asked to pay a bribe in the last 24 months. This was dramatically higher than both
the global results (18 per cent) and results for Eastern Europe (23 per cent).
Approximately the same number of respondents declared that they had lost an
opportunity to a competitor, whom they believe had paid a bribe. Nonetheless, as
already mentioned, the highest levels of the Russian government are tackling the
problem of bribery and corruption.17 Russia is party to the following international
conventions against corruption:
+ UN Convention against Corruption 2003 (Corruption Convention) (ratified by

Russia in February 2006);
+ Council of Europe Criminal Law Convention on Corruption 1999 (ratified by
Russia in October 2006);
+ Additional Protocol to the Criminal Law Convention on Corruption 2009 (Russia
signed this on 7 March 2009, but has not ratified it yet);
+ OECD Convention on Combating Bribery of Foreign Public Officials in Inter-
national Business Transactions 2012 (Russia joined on 17 April 2012).
In recent years the authorities have stepped up anti-corruption efforts, but there has not
been a systemic breakthrough in the situation. Officials acknowledge that corruption
has become the most pertinent economic crime problem, asserting the need to “create a
public climate that rejects corruption”. There are several other prominent ongoing
corruption scandals. Large sums were embezzled, for instance, from the budget of the
preparations for the Asia-Pacific Economic Cooperation (APEC) summit held in the
Far East in 2012. But corruption goes much deeper and can be said to strike at the very
core of the Russian leadership’s own strategic agenda.
Corruption and embezzlement even threaten the government’s plans to modernize the
Russian army. According to Chief Military Prosecutor, Sergei Fridinsky, in 2013 the
established damage from corruption-related offences within the armed forces increased
by 5.5 times and exceeded 4.4 billion roubles (roughly 130 million US dollars).18
Earlier, in an interview with the official government publication, he disclosed the
mechanisms of the financial and economic crime in the armed forces:
17
PWC (2014) 2014 Economic Crime Survey in Russia, Moscow: PWC, p. 17.
18
http://vpk-news.ru/news/16702.
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Every year huge sums are allocated for defense but the achievements are limited. Meanwhile,
the schemes of embezzling [funds] from the state are being refined. Forgeries of documen-
tation, falsified reporting about allegedly completed works and services, kick-backs for state
orders, all this makes part of the fraudsters’ arsenal. As a result, enormous funds are
embezzled – practically every fifth rouble, and the supplies of low-quality equipment to army
continues.19
President Putin has sought to reinvigorate a broader, long-running anti-corruption drive

throughout the country. This drive includes three main elements. First is the reorgan-
ization of the relevant official bodies, including the creation of an anti-corruption
directorate in the presidential administration, which centralizes the work previously
done by several directorates. Second, a plethora of new legislation has raised the
salaries of ministers and other officials while obliging them to declare personal
information on incomes and property, and forbidding foreign banking arrangements.
New legislation also covers tenders for state contracts and expenditure. Third, senior
figures have led major audits of government structures, state companies and law
enforcement bodies. Nearly 3,000 civil servants were consequently subject to legal
liability, and 200 have been dismissed, including five from federal executive agencies
and some 160 from regional offices of the federal government.20
Other types of CoP. Out of the wide range of other CoP, characteristic to
contemporary Russia, one should name market manipulation; illegal use of inside
information; and breach of legal requirements for counteracting illegal use of inside
information. These offences affect mostly Russian financial markets and to a lesser
extent other sectors. Another concern is the widely spread specific form of hostile
takeovers called reiderstvo (raiding), which corresponds to the present stage of Russian
capitalism, the stage of initial capital accumulation. Corporate raiders seek not only a
portion of a target business’ profits, but the entire business itself. Small and medium-
size enterprises have also been victims of raids. Not only the economic activity of these
firms themselves, but also the commercial properties they own attract raiders. Agricul-
tural lands are also widely targeted in reiderstvo practices, especially in the Moscow
region. Researchers single out four basic corporate raiding schemes: bankruptcy,
corporate, litigation and land schemes. In the bankruptcy scheme, the raiding company
usually acquires a substantial portion of the target company’s debt, forces the company
into bankruptcy by demanding immediate repayment of the debt, and then corruptly
obtains control over and manipulates the bankruptcy proceedings to take complete
control of the target company. Corporate raiding schemes often involve the corrupt
acquisition of control over the target company by falsifying internal corporate docu-
ments and/or corruptly obtaining control over a significant portion of the voting stock
or the board of directors of the target company. In litigation schemes, the raider files
one or more civil lawsuits against the target, often in a remote location where the raider
has influence over the local judiciary, and then obtains a judicial order authorizing
seizure of some or all of the target’s assets. Similar to corporate schemes are land
19
Rossiyskaya Gazeta, 24 May 2011 interview with S. Fridinsky.
20
Andrew Monaghan (2014) “Sochi Is a Sad Reminder of Corruption’s Grasp”, The Moscow
Times, 14 Feb. 2014 available at http://www.themoscowtimes.com/opinion/article/sochi-is-a-sad-
reminder-of-corruptions-grasp/494538.html.
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raiding schemes in which raiders falsify real property documents to illegally take
control of physical assets.21
Other important CoP types include cybercrime, food adulteration, production and
marketing of counterfeit goods, theft of intellectual property and so on.
CONCLUSIONS
This brief overview of the situation with economic crime in Russia shows, besides the
obvious disappointments in relation to the actual state of efficiency of countering its
concrete forms and manifestation, a number of causes for concern at a more systemic
level. The discrepancies between statistical reporting and the real-life situation means
that we do not have a complete and objective picture about economic crime in this
country. We do not know the exact costs of the CoP to society. We are poorly informed
of the real mechanisms and links of corporate crime. Nor are we able to predict the
behaviour of major corporate criminals. Without changing the fundamental approaches
to the CoP problem, we cannot offer adequate and concrete measures to counter
economic, financial or corporate crime in Russia.
Concluding this chapter, we would like to emphasize again that the majority of CoP
in Russia reflect the specifics of the current transitory stage of the country’s
development. The increased incidence of economic crime stems from the insufficient
legitimacy of the post-Soviet change perceived by the society as a whole and by the
new class of property owners in particular. Valery Zorkin, chairman of the Supreme
Court of the Russian Federation, observed that “private property (and especially the
large-scale highly profitable property) has failed to acquire full-blooded legitimacy”.22
Moreover, Russian business recognizes that it is the doubtful legitimacy of Russian
property that lies at the root of many criminal aspects of economic life in the country,
including the elevated level of the shadow economy, corruption and raiding, as well as
the low levels of non-speculative investment. Without legitimization of the property and
the social coming-out of semi-legal capital, Russian society is doomed to remain in a
state of permanent instability and criminal self-destruction.
Legitimization will make the powerful more potent without inflicting losses on the
rest of the society. It will open to them new gateways to increased prosperity without
the need to indulge in criminal activity. Increased legitimacy will result in greater
stability and social order.
21
Thomas Firestone (2008) “Criminal Corporate Raiding in Russia”, International Lawyer,
vol. 42, no. 4 (Winter), pp. 1207–1229.
22
Valery Zorkin (2014) “Ekonomika I Pravo: Novy Kontekst”, Rossiyskaya Gazeta, 21 May
2014 (in Russian).
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PART II
THE ENTERPRISE OF CRIME
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6. Organized economic crime

Shima D. Keene
INTRODUCTION
Organized crime is one of the greatest threats to human, national and international
security throughout the world. It is not only a threat, but a daily reality that causes
immense harm to individuals, families and communities,1 capable of undermining
governance, fuelling corruption and hindering economic development.2 Evidence drawn
from law enforcement activity suggests that organized crime is not only large in scale
and impact,3 but that some elements have diversified and globalized, reaching macro-
economic proportions.4
Organized Crime Groups (OCGs) are most commonly associated with drugs traffick-
ing. However, they are increasingly known to be have diversified, becoming involved in
many different types of criminal activity to include fraud, identity theft, burglary, child
sexual exploitation, counterfeit currency, intellectual property crimes, environmental
and wildlife crimes, human smuggling and trafficking, firearms and cybercrime.5
Furthermore, their reach has expanded as a result of globalization, especially with the
aid of internet-based technologies, which have enabled the indiscriminate targeting of
potential victims irrespective of their age, sex, race, location or religion.
Moreover, organized crime is on the increase. In 2009, global organized crime was
estimated to generate $870 billion per annum in illegal profits, representing 1.5 per cent
of global GDP.6 In 2014, this figure rose to approximately $1 trillion.7 Furthermore,
this trend in growth is expected to continue. In the United Kingdom (UK), the number
of active OCGs known to law enforcement is approximately 5,300.8 The human and
1
National Crime Agency, National Strategic Assessment of Serious and Organised Crime
2014, 1 May 2014, p. 1.
2
World Economic Forum, ‘Global Agenda Council on Organized Crime 2012–2013’
<http://www.weforum.org/content/global-agenda-council-organized-crime-2012-2013> accessed
2 June 2014.
3
SOCTA 2013: EU Serious and Organised Crime Threat Assessment, European Police
Office, 2013, p. 9.
4
United Nations Office on Drugs and Crime, The Globalization of Crime: A Transnational
Organized Crime Threat Assessment, 2010.
5
Interpol, ‘Organised Crime’ <http://www.interpol.int/Crime-areas/Organized-crime/
Organized-crime> accessed 2 July 2014.
6
UNODC, ‘Transnational Organized Crime:The Globalized Illegal Economy’ <http://www.
unodc.org/toc/en/crimes/organized-crime.html> accessed 26 June 2014.
7
FBI, ‘Organised Crime, Overview’ <http://www.fbi.gov/about-us/investigate/organized
crime/overview> accessed 8 July 2014.
8
2014, 1 May 2014, p. 7.
65
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economic costs of such groups are considerable.9 In purely economic terms, the cost of
organized fraud alone is reported to be £30 billion per annum in the UK.10
WHAT IS ORGANIZED ECONOMIC CRIME?

Organized economic crime can be described as economic crime which is carried out
(directly or indirectly) by OCGs. As such, an understanding as to what exactly
constitutes organized crime as well as economic crime may be helpful. Unfortunately,
there is no universal definition for either term. Definitions for organized crime tend to
be rather broad in order to accommodate the large variety of OCGs in existence. For
example, according to the UK government, serious organized crime is ‘… serious crime
planned, co-ordinated and conducted by people working together on a continuous
basis’ where ‘their motivation is often, but not always, financial gain’.11
Similarly, some definitions for economic crime can be equally broad, making it
almost indistinguishable from organized crime.
Economic crimes refer to illegal acts committed by an individual or a group of individuals to

obtain a financial or professional advantage. In such crimes, the offender’s principal motive is
economic gain. Cyber crimes, tax evasion, robbery, selling of controlled substances, and
abuses of economic aid are all examples of economic crimes.12
However, what distinguishes organized economic crime from economic crime is that it
is likely to incorporate characteristics of organized crime, namely violence or the threat
of violence as well as bribery and corruption.13
In practice, economic crime, organized or otherwise, is synonymous with white
collar crime.14 The UK’s National Crime Agency (NCA)15 has identified the key threats
relating to economic crime as fraud, bribery, corruption and sanctions evasion, market
abuse and insider dealing, money laundering and criminal finance, counterfeit currency
9
Hannah Mills, Sara Skodbo and Peter Blyth, Understanding Organised Crime: Estimating
the Scale and the Social and Economic Costs, Research Report 73, Home Office <https://
www.gov.uk/government/uploads/system/uploads/attachment_data/file/246390/horr73.pdf> ac-
cessed 1 June 2014.
10
2014, 1 May 2014, p. 21.
11
National Crime Agency, ‘Organised Crime Groups’ <http://www.nationalcrimeagency.
gov.uk/crime-threats/organised-crime-groups> accessed 3 July 2014.
12
US Legal Definitions, ‘Economic Crime’ <http://definitions.uslegal.com/e/economic-
crime/> accessed 16 July 2014.
13
HM Government, Serious and Organised Crime Strategy, October 2013, p. 14.
14
‘White collar crime’ is a term coined by sociologist Professor Edwin Sutherland as ‘crime
committed by a person of respectability and high social status in the course of his occupation’ to
describe non-violent crime committed for monetary gain.
15
National Crime Agency, ‘Economic Crime Command’ <http://www.nationalcrimeagency.
gov.uk/about-us/what-we-do/economic-crime> accessed 26 June 2014.
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Organized economic crime 67
and cyber-enabled identity crime.16 The result is that the financial aspects of criminal
investigations tend to be diverted towards specialized ‘economic’ crime departments, as
opposed to using these aspects to combat organized crime as a whole.
STATEMENT OF THE PROBLEM

Organized crime is about making money.17 It is about making as much money as
possible as quickly as possible through any means available, both legitimate and illicit.
As such, it naturally follows that the best way to counter the threat is by targeting what
criminals most want – money – which can be used to acquire assets either to enjoy in
their own right, or to be used as a vehicle for money laundering to attempt to disguise
the proceeds of crime.18
There is no doubt that improvements have been made in recent years throughout the
globe to introduce new legislation and regulation, to enable better detection and
confiscation of the proceeds of crime. Additionally, in recognition that money will enter
the global financial system at the weakest point, considerable effort has been made to
strengthen the weaker jurisdictions acting as entry points for criminal money. This
activity has been predominantly driven by the Financial Action Task Force (FATF)19
recommendations, which serves as a global template for good practice. However, the
real effectiveness in terms of its impact on organized crime is questionable at best.20
One reason is that the institutions that exist to counter organized crime currently lack
the agility that is required to be effective. The world has evolved, driven by
globalization, with criminality following suit. In contrast, the institutions that counter
the threat are failing to keep up to speed as they are forced to navigate through a
number of obstacles at the same time as attempting to tackle the threat.21
The question of ownership can also be an issue; in other words, who is responsible
for doing what? The division of responsibilities may appear relatively straightforward
on paper, but in practice, there are many factors that complicate the issue. This is
particularly true in cases involving international co-operation, especially where treaties
16
National Crime Agency, Strategic Assessment of Serious and Organised Crime 2014,
1 May 2014, p. 21.
17
Home Secretary’s speech on organized crime at RUSI, ‘Understanding and Confronting
Organised Crime’, delivered at the Royal United Services Institute, Whitehall, London on
Wednesday 10 June 2014 <https://www.gov.uk/government/speeches/home-secretarys-speech-
on-organised-crime-at-rusi> accessed 13 July 2014.
18
Michelle Gallant, ‘Promise and Perils: The Making of Global Money Laundering,
Terrorist Finance Norms’ (2010) 13(2) Journal of Money Laundering Control 175.
19
The FATF is an inter-governmental body established in 1989 by the Ministers of its
Member jurisdictions. Its objectives are to set standards and promote effective implementation of
legal, regulatory and operational measures for combating money laundering, terrorist financing
and other related threats to the integrity of the international financial system.
20
Shima D. Keene, Threat Finance: Disconnecting the Lifeline of Organised Crime and
Terrorism (Gower 2012).
21
Examples of obstacles include legislation especially in relation to human rights, as well as
cultural prejudices, mistrust and information and communications technology (ICT) challenges.
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do not exist between the countries concerned. The challenge can begin with even the
basic definition of the crimes concerned, or their key elements, which may vary from
country to country.22 Furthermore, there may be inconsistencies in substantive laws that
may be further complicated by differences in investigative techniques, which are
governed by national or local law.
Further complications may arise if the location of the alleged perpetrator is in a
different country to that of the victim, as there may be difficulty in attempting to
establish the identity of the wrongdoer and of obtaining enough evidence to support a
conviction. This is particularly true in cases relating to cybercrime. However, even
where the investigation is contained within national borders, the reactive nature of law
enforcement inevitably results in a game of ‘catch up’ as in-house technological
expertise and resources take time to come up to speed.23 In addition, legislative bodies
also require time to create new laws or to adapt the existing law to clear a path for the
prosecution of the new e-criminal activities.24
A more general issue relates to the silo-centric approach which leads to each
department viewing its specific role in the fight against organized crime with a
restricted perspective. Having a defined role in itself is not the issue. What is of
concern is the overall culture of risk transfer, where individuals and departments are
often unwilling to take responsibility for what may later be seen as their failure.
Furthermore, activities which are perceived not to be a core responsibility will often be
neglected.
This is particularly relevant in the current threat environment where effects of even
distant events can be highly significant elsewhere, and even the most local develop-
ments may come to have enormous global consequences.25 As such, a change in
mindset is needed to recognize that the boundaries between domestic matters and
global affairs have become increasingly blurred and that what may seem like someone
else’s problem now may well become your own problem soon.26
A more fundamental issue is that many people, including not only members of the
public but also front-line police officers, do not fully understand what organized crime
is. This is partly because organized crime is a dynamic concept which is forever
evolving, and is, as such, a difficult phenomenon to define. The catch-all phrase of
‘organized crime’ is undoubtedly conceptually inadequate. However, attempting to
22
Tyler Moore, Richard Clayton and Ross Anderson, ‘The Economics of Online Crime’
(2009) 23(3) Journal of Economic Perspectives 3.
23
A recent study, commissioned by the all-party e-commerce lobby group EURIM, reported
that there is a huge backlog of e-crimes and a serious shortage of skills to deal with them. See
‘Police Need More e-Crime Skills’ BBC online <http:/news.bbc.co.uk/go/pr/fr/-/1/hi/technology/
3725305.stm> accessed 2 February 2014.
24
Paul Hunton, ‘The Stages of Cybercrime Investigations: Bridging the Gap between
Technology Examination and Law Enforcement Investigation’ (2011) 27(1) Computer Law and
Security Review 61.
25
Chris Donnelly and David McOwat, ‘Adapting Forces to Deal with New Challenges to
National and International Security’ (2012) Global Perspective Statecraft Paper.
26
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define organized crime is far from being a purely academic exercise, as failure to do so
leads to operational consequences which impact resourcing and investigative powers.
PERCEPTION OF ORGANIZED CRIME

In the words of Home Secretary Teresa May, ‘Organised crime is not what you think it
is.’27 This is partly due to perception which is influenced by the often glamorized
portrayal of organized crime in fictional representations in television or film. This
mismatch between reality and perception equally applies to the methods and resources
available to tackle the threat, and subconsciously influences expectations. This is true
even of individuals who really should know better.28 As a result, the term ‘organized
crime’ is more likely to conjure up an image of hierarchical groups such as the Italian
or Russian Mafia, the Chinese triads or the Japanese Yakuza, as opposed to the less
sophisticated groupings of ‘seedy, immoral and grubby individuals’29 who make up a
typical OCG.
The significance is that this misperception as to what organized crime is affects the
ability to identify and report it appropriately so that it can be dealt with accordingly.
This applies both to police and to victims. Police forces collectively possess a great
mass of information relevant to organized crime. However, unless the relevance of the
information is recognized, precious pieces of the jigsaw puzzle are not captured and
fail to contribute towards operational intelligence. The mindset of many front-line
police officers is such that they need to know what they are looking for. As a result,
they are likely to only find what they are looking for. If something they encounter is not
in their vocabulary, they will more often than not dismiss the evidence.
PERCEPTION OF ECONOMIC CRIME

It can be argued that organized crime is ‘economic crime’ in the sense that its
motivations are predominantly economic.30 Organized crime would not exist (in the
way it does today) if it were a loss-making activity! However, from an operational
27
Organised Crime’, delivered at the Royal United Services Institute, Whitehall London on
28
The author’s own experience lecturing to Master’s students in forensic science as well
working with non-specialist front-line police officers from various regional law enforcement
agencies.
29
30
‘Their motivation is often, but not always, financial gain.’ <http://www.nationalcrime
agency.gov.uk/crime-threats/organised-crime-groups> accessed 26 June 2014.
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perspective, a distinct differentiation is made between ‘economic’ crime and ‘organ-

ized’ crime. The perception of economic crime is that of a specialist standalone
discipline, synonymous with white collar crimes such as fraud and insider dealing. This
in turn results in lost opportunities in terms of tackling organized crime in general. A
further concern is that economic crime is generally not perceived to be as ‘serious’ as
other types of crime such as murder, violent assaults and drugs dealing.31 Even ‘lesser’
crimes such as traffic offences receive more attention and resources compared to
economic crime.
Part of the problem is that economic crime is deemed to sit within the domain of
financial experts, due to the perception of complexity and inaccessibility of financial
information. As a result, non-specialist investigators are reluctant to take on any case
involving money and are quick to refer them to ‘financial experts’, thereby transferring
the responsibility of investigation elsewhere. This would be all well and good if there
were an adequate number of financial ‘experts’ integrated into the system. However,
this is currently not the case.
FINANCIAL EXPERTISE
The necessary financial expertise is currently not readily available within most law
enforcement agencies, and what resources are available usually reside within specialist
economic crime departments, such as insider trading or complex fraud. This is because
the understanding as to what financial intelligence/evidence can bring to an investiga-
tion is often lacking at all levels, leading to a lack of appetite for financial expertise.32
It is unsurprising therefore that many regional law enforcement agencies do not have
adequate in-house resources capable of interpreting even the most basic of financial
statements.
Consequently, the task is outsourced to external forensic accountants who are
brought in from time to time working to a very narrow remit to investigate specific
cases typically involving complex fraud. This is all well and good. However, there is
also an immediate need for individuals with an investigative mindset coupled with basic
accounting skills that gives him or her the ability to instigate and pursue lines of
investigations currently not pursued. Lack of financial expertise can result in the
absence of any meaningful financial intelligence being produced.
This situation is exacerbated by the segregation between financial and criminal
intelligence as a result of the narrow definition of economic crime, which encourages
inadequate use of financial intelligence to tackle organized crime outside the immediate
31
32
For the purpose of this chapter, financial expertise/experts refers to investigators who are
comfortable in analysing and detecting anomalies in a range of financial data ranging from basic
bank statements to company accounts.
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remit of economic crime. However, the problem of inadequate financial intelligence

also applies to criminal intelligence in general.
CRIMINAL INTELLIGENCE
The First National Strategic Assessment published on 23 May 2014 highlighted the
limitations of the current intelligence picture, particularly with respect to the regional
dimension.33 The limited intelligence coverage identified has been described as ‘the
Achilles heel of the government’s response to organised crime’,34 with serious
implications for the NCA as well as the Regional Organised Crime Units (ROCU) and
Serious Organised Crime Units (SOCU).
The notion of intelligence-led policing is not a new concept. However, despite
successive reports by the Association of Chief Police Officers (ACPO)35 recommending
that the use of criminal intelligence should play a more central role in policing,
intelligence-led policing continues to be a far cry from reality. Although the use of
‘intelligence’ has long been practised by specialist police units such as Major Crime,
the ‘intelligence’ obtained can only be described as being reactive and sketchy at best.
The attempt to incorporate intelligence into ‘mainstream’ policing has not been
effective, due to the fact that the main business of policing continues to be reactive. The
introduction of the National Intelligence Model (NIM) in 2000 attempted to address
many of the key issues highlighted and to introduce a unified national approach to
intelligence-led policing. However, despite the strong promotion of the NIM by the
Home Office, ACPO and Her Majesty’s Inspectorate of Constabulary (HMIC), police
forces nationally face a number of challenges in attempting to implement the model
fully.36
33
Sasha Jesperson, Assessing the Threat of Organised Crime: The First National Strategic
Assessment, 23 May 2014, RUSI <https://www.rusi.org/analysis/commentary/ref:C537F3E5
10C6E5/#.U6qzJbGmXzo> accessed 25 July 2014.
34
Charlie Edwards, Director, National Security and Resilience Studies, RUSI. ‘The National
Crime Agency: Britain’s New Response to Organised Crime’ RUSI News brief, 13 November
2013 <https://www.rusi.org/publications/newsbrief/ref:A5283702508EFE/#.U8keGbGmXzo>
accessed 18 July 2014.
35
ACPO (1975). Report of the Subcommittee on Criminal Intelligence (the Baumber
Report). London: Association of Chief Police Officers; ACPO (1978). Third Report of the
Working Party on a Structure of Criminal Intelligence above Force Level (the Pearce Report).
London: Association of Chief Police Officers; ACPO (1986). Report on the Working Party on
Operational Intelligence (the Ratcliffe Report). London: Association of Chief Police Officers;
ACPO (1996). Report on International, National and Inter-force Crime. London: Association of
Chief Police Officers.
36
NIM is an information-based deployment system. The purpose of NIM is to create a basis
for the identification of crime patterns, which in turn enables a more fundamental approach to
problem solving in which resources can be tasked efficiently against an accurate understanding
of crime and incident problems. It also intends to drive effective strategy for all law enforcement
needs, provide operational focus and professionalize the intelligence discipline within law
enforcement.
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Recent research has shown that many front-line police officers37 have little awareness
as to the purpose of intelligence, as well as how intelligence should be developed and
applied in a policing context.38 Intelligence is generally understood by shift officers and
neighbourhood officers as ‘information that is not good enough to be used as evidence’
and, as such, a cumbersome administrative task which gets in the way of their ‘proper’
job. This results in the variable quality of information submitted as well as the lack of
urgency in terms of submission. This is then processed to become criminal intelligence.
Furthermore, for the initial raw information to be turned into useable intelligence
requires analysis leading to meaningful conclusions and recommendations. Computers
may assist with analysis by compiling large amounts of data into an easily accessible
format, but this is still only collated data; and it falls far short of being intelligence.39
The key therefore is to have individuals who are capable of interpreting the data in a
way that has operational relevance. Currently, most intelligence officers merely collate
information which is archived in various police information databases, often disjointed
in nature. Despite the existence of the Police National Computer (PNC) since 1974,
much of the relevant ‘intelligence’ is retained within local databases. Here, a significant
opportunity awaits, provided that the cultural and technical challenges can be over-
come.
MEASURING SUCCESS
The ability to measure success is important in that perceived success is likely to affect
future budgets, which in turn will affect operational capability.40 On the other hand, the
inability to demonstrate success may endanger the organization’s future existence.
However, in the context of tackling organized crime, this can be challenging as a major
part of the remit is to not only prosecute, but to disrupt and thus ‘prevent’ a criminal
activity from occurring. Success in commercial business, for example, can be measured
through the simple calculation of profit. However, this cannot, and should not, be
applied to law enforcement and other public agencies.41 This is equally true of
departments such as compliance and financial crime within financial institutions, which
are viewed as cost centres and tolerated due to regulatory requirements. So the question
then becomes that of how success can be measured for departments and organizations
involved in prevention.
Another factor to consider is that the current focus for law enforcement agencies,
among public sector organizations in general, has been efficiency, which in turn is often
37
Who collect the information, which is then processed to become criminal intelligence.
38
Shima D. Keene, Bullfinch Review: The Use of Financial and Criminal Intelligence in the
Context of Tackling Child Sexual Exploitation, Thames Valley Police, Unpublished Report,
March 2014.
39
Shima D. Keene, Operationalizing Threat Finance Strategies, CSRC/Army War College
Publication, March 2013.
40
An increase in budget will translate into more resources, both in terms of human resources
and technical resources.
41
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misinterpreted as cost cutting. However, excessive focus on ‘efficiency’ can also be

counterproductive, as ‘efficiency’ does not always translate into ‘effectiveness’. In
addition, there has been a tendency for public sector organizations to increasingly view
themselves as business units. The NIM, which describes law enforcement activity as a
business, is a case in point. The concern is that the public sector is quite distinct in
terms of its raison d’être to a ‘business’ in the private sector, and attempting to emulate
the practices of a private sector organization without careful adaptation has some very
real dangers.
There is also a tendency to measure success in small incremental steps relative to
past successes or failures, as opposed to measurement against the problem that needs to
be tackled. It is understandable that public bodies such as the police forces need to be
measured in terms of their performance in order to justify their activities/expenditure
which is funded by the public purse. Some performance measures are clearly necessary.
However, an obsession with the need to comply with performance figures can be very
damaging. In the past decade, the focus has turned to how quickly the police can
respond to an incident, with little consideration given to what happens when they arrive
at the incident. This also reinforces a culture of quantity not quality. When the main
concern for officers on the ground becomes political and personally driven,42 achieved
through the quest to meet specific performance targets set by the force, the main
purpose of policing is lost. This in turn impacts upon everything that the force does, as
well as loses the support of the public.
CONCLUSIONS
Organized crime, including organized economic crime, is a complex multi-faceted
problem. The traditional approach to attempting to tackle such problems has been to
compartmentalize aspects of the known issues and attempt to tackle each component
independently. However, this silo approach is ineffective as the complex interdepend-
encies mean that action taken to address one aspect of the problem may reveal or
aggravate problems identified elsewhere.43 The situation is exacerbated as a result of
the incomplete, contradictory and constantly evolving nature of the phenomenon.
As such, it is essential that a ‘problem’ is tackled in the context of the existing
interdependencies in order to be better able to appreciate the possible knock-on effects
of actions which may be taken to disrupt the threat. Furthermore, these challenges can
no longer be tackled by any single organization or country. The hybrid nature of
problems and conflict itself, coupled with resource limitations, will require partners to
work more closely together than ever before. This multi-stakeholder environment in
itself can be challenging due to the existence of differing cultures, both organizational
and geographical, as well as differing perspectives and motives, despite the united goal
of the partnership as a whole.
42
In terms of achieving positive Performance Development Review (PDR) outcomes for the
purpose of personal career progression.
43
The silo approach exists even within SOCUs and counter terrorism units, especially in
relation to finance.
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Money/finance is the enabler of activities harmful to human, national and inter-

national security. It is a key component of the economic base of an organization, and
thus enables an OCG to function. This is true of any organization or individual. It
naturally follows that if you disrupt or eliminate a group’s economic base, you are
challenging its very survival. This is why tackling the financial aspects of an OCG is so
important.
The challenge is that the financial/economic network of OCGs are wide and
complex. The situation is far from being black and white. In between lies a mass of
grey consisting of various individuals and organizations who may be victims, per-
petrators or gatekeepers, which combine to enable the criminal financial cycle to thrive.
Understanding the criminal financial network as a whole is key to unravelling the
complexity of organized crime. As such, the importance of financial intelligence cannot
be overstated. However, financial intelligence is not simply about ‘following the
money’. That is only the tip of the iceberg. As with any form of intelligence that is fit
for purpose, it is about framing the right questions, then following that through by
looking in the right places and talking to the right people. It is an art form that requires
thoughtful contemplation leading to conclusions and recommendations that can be
operationally achievable, as opposed to collection for the sake of collation alone.
Also, financial intelligence should not be treated as a standalone subject, but instead
as knowledge that is capable of supporting existing efforts to counter organized crime.
Financial network analysis may be used to support and further develop existing and
ongoing work to validate existing hypotheses where intelligence can be weak and, as
such, should be considered an integral part of any criminal investigation. Given the
right toolkit of skill sets and attitudes, the challenge can then become an opportunity.
Financial intelligence holds special utility in that it leads directly to actionable
outcomes designed to influence target behaviour, the target being any individual or
organization in the financial logistical supply chain. Influence is reliant on the
successful manipulation of incentives and disincentives. This involves shaping the
spectrum of options that are available to groups through tailored and focused activities
aimed at specific pressure points.
In attempting to counter such an adversary, the criticism of silo working becomes
even more pertinent. The existence of Chinese walls is a double-edged sword; they not
only protect, but also deny vital access and knowledge to those who require it. It is no
longer appropriate that the various elements of the stakeholder community engaged to
combat organized crime operate in their own individual comfort zones. As challenging
as it may be, the battle against organized crime must be fought on a level playing field
if there is to be any chance of success.
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7. Trafficking crimes
Frank G. Madsen
INTRODUCTION
Trafficking crimes are typically a subset of organized crime, at least as the latter is
defined in the United Nations Palermo 2000 convention. It is therefore of import to
analyse the concept of organized crime, which, unfortunately, will not be possible in
this short chapter.1 There are several ‘species’ of organized crime and organized
criminals; trafficking crimes are typical of all from so-called professional criminals,
that is groups of criminals that form and re-form as required, via the criminal societies
to terrorists utilizing organized crime methodology to fund themselves.2 The generic
term organized crime is generally used for crimes that are organized, that is profes-
sional crime and criminal societies.
A crucial aspect of all criminal networks is that they are self-organized critical
systems. They are critical systems because of the tension between the elements in the
system itself, between the system and similar systems, and between the system and its
legal and socio-political environment. This intrinsic state of affairs is exacerbated by
the lack of an external conflict resolution mechanism. Nevertheless, the magnitude of
the disturbance will be absorbed by the self-repairing property, which characterizes
such systems, as one participant is replaced by another and as a new balance is struck
between networks.
Whereas one can distinguish four species of organized crime, by characteristics, the
criminal activities of organized crime can be subdivided into three kinds, by function,
namely coercive, predatory and market crime.
In coercive crimes the criminal revenue is generated by violence or the threat of the
use of violence. Typical examples are the pizzo (Italian for ‘protection money’),
extortion in general, and interference in labour disputes and stockholder meetings.
Predatory crimes are a type of crime where the criminals piggyback on ordinary
societal activities, but without the supply of any goods or services. Examples are
legion, but credit document frauds and white collar crimes in general come to mind.
These activities constitute one of the major revenue streams of organized crime.
1
Frank G. Madsen, Transnational Organized Crime (New York and London: Routledge,
2009); and for a more in-depth historical treatment: Frank G. Madsen, ‘The Historical Evolution
of the International Co-operation against Transnational Organized Crime: an Overview’, in
Pierre Hauck and Sven Peterke (eds) International Law and Transnational Organized Crime
(Oxford: Oxford University Press (forthcoming)).
2
Jean Népote, ‘Interpol et le Crime Organisé’, Revue Internationale de Police Criminelle,
no. 282 (November 1974), 230–236. The article consists of Népote’s address to a conference on
organized crime held at the seat of the Bundeskriminalamt, Wiesbaden, Federal Republic of
Germany, 22 October 1974.
75
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Finally, trafficking or market crimes are those crimes where organized crime does
deliver goods and services that are not otherwise readily available, while not neces-
sarily being illegal, for example brand tobacco products.
After this introduction, the chapter consists of two parts of which the first considers
market crime and the second some individual types of crime.
MARKET CRIME
Following the taxonomical and functional distinctions made above, trafficking or
market crimes are of a kind, where the criminals actually deliver goods or services that
willing customers cannot otherwise readily obtain or cannot obtain at an affordable
price. Such crimes are the subject of the study of organized crime in general, but are
perhaps more specifically typical for the professional crime species, that is executed by
protean or starfish organizations that form and re-form themselves in accordance with
the principle of critical self-organization.3
It is of crucial import, however, to stress that the very basis for organized crime’s
involvement in market crimes is that of denied demand, which, if the demand is
important enough, will create the necessary supply to clear the market.
Denied Demand
The major, transactional part of organized crime is about satisfying demand, namely
denied demand, since such organizations provide us with the things we really should
not want in the first place, for example drugs, illegal gambling and prostitution.4 Their
activities are not necessarily concentrated on these illicit goods, however, and they will
deliver whatever goods will provide considerable profits. They will also, and indeed do,
closely follow societal developments in order to maximize profits by responding to
such developments. For example, advances in surgical organ transplantation techniques
and the concomitant surge in a number of – mostly lifestyle induced – pathologies
leading to a sharp increase in demand have opened a new window of opportunity for
illicit gains: the supply of organs for transplantation.5 Likewise, in our developed
world, one of the more important societal parameters is the increased import of the
health sector. This sector has two major characteristics: first, in the richer, developed
countries populations are growing older and have increased health care requirements,
and, second, funds are being invested heavily in the sector by private individuals, but in
particular by governments. Thus the average OECD country private and public
3
Ori Brafman and Rod A. Beckstrom, The Starfish and the Spider: The Unstoppable Power
of Leaderless Organizations (New York: Portfolio (Pelican), 2006).
4
The non-transactional part of organized crime activities includes – as noted above –
coercive and predatory crimes such as the traditional organized crime income generators, fraud
and extortion; corruption, although a core organized crime activity, is best considered a means.
5
See Frank G. Madsen, ‘Organ Transplantation and Transnational Organized Crime’, RUSI
Journal, vol. 158, issue 5 (2013), 6–17.
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Trafficking crimes 77
expenditure on health in 2010 was 9.5 per cent of GDP.6 This in and by itself will
attract the attention of organized criminals, but not only. This particular sector presents
the further attraction that it is characterized by the existence of denied demand, for
example access to cutting-edge pharmaceutical products, to organs for transplantation,
and to care and cure homes for the elderly and long-term ill. Amusingly, an Italian quip
states that sanità rima con criminalità or ‘health is a rime on crime’.
Denied demand is the resultant of a series of political choices, which have led to the
creation of an international prohibition regime. Whereas it would not be helpful to
criticize such choices, it is, however, of core import to stress that a so-called grey
market has never been defeated from the supply side. Therefore, it is safe to posit that
if denied demand becomes important enough, an illicit supply will meet the demand in
a marketplace and clear the market. Law enforcement can neither prevent the creation
of the market nor cause its closure. Any consideration of countermeasures would, in
consequence, have to include two fundamental questions: first, if a given prohibition
regime is really necessary and, second, how one can address the problem from the
demand rather than from the supply side.7
Denied demand is met by illicit supply, which consists in the arbitrage of borders;
the latter are often external, as is mostly the case in the illicit trade in narcotic drugs
and arms, but also internal, namely when a given good or service is made illegal, for
example gambling, or unattainable because of prohibitively high taxation, for example
brand tobacco product. In the former case organized crime provides access to an illegal
service, namely an ‘underground’ casino, in the latter to an otherwise legal product,
rendered illegal only by the non-payment of duties, that is by smuggling or diversion.
Scope of the Trade
For obvious reasons, it is impossible – with any degree of certainty – to estimate the
value of trafficking crimes, since the active business units do not produce quarterly
reports, quite the opposite. But, as Peter Andreas rightly notes, it must be better to
persevere in the study of such crimes using the best possible estimates rather than
desisting.8
The estimate by the World Economic Forum (WEF) in 2011 might constitute an
acceptable approach, see Table 7.1. According to the WEF, the rough estimate of the
market of illicit goods would be roughly one trillion US dollars.9
6
OECD, ‘Health Expenditure’, in OECD Factbook 2013: Economic, Environmental and
Social Statistics (Paris, France: OECD Publishing, 2013), 249. For narcotic drugs, see Frank G.
Madsen, ‘International Narcotics Law Enforcement: A Study in Irrationality’, Journal of
International Affairs vol. 66, issue 1 (Fall/Winter 2012) p. 123.
7
Whereas empirical evidence seems to prove conclusively that a grey market cannot be
defeated from the supply side, one may reasonably raise the question if any evidence would
allow one to be more optimistic as regards intervention on the demand side. In fact, the sharp
decline in the number of male smokers in the western world over the last couple of decades
would encourage demand-side intervention.
8
Peter Andreas, Smuggler Nation (Oxford and New York: Oxford University Press, 2013),
xii.
9
One trillion = one million millions or x10E12.
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Table 7.1 Rough estimated market size of illicit goods based on public sources
(billion US$)
Counterfeit pharmaceutical drugs 200

Prostitution 190
Marijuana 140
Counterfeit electronics 100
Cocaine 80
Opium and heroin 60
Web video piracy 60
Software piracy 50
Cigarette smuggling 50
Human trafficking 30
Environmental crimes and natural resources trade 20
Logging 5
Art and cultural artefacts 5
Small arms 1
Source: Global Risks 2011. Cologny/Geneva, Switzerland: World Economic Forum, p. 23, table 3.
This estimate does not include vast segments of the market for counterfeit goods, such
as counterfeit luxury goods, counterfeit automobile and aircraft spare parts, counterfeit
consumer goods and counterfeit fertilizers. An UNICRI/Bascap report estimates
that the total global value of counterfeit and pirated products in 2014 will reach
US$1.7 trillion.
Estimating the value of the trade in counterfeit goods is particularly difficult because
of the heterogeneous nature of the product mix. The value of a counterfeit, generic
anti-malarial product, for example, is equal to the market price because that is what the
patient will have paid. But what is the value of counterfeit luxury goods, for example a
counterfeit 25 dollar brand-imitation watch? Is it $25 or the corresponding market price
of the genuine brand watch, which may be a hundred times more?
The nefarious nature of counterfeit goods consists in a series of negative business,
regulatory and health and safety issues.10 Such trade crowds out the legitimate product
and the copyright or patent holder will lose the market, in parte or in toto, to the
counterfeiter or copier. This may obviously put a damper on innovation, which, from an
economic point of view, is the hallmark of modern, western society. The trade in
counterfeits and pirated product also facilitates the creation and operation of the
10
UNICRI/ICC-Bascap, Confiscation of the Proceeds of IP Crime: A Modern Tool for
Deterring Counterfeiting and Piracy (2013). Available at www.iccwbo.org. UNICRI: United
Nations Interregional Crime and Justice Research Institute. ICC: International Chamber of
Commerce. Bascap: Business Action to Stop Counterfeiting and Piracy, an organism created
under the auspices of the ICC.
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underground economy and thereby deprives the government of revenue, dislocates

legitimate employment and often makes adequate health and safety controls difficult or
impossible.11 This point is emphasized by a series of recent seizures of unsafe –
counterfeit or pirated – toys in the European Union. Finally, such trade often exploits
the Internet as an illicit marketplace for counterfeits, thus eroding confidence in that
media.
GOODS AND SERVICES

This subsection will briefly review a certain number of market crimes that have been
and are of import to the viability of organized crime as a business. Exhaustibility is, in
this instance, an unattainable ideal; organized crime will deal in the procurement of any
goods and services that may, at a given time and at a given location, be profitable. This
extreme flexibility bordering on the protean is not only a characteristic of organized
crime, in particular in its professional crime garb, it is also its great force, in particular
when linked to another characteristic of such organizations, namely self-organizing
criticality. The importance of this term cannot be sufficiently stressed.
Therefore, in the following most of the topical subject areas will only be briefly
reviewed, while just a few areas are analysed at length. This selection is purely
idiosyncratic while, however, being constantly influenced by the author’s concept of
emerging crime. In other words, some crimes that, some would argue, are nocuous to
society are not reviewed, because they are well known, while others that may appear of
less import are analysed. The subject areas analysed in the following have been chosen
to emphasize the importance and socially nocive character of crimes that are perhaps
less well known.
Art Crime
Crimes against works of art, theft and destruction, for example, are on the rise. This
subsection considers art theft as such in the first part and then the worrying emergence
or re-emergence of theft or destruction of works of art as a kind of cultural genocide in
the second.
While the theft of works of art may, in the public perception, have been the remit of
the gentleman thief, and although the world of crime may have changed also in this
area from the 1990s, art and stolen art remain the subject matter of the shadowy world
of art dealers. Art is stolen by both opportunistic thieves and more organized criminals
– in this case perhaps to order? – but the fact that so much art disappears and never
11
In shorthand: counterfeit product is copyright violation, i.e. the product is presented as
having been manufactured by the copyright holder, although it is not, and it bears the copyright
holder’s name. Pirated goods are violations of the patent; they do not carry the patent holder’s
name, but they are manufactured using the patent holder’s patented idea, be it process or
substance. The deplorable international inactivity – with the laudable exception of Interpol –
against often dangerous counterfeit or pirated pharmaceutical product is caused by political
squabbles over such definitional issues. See Amir Attaran et al. ‘How to Achieve International
Action on Falsified and Substandard Medicines’, British Medical Journal. 2012;345:e7381.
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resurfaces or resurfaces after decades has led some scholars to pose the question of the
whereabouts of such stolen art. In a New York Times tally, reported by Naím, the world
is missing 551 Picassos, 43 Van Goghs, 174 Rembrandts and 209 Renoirs.12 Some
undoubtedly are held by secretive collectors, who can only admire their collections
alone, as these works of art would be easily recognizable. Others – and this may
explain the increase in the traffic – may be held as investment or as a sort of reserve
currency paid for by illicit funds. The point here is that in the post-gold standard era,
currency is only as robust as the trust that subtends it. If one were to imagine a
situation where, as a result of, say, war or a major epidemic, the subtending trust were
to disappear, one would be wise to possess investments resistant to such disorder.
Whereas stolen art eventually, one would hope, will resurface somewhere, and
although looting of archaeological sites and religious sites often involves some
destruction of art and context, known as acquisitive vandalism, a particularly worrying
aspect of art crime is art vandalism. Fine and Shatin define art vandalism as the
intentionally destructive and illegal damage to a work of art.13 Conklin departs from
this definition by including negligence, which is less than helpful.14 One should retain
Fine and Shatin, insisting on the intention to destroy, while fine-tuning various
motivations. In this section, an often overlooked but crucially important subsection of
vandalism, namely that part motivated by damnatio memoriae, will be emphasized.
Somewhat hesitantly, one might agree with Bevan and argue that this form of
vandalism is cultural genocide, namely the deliberate attempt to eradicate the cultural
presence and, indeed, the former and present existence of a people or community
definable by ethnicity or religion, an idea, or, more rarely, of a person.15 The ultimate
goal of the destruction is the erasure or transformation of identity.
Examples are, respectively, the so-called Kristallnacht in Germany, 9–10 November
1938, which witnessed the destruction of hundreds of synagogues; the somewhat naive
removal of the name of Mussolini from a long inscription in front of Augustus’
mausoleum in Rome presumably in a futile attempt to pretend that Italian fascism had
not existed or more easily to forget that it did; and finally the erasure of the name of
Geta from the nearby triumphal arch of Septimius Severus, albeit somewhat earlier,
whereby Geta’s murderer, Caracalla, relegated his brother to eternal oblivion, or at least
attempted to.
The worrying and apparently unstoppable trade in art and antiquities, including
artefacts from irregular excavation and art purloined from churches, synagogues,
temples, public buildings and museums, often presents an example of double motiv-
ation: profit and cultural extinction. An example here might be the trade in works of art
12
Edward Dolnick, ‘Stealing Beauty’, New York Times (24 August 2004), A17. Moisés
Naím, Illicit (New York: Doubleday, 2005), 171.
13
Gary Alan Fine and Deborah Shatin, ‘Crimes against Art: Social Meanings and Symbolic
Attacks’, Empirical Studies of the Arts, vol. 3 (1985), 135–152.
14
John E. Conklin, Art Crime (Westport, Conn.: Praeger, 1994), 227.
15
Robert Bevan, ‘Razing the Past: Soldiers and Civilians Are Not the Only Casualties of
War. Aggressors Also Target the Physical Monuments to an Enemy’s Existence and So Attack
Their Libraries, Churches and Schools. Robert Bevan Reports on the Destruction of Memory’,
The New Statesman, vol. 134, issue 4770 (12 December 2005). ‘Hesitantly’ because one cannot
compare the physical destruction of an ethnic or religious group with that of destruction of art.
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and antiquities from Turkish-occupied northern Cyprus.16 In this case, one observes
both intentional cultural dispersal and, since this is more often than not linked with
acquisitive vandalism, damage done in the course of an effort to acquire money or
property by inexpert removal of murals, folding of oil paintings, and so on.17
The importance of art as a constituent element of cultural identity may be observed
in the joy with which the three pre-Angkorian sandstone statues that had been looted
from Prasat Chen at the Koh Ker Temple Complex almost forty years earlier were
received back in Cambodia in June 2014.18
Illicit Traffic in Tobacco Product
This trade is particularly instructive for an understanding of trafficking crimes. It

emphasizes the effect of government regulation, in this case exorbitant taxation, which
creates denied demand and has a series of undesirable consequences.
First, the regulation inexorably leads to the creation of diversion from a lower-price
to a higher-price market in an almost classic case of arbitrage, colloquially referred to
as ‘buttlegging’. This is presumably the part of the illicit trade that deprives govern-
ment of the largest amount of tax revenue. It includes tourists returning from abroad
with excess quantities of tobacco product but also the nocturnal high-speed boat traffic
between the Illyrian coast and Italy, which has been going on at least since the Second
World War. But a lucrative trade in genuine but diverted product also exists within the
borders of the United States, namely from states with relatively low tobacco taxation,
for example Virginia, and states with high taxation, for example New York.
Second, the creation of a market of piracy product, that is tobacco product that looks
like brand product, but without carrying the brand name, known as illicit whites. This
term refers to cigarettes legally produced in one jurisdiction but offered for sale in
another where their sale is illegal typically for distribution and health reasons. In
Europe the best known are Jin Ling (produced in Russia) and Gold Mount from the
United Arab Emirates. Of the 65.5 billion illicit cigarettes smoked in the European
Union in 2012, 24.5 per cent were illicit whites. In 2006, the corresponding number
was 2.4 per cent, which proves the rapid increase in this trade. Third, denied demand
has led to the establishment of a market for counterfeit product, that is product as in the
previous paragraph, but carrying the brand name. The key consumption and export
market is China. There are 300 million smokers in China with a yearly consumption of
two trillion cigarettes or one third of all cigarettes smoked in the world. It is also the
centre for the production of counterfeit cigarettes (400 billion in 2012).
Fourth, the encouragement of the legitimate industry to enter the diversion market in
order to capture part of this market. The legitimate producers recuperate the same profit
16
Charalampos G. Chotzakoglu, Religious Monuments in Turkish-Occupied Cyprus: Evi-
dence and Acts of Continuous Destruction (Nicosia, Cyprus: Museum of the Holy Monastery of
Kykkos, 2008).
17
Stanley Cohen, ‘Property Destruction: Motives and Meanings’ in Colin Ward (ed.)
Vandalism (New York: Van Nostrand Reinhold, 1973), 215–257.
18
I thank His Highness Sisowath Ravivaddhana Monipong of Cambodia for having shared
with me this information as well as having provided me with a filmed testimony of the reception
ceremony for the statues held in Phnom Penh on 3 June 2014.
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as on the legitimate market, since the price differential is created only by the
non-taxation.
Fifth, the creation of an important income stream for organized crime and, sixth, of
a similar, important income stream for terrorist groups.19 Some examples: from 1999 to
2004, the Irish Republican Army (IRA) is estimated to have earned US$100 million
from smuggling cigarettes to Northern Ireland.20 Likewise, one Muḫtār Bitmuḫtār,
a.k.a. Mukhtar Belmukhtar, alias ‘Mister Marlboro’ alias ‘The One-Eyed’, financed his
and his group’s terrorist activities through the trade in illicit tobacco product in
southern Africa; a traffic of a total value of approximately one billion US dollars.21
Table 7.2 Illicit tobacco consumption (percentage of total)
> 20% Lithuania, Latvia

10.1–20% Finland, Estonia, Ireland, UK, Poland, Germany, the Netherlands,
Luxembourg, France, Bulgaria, Greece
5.1–10% Sweden, Syria, Italy, Romania, Austria, Slovenia
< 5% Czech Republic, Slovakia, Hungary, Denmark, Portugal, Cyprus
Source: Elaborated by author based on Cuscito, Giorgio. 2013. ‘Dove c’è fumo c’è Cina’ (Where there is
smoke there is China), Limes, vol. 10; eBook Version, 196–201, map 1 (p. 198).
The illicit cigarette consumption in the European Union in 2012 was 65.5 billion, or
11.1 per cent of the total, with a tax loss of €12.9 billion (US$16.9 billion).22 The
differences in levels of illicit tobacco consumption are outlined in Table 7.2.23
Counterfeit Pesticides
This type of illicit trade has often been neglected in the study of trafficking crimes, but
wrongly so.24 In fact, such pesticides are introduced into Europe in large quantities.
More often than not, they contain illegal active ingredients that could potentially be
dangerous to health.
19
William Billingslea, ‘Illicit Cigarette Trafficking and the Funding of Terrorism’, The
Police Chief, vol. 71, issue 2 (2004) pp. 49–54.
20
Ibid.
21
Jamie Doward, ‘How Cigarette Smuggling Fuels Africa’s Islamist Violence’, The Guard-
ian (27 January 2013). Part of the al-Qaeda franchise. Contrary to the premature announcement
of his death, he seems to be alive, operating in and from Chad.
22
Philip Morris International, ‘New Study Finds EU Black Market for Cigarettes Reaches
Record High; Member States Tax Loss an Estimated €12.5 Billion’ (17 April 2013).
23
Giorgio Cucito, ‘Dove c’è fumo c’è Cina’, Limes, vol. 10 (November 2013), 167–172.
24
I thank my friend, Mr D’Arcy Quinn, for having introduced me to the disquieting world of
counterfeit pesticides. For a general overview, see CropLife International, Counterfeit and Illegal
Pesticides Smuggling Caused by Unregulated International Trade. Brussels, Belgium: CropLife.
Europol, Growth in the Trade in Counterfeit and Other Illegal Pesticides across Europe.
OC-Scan Policy Brief for Threat Notice No. 011-2011. The Hague, the Netherlands: Europol,
2011.
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The recent seizure in the European Union, 19 May 2014, of 21 tonnes, including
10.5 tonnes of pesticides not authorized on the EU market and 10.5 tonnes of
insecticides carrying the false label of a well-known manufacturer, illustrates the point.
The illegal pesticide had been manufactured in China, brought via ship to Odessa,
Ukraine, and then overland to Poland, where – acting on information from OLAF (the
European Anti-Fraud Office) – it was seized.25
Ten per cent of all pesticides in the world are illegal, 7 per cent in the European
Union. The largest seizure, so far, in Europe was of 28 tonnes on 4 January 2010 in
Hamburg, Germany.26
Illicit traffic in pesticides clearly illustrates the dangers inherent in such trade. First,
the product almost always contains chemical compounds that are illegal for use as
pesticides in the western world because they are potentially dangerous to human health.
Second, the shipments follow routes used for licit traffic. Third, it took – and generally
takes – international cooperation to arrive at a seizure, in this case the good offices of
OLAF. Fourth, the possibility that anybody, manufacturer, shipper, shipping agent,
vessel owner or recipient, will be held criminally responsible is remote.
Counterfeit Pharmaceuticals
The societal importance of controlling distribution and quality of pharmaceuticals,

within each jurisdiction as well as internationally, should not need explanation.
Nevertheless, the WEF expert panel, cf. Table 7.1, estimates that counterfeit pharma-
ceuticals constitute the largest market segment of illicit goods.
Indeed, Nayyar, Breman, Newton and Herrington in their important 2012 article
point out that27
+ 30 per cent of drugs purchased at random in Southeast Asia failed testing of their
pharmaceutical ingredient.
+ 35 per cent of drugs purchased in Sub-Saharan Africa failed the same testing.
+ Based on World Health Organization (WHO) research, 655,000 individuals are
killed by malaria every year, of which 200,000 are ascribable to substandard and
counterfeit production of anti-malarial medication.
Only Interpol seems to take any meaningful action against counterfeit pharmaceuticals.
Their action, however, has so far been limited to postal interception, which may present
a somewhat skewered image of the market of counterfeit pharmaceutical product.
Between 13 and 20 May 2014, Interpol directed a worldwide enforcement action in 110
countries, codename Pangea VII, whereby some thirty million dollars’ worth of
counterfeit pharmaceuticals were seized, 239 individuals were arrested and 10,000
25
Smuggled Counterfeit Pesticides. Press Release No. 13/2014 of 31 July 2014. Brussels,
Belgium: OLAF, EU.
26
Barbara Conforti, Santé, sécurité, contrefaçon, attention danger. CAPA TV Production,
2011.
27
Gaurvika M. L. Nayar, Joel G. Breman, Paul N. Newton and James Herrington,
‘Poor-Quality Antimalarial Drugs in Southeast Asia and Sub-Saharan Africa’, The Lancet
Infectious Diseases Journal, vol. 12, issue 6 (June 2012), 488–496.
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illicit websites were closed. The seized product belonged to a number of therapeutic
areas, namely analgesics, thyroid hormones, anxiolytics, and insulin.28 A 2012 report
from the EU Commission indicates that counterfeit pharmaceuticals constitute the class
of product most often seized on the borders of the European Union.
Counterfeit anti-cancer product is becoming more and more prevalent among seized
counterfeit pharmaceuticals in general, that is, not only postal interception. This is
caused by the high price of such product, which attract poorer patients to what they
believe to be a cheaper source. One might speculate that the present novelty expressed
by experts is caused by the collection methodology, since all seizures are postal
seizures from Internet orders. Counterfeit anti-cancer drugs have always been a
favourite with counterfeiters, because an adverse or lacking patient reaction was
ascribable to the illness not the pharmaceutical product. Apart from Interpol’s highly
successful Pangea VII operation, some major recent seizures are included in Table
7.3.29
Table 7.3 Counterfeit pharmaceuticals – some recent cases
+ 16 April 2014. Roche, a Swiss pharmaceutical company, reported that a counterfeit

version of Herceptin (against breast cancer) had been discovered in the United
Kingdom, Finland and Germany. Some seized product contained no active
ingredient at all, some was highly diluted.
+ 2012. Roche’s anti-cancer drug Avastin was counterfeited and placed on the market
in the United States and in Europe.
+ October 2013. One million counterfeit tablets of Pfizer’s Xanax (an anti-depressant)
were seized at the Zürich Airport, Switzerland. The product was en route from
China to Egypt.
+ February 2014. Le Havre, France. Customs seized 24 million tablets of Viagra
(Pfizer) and Cialis (Eli Lilly), both used for erectile dysfunction. Market value €11
million. The product was concealed in two containers wrongly declared to contain
tea.
+ May 2013. Le Havre, France. Customs seized 1.2 million sachets of aspirin under
trade name Aspégic (Sanofi). The sachets contained only sugar. The French Finance
Minister stated that the product had been sold to a Spanish company in the Baleares
Islands believed to be only a front company and that the end-markets for the
counterfeit product was to have been Spain, southern France and francophone
Africa.
+ 2011. Kenya. 3,000 patients absorbed counterfeit retro-viral product.
Source: Compilation by author based on international media reports.
28
The presence of insulin is rather surprising. Hitherto, counterfeiters have avoided insulin,
because the lack – or erroneous dosing – of active ingredient would be detectable immediately
by the patient’s reaction.
29
Chloé Hecketsweiler, ‘Offensive d’Interpol contre les pharmacies illégales’, Le Monde –
Economie et Entreprise (23 May 2014), 3.
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The counterfeiting of pharmaceutical product is more lucrative than the illicit traffic in
narcotic drugs and – in practical terms – risk-free (for the criminal, not the patient).
Aline Plançon opines that one thousand euros invested in the counterfeiting of
pharmaceuticals will yield between 200,000 and 450,000 euros in profit, depending on
the end-market.30
CONCLUSION
This chapter has emphasized the causal relationship between the concept of denied
demand and trafficking crimes. It has illustrated this relationship with an analysis of a
few such crimes, some of which can be considered emerging crimes, while all have
severe negative, societal consequences.
In fact, the full negative impact of trafficking crimes that constitute abuse of the
environment remains to be fully evaluated. These include, but are by no means limited
to, the trade in hardwood timber, and deforestation in general, the trade in toxic waste
for illicit disposal and the traffic in counterfeit pesticides, which all involve serious
harm to the environment and potential risk to human health, as does the counterfeiting
of pharmaceuticals. Art crime, and in particular the looting of archaeological and
religious sites, leads to the dilution or extinction of cultural identity. Finally, purely
financial trafficking crimes, as illustrated by the illicit trade in tobacco product, entail
an important diminution of government revenue, invalidate government’s ability to use
pricing as a tool, for example, for health education, provide organized criminals and
terrorists with important revenue streams, and erode the citizens’ respect for the rule of
law.
From 1912, the first – misguided – international opium treaty, an increasingly
inclusive international prohibition regime has been created, which to a large degree is
both unenforced and unenforceable. One might be forgiven for thinking that it would
make more sense to concentrate effort on a few issues that entail clear societal harm.
30
Chloé Hecketsweiler, ‘“1000 euros investis dans les faux médicaments peuvent rapporter
entre 200000 et 450000 euros.” Questions à Aline Plançon, chargée de la criminalité pharma-
ceutique à Interpol’, Le Monde – Economie et Entreprise (23 May 2014), 3.
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8. Economic crime and terror: spinning a web of

greed and fear
Shazeeda A. Ali
INTRODUCTION
“No wealth can ever make a bad man at peace with himself” opines Plato, but the
abundance of criminals and criminally derived wealth seems to challenge this phil-
osophy. Economic crime, financial crime, white collar crime are all different terms used
to describe offences where both the means of commission and the objectives involve
money. Whatever the name, these are menacing crimes with potentially devastating
consequences.
The range of economic crimes is extensive, but the focus of this chapter will be
confined to money laundering, corruption, tax evasion and terrorist financing as, in
many instances, they share a common methodology.
A. MONEY LAUNDERING
Successful money laundering severs the links between the criminal, the crime and the
proceeds of crime. If the money cannot be linked to the crime or its perpetrator, the
criminal can enjoy the success of his criminality and continue to build his illicit
enterprise without fear of apprehension and prosecution.
Money laundering has therefore been described as “the criminal’s way of trying to
ensure that, in the end, crime pays”.1 However, apart from insulating the criminal and
his ill-gotten gains, the wider implication of money laundering is that it can negatively
impact every aspect of society by causing severe economic, political and social
damage.
In this context, the drug trade has been viewed as “the greatest single threat to the
social, economic fabric of the (Caribbean) … Unchecked it will destroy us, absolutely
destroy us … the money available is just too great.”2 Caribbean Community Secretariat
(“CARICOM”) leaders have long concluded that “narcotics trafficking and its associ-
ated evils of money laundering, gun smuggling, corruption of public officials, crimin-
ality … constitute the major security threat to the Caribbean today”.3 Of course, it is
1
U.S. Department of State, “The Consequences of Money Laundering and Financial
Crime” (May 2001) Vol. 6 (2) Economic Perspectives 6.
2
Former Bahamian Prime Minister, Lynden Pindling quoted in Maingot, A., “Laundering
the Gains of the Drug Trade: Miami and the Caribbean Tax Havens” (1988) 30 Journal of
Inter-American Studies and World Affairs 167.
3
Heads of Government meeting held in Barbados in December 1996.
86
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Economic crime and terror 87
not just drug proceeds that pose such a threat as “there is no moral difference between
drug trafficking and other serious offences as the risks from both are great”.4
Impact of Money Laundering
It may be said that money laundering represents the greatest non-military security
threat to Jamaica. Indeed, the rise of organised crime gangs is partly attributable to
successful money laundering, and much of the anti-social behaviour is connected to
these notoriously brutal gangs. There is evidence of drug gangs engaging in robberies
to diversify their income and also fencing stolen high-value property in order to convert
their illicit cash into commodities, as part of the laundering process.
Jamaica’s crime statistics are alarming and rank among one of the highest in the
world. National polls indicate that crime is the public’s number one concern and,
indeed, fear and anxiety affect all sections of Jamaican society to significant and, in
some cases, debilitating degrees.5 The result “is an erosion of public confidence in the
state’s ability to reduce the incidence of crime”.6
The massive earnings generated by crime radically change the system of values in
the society, as crime kingpins become role models for disillusioned inner-city youth.
Ultimately, the influence of criminal organisations can weaken the social fabric,
collective ethical standards and the democratic institutions of society.7
Money Laundering Methods and Effects
A common money laundering technique is for criminals to purchase cash intensive

businesses such as laundromats or restaurants to provide a legitimate source of income.
The criminal commingles the illicit funds with the business’s income and justifies his
wealth as business profits and may even pay taxes on the combined income. The front
business provides an aura of legitimacy but since the owner is injecting illicit funds he
gets an unfair advantage over his legitimate competitors, who have to obtain capital
from the financial markets.8 He is able to subsidise the products and services at levels
below market rates, which can result in the crowding out of private sector business by
criminal organisations.9
Money may be laundered through “sterile” investments, rather than placed in
productive channels. Sterile investments generate minimal additional productivity for
the economy and include high-value consumption assets such as art, antiques, jewellery
4
Quoted in Burrell, P., “Preventing Tax Evasion through Money-Laundering Legislation”
(2000) Vol. 3 (4) Journal of Money Laundering Control 304.
5
National Crime Prevention and Community Safety Strategy (“NCPCSS”).
6
Jones, M., “Crime-Related Events: A Path to Policy Change in Jamaica?” (April 2014)
Vol. 1 (1) Caribbean Journal of Criminology 76.
7
OECD Policy Brief (1997–98).
8
Ali, S., Money Laundering Control in the Caribbean (2003) Kluwer, London.
9
U.S. Department of State, “The Consequences of Money Laundering and Financial
Crime” op. cit.
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and luxury automobiles.10 This is done to preserve their value or make them more
easily transferable. For developing countries, the diversion of such scarce resources
presents a serious impediment to economic growth.
Criminals seek to dominate the market by both fair and foul means and engage in
unfair business practices such as predatory pricing, extortion and corruption.11 Criminal
participation in a commercial activity could distort that market. For example, inflated
prices paid for real estate causes the price of similar houses to escalate to a level not
commensurate with the true value of that property. This produces a disruption of the
natural growth of the property industry. Where the market appears lucrative, legitimate
investors may be attracted to it, but loans for these purchases are secured using the
inflated value of the property. This causes a speculative bubble to arise, but when the
bubble bursts it would lead to a crash in that market.12
Money launderers are primarily motivated by minimising their risk of detection
rather than the rate of return so when particular investment vehicles no longer suit their
needs they abandon them, to the detriment of that sector. Developing countries can
become favoured by large-scale money launderers for short periods, the sheer volume
causing a sharp surge in financial activity and creating a façade of financial growth.13
However, this is usually followed by an equally sharp decline, resulting in severe
macroeconomic instability.
The large inflows and outflows of money associated with money laundering can
confuse policymakers and significantly influence economic indicators affecting infla-
tion, including monetary levels, exchange rates and interest rates as well as the price of
assets in which the illicit money is invested.14 Consequently, changes needed to attract
legitimate income are not made.
Money laundering creates risks for the safety and soundness of financial institutions.
If criminals infiltrate the financial sector, the investing public may conclude that it is
neither stable nor trustworthy and they will transfer their capital to countries perceived
as safer. The costs of such capital flight include “a loss of productive capacity, tax base,
and control over monetary aggregates – imposing a substantial burden on the public at
large and rendering policymaking more difficult”.15
Where a jurisdiction acquires such notoriety, foreign financial institutions may
decide to limit their transactions with institutions from that jurisdiction, subject their
10
Asian Development Bank, Manual on Countering Money Laundering and the Financing
of Terrorism (March 2003).
11
Sherman, T., “International Efforts to Combat Money Laundering: the Role of the FATF”
in H. MacQueen (ed.) Money Laundering (Edinburgh: University Press 1993).
12
Comstock, M., “GATT and GATS: A Public Morals Attack on Money Laundering” (1994)
15 Northwestern Journal of International Law and Business 139.
13
of Terrorism, op. cit.
14
Tanzi, V., “Money Laundering in the International Financial System” IMF Working Paper
(1996).
15
Loungani, P. and P. Mauro, Capital Flight from Russia, IMF Policy Discussion Paper
(June 2000).
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transactions to extra scrutiny or even terminate correspondent or lending relation-

ships.16 Legitimate businesses may suffer from reduced or more costly access to world
markets due to extra scrutiny of their ownership, organisation and control systems.17
Any country known for lax enforcement of anti-money laundering (“AML”) laws is
less likely to receive foreign private investment and eligibility for foreign governmental
assistance would be limited.18 Further, where the Financial Action Task Force (“FATF”)
declares a jurisdiction as being non-compliant, other FATF member countries may
impose counter-measures against the listed state.
AML Framework
In Jamaica there exists a strong legislative framework to fight the scourge of money
laundering. This comprises the following key pieces of legislation:
1. Proceeds of Crime Act (“POCA”);19

2. Proceeds of Crime Regulations;
3. Proceeds of Crime (Money Laundering Prevention) Regulations.
Indeed, it may be said that POCA represents “a raft of legislation of which Dracon, the
Athenian legislator, would have been proud”.20 POCA creates the offence of money
laundering which occurs where a person engages in a prohibited act where he knows or
has reasonable grounds to believe that the relevant property constitutes or represents a
person’s benefit from criminal conduct.21 For this purpose, “benefit” is defined as
including any “property, service or advantage” and it is immaterial who carried out or
benefited from the conduct. The definition covers all conduct which would constitute
an offence in Jamaica and includes conduct which occurs abroad but which would
constitute an offence if it occurred in Jamaica.
POCA provides a post-conviction asset recovery machinery which includes:
1. forfeiture of property used in, or in connection with, criminal conduct;

2. forfeiture of property that represents the defendant’s benefit from criminal
conduct;
3. a pecuniary penalty order requiring the defendant to pay an amount equal to the
value of the benefits obtained from his criminal conduct.
In addition, POCA provides for civil recovery which takes the form of civil proceed-
ings against any person who the Asset Recovery Agency (“ARA”) believes holds
16
Schott, P.A., Reference Guide to Anti-Money Laundering and Combating the Financing of
Terrorism (2nd ed.) (Washington D.C., The International Bank for Reconstruction and
Development/The World Bank, The International Monetary Fund 2006).
17
Ibid.
18
Ibid.
19
For a discussion on POCA, see Ali, S., Proceeds of Crime Act: Taking the Profit Out of
Crime (MIND, Kingston, 2014).
20
UMBS Online Ltd. v. SOCA [2007] EWCA Civ 406.
21
Sections 92 and 93 POCA.
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property obtained from unlawful conduct.22 The court may follow and recover property
from any person who obtained it from the original perpetrator. The order is discretion-
ary and the court would only make it if it is just and equitable to do so. Where a civil
recovery order is made, the recoverable property is vested in the ARA.
Civil recovery is a particularly useful device where the offender is unavailable for
prosecution or where it is difficult to obtain sufficient evidence to obtain a conviction
against him and, as such, it is an important tool for dealing with crime bosses who are
usually insulated from apprehension and prosecution.23
POCA also provides for the civil recovery of cash, in excess of JA$100 000, which
was either intended for use in crime or obtained from unlawful conduct. For these
purposes, cash includes postal orders, cheques, bank drafts, bearer bonds and bearer
shares.24 If the allegations are proved the cash may be forfeited.
Whilst the majority of the provisions apply to the general public, there are certain
obligations that apply exclusively to the regulated sector, which comprises financial
institutions and designated non-financial institutions (“DNFIs”). For now, DNFIs
include attorneys-at-law, accountants and real estate dealers as well as casino and
gaming operators.
Persons in the regulated sector have obligations relating to customer identification,
record-keeping and disclosure of knowledge or belief that another person is engaged in
a transaction that could constitute money laundering.25 This disclosure is known as a
Suspicious Transaction Report (“STR”) and is made to the designated authority.26
Under the Proceeds of Crime (Money Laundering Prevention) Regulations, financial
institutions also have a duty to report cash transactions that attain the prescribed
amount.27
In order to prevent an investigation from being jeopardised, the offence of tipping-off
may occur where there is an unauthorised disclosure of an STR or other information
that may prejudice a pending or ongoing money laundering investigation.28 There is
also a related offence of prejudicing an investigation where there is either disclosure of
information prejudicial to a POCA investigation or destruction, concealment or
falsification of documents relevant to an investigation.29 In order to follow the money,
POCA prescribes certain investigative orders including customer information orders,
disclosure orders, search and seizure warrants and monitoring orders.30
The general public has a duty to report the transportation, either into or out of
Jamaica, of cash (including bearer-negotiable instruments) in excess of US$10 000 or
22
Section 57 POCA.
23
Ali, S., “The Civil Law: a Potent Crime-fighting Device” (2014) Vol. 17 (1) Journal of
Money Laundering Control 4.
24
Section 55 POCA.
25
Section 94 POCA.
26
This is the Chief Technical Director of the Financial Investigations Division.
27
Money transfer and remittance agents US$5 000; Cambios and bureaux de change
US$8 000; Banks and other financial institutions US$15 000.
28
Section 97 POCA.
29
Section 104 POCA.
30
Sections 105 to 128 POCA.
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its equivalent.31 This is intended to detect persons who attempt to smuggle illicit cash
since non-compliance may be a sign that the person failing to make the report has
something to hide.
In a bid to move to a “cashless” society and thus reduce the amount of illicit cash in
circulation, POCA prohibits a person from engaging in a financial transaction involving
cash exceeding the prescribed amount,32 unless he is an exempted or permitted person
or the transaction has been exempted.33 A person is also prohibited from structuring a
cash transaction so that it falls below the prescribed amount where the aggregate would
exceed that amount.
An important AML strategy is to establish a risk profile for each customer. Under
POCA, where a client is deemed to be high-risk, enhanced due diligence procedures
must be followed including:
1. obtaining senior management approval to conduct the transaction;

2. verification of the applicant’s source of funds;
3. enhanced monitoring including obtaining more detailed information;
4. making the first payment in the transaction through an account in the applicant’s
name with a financial institution.
Civil Liability
Apart from criminal liability under POCA, developments in the law of restitution and
the law relating to constructive trusts are relevant for imposing civil liability for money
laundering. In particular, the equitable concept of “intermeddler liability” could affect a
financial intermediary or professional gatekeeper who is involved in hiding the
proceeds of crime.
This principle forms the basis for two types of liability. The first is recipient liability
and occurs if the defendant receives misappropriated trust property.34 In that case he
would be liable to return it to the victim of fraud and would evade liability only if he
was a bona fide purchaser for value without notice.
The second basis of intermeddler liability is accessory liability and may occur even
where the defendant never received the misappropriated property. Liability accrues
where the defendant dishonestly assists in a scheme involving property derived from a
breach of trust or fiduciary duty.35 Here, he would be liable to a personal order to
account to the victim an amount equal to that which he was defrauded.
AML Benefits
Effective AML policies reinforce a variety of good-governance policies that help

sustain economic development, particularly through the strengthening of the financial
31
Section 101 POCA.
32
JA$1 million.
33
Section 101A POCA.
34
BCCI v. Akindele [2000] 3 W.L.R. 1423.
35
Royal Brunei Airlines v. Tan [1995] 2 A.C. 378 (PC).
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sector.36 They provide a disincentive for criminal involvement in the economy and
permit investments to be put into productive purposes that respond to consumer needs
and help the productivity of the economy.37
These benefits include enhanced risk management techniques, leading to greater
stability and economic development because of increased integrity of financial insti-
tutions and markets. This would also result in lower crime and corruption levels as well
as a positive reputation in the international community.
B. CORRUPTION
The opportunity for abusing one’s office for personal gain has existed from time
immemorial and is said to reside in any position that yields discretionary power. In
many aspects of Caribbean life, one sees the “greasing-of-the-palm” when those who
are being paid to provide a service insist on an additional “under-the-table” payment
for that service, without which, the citizen is simply frustrated.38
Whilst most persons record and condemn acts of corruption, when it comes to
articulating such conduct through the law and institutions of the traditional justice
system, “real problems of definition, scope and proportionality arise”.39 Nonetheless, a
somewhat generic definition of corruption is the misuse or abuse of entrusted power for
private gain.
Corruption may fall into one of the following categories.
1. Public sector/political corruption: where government officials or public servants

use their official powers for illegitimate private gain.
2. Private sector corruption: the misuse of office for personal benefit by persons
within the private sector.
3. “Grand corruption”: where the leaders of a state use their positions to siphon off
money from the state for their personal gain, such as the Duvaliers of Haiti,
Suharto in Indonesia and Abacha in Nigeria.
There are several forms of corruption including bribery, cronyism, nepotism and
embezzlement, but bribery is perhaps the most common form of corruption in
Caribbean society. Bribery requires two participants: one who gives the bribe and one
who takes it. Bribes may be demanded in order for an official to do something he is
already paid to do, such as facilitation payments to receive preferential treatment.
Alternatively, bribes may be demanded in order to circumvent rules in order to provide
services that the recipient is prohibited from providing.
36
of Terrorism, op. cit.
37
Terrorism, op. cit.
38
Smith, L.B., “Jamaica-still a problem” Jamaica Observer (January 7, 2014).
39
Rider, B., “Recovering the Proceeds of Corruption” (2007) Vol. 10 (1) Journal of Money
Laundering Control 5.
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Factors Facilitating Corruption
It is said that people are as corrupt as the system allows them to be and it is “where
temptation coexists with permissiveness”40 that corruption takes root on a wide scale.
Transparency International (“TI”) has identified the following conditions as producing
an environment conducive to corruption:41
1. absent or dysfunctional democracy;

2. information deficits including lack of government transparency and accountabil-
ity;
3. weak administration and legal profession;
4. lack of judicial independence;
5. poorly paid officials who try to “supplement” their income with bribes;
6. low literacy as this results in less questioning of corrupt behaviour;
7. lack of whistleblower protection as this creates less incentive to report corruption.
Effects of Corruption
The cost of corruption may be viewed in terms of political, economic and social
consequences and, as such, corruption poses a serious development challenge. Accord-
ing to TI, corruption constitutes a major obstacle to democracy, good governance and
the rule of law as offices and institutions lose their legitimacy when they are misused
for personal advantage. In some countries, the culture of corruption extends to every
aspect of public life, the end-point of which is a kleptocracy, literally “rule by
thieves”.42
Where grand corruption results in the depletion of national wealth, poverty results
for the masses. This could lead to social unrest, with political oppression being invoked
to retain power and democracy being replaced with rule by force.
Economically, corruption hinders the development of fair market structures, distorts
competition and thereby deters investment.43 It is therefore a key element in economic
under-performance and a major obstacle to poverty alleviation and development.44 For
instance, where bribes are made to officials for the waiver of customs duties or taxes,
this would result in reduced revenue for the government. A 2010 Don Anderson Poll
found that, for the first time, Jamaicans perceived corruption as “that thing that was
most wrong with Jamaica”.
The effect of corruption on the social fabric is perhaps the most damaging. It
undermines people’s trust in the political system, in its institutions and in its leadership.
Frustration and general apathy among a disillusioned public may result in a weak civil
40
Transparency International http://archive.transparency.org/news_room/faq/corruption_faq.
41
Ibid.
42
http://en.wikipedia.org/wiki/Political_corruption.
43
http://archive.transparency.org/news_room/faq/corruption_faq.
44
National Integrity Action https://niajamaica.org/.
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society.45 Ultimately, “bad governance, disaffected citizens and poverty are corruption’s
inevitable outcomes”.46
Money Laundering and Corruption Connection
There exists a close nexus between corruption and money laundering, both intertwined
and complementary to each other. Criminals will try to gain the complicity of officials
to facilitate the laundering of their wealth so that their criminal enterprise can thrive
without disruption. In this regard, bribery may occur in critical gateways, such as
financial institutions, lawyers, accountants, law enforcement agencies and court offi-
cials.47 Bribery may be committed to facilitate the smuggling of cash, foil investiga-
tions, destroy evidence and circumvent AML reporting procedures.
Furthermore, corruption is not only a product of money laundering but also a source
since the bribes received also need to be laundered. In many cases, the money is
laundered in foreign jurisdictions, adding to capital flight. Since bribes need to be kept
secret, sometimes the methods employed to pay bribes imitate those used to launder the
proceeds of crime.
Overall, collusion between criminals and persons in the public and private sectors
produces a crime, violence and corruption matrix as those that cannot be bought will be
made to cooperate through force, with money laundering being a facilitator and product
of all three.48
Perception of Corruption
TI’s Corruption Perceptions Index (“CPI”) is based on the perception of the degree of
corruption as seen by business people and risk analysts in the particular country. A
rating of 100 means that the jurisdiction is considered to be very clean whilst a rating
of 0 means it is perceived to be highly corrupt. Jamaica maintains a poor score on the
CPI; for instance, in 2012, 2013 and 2014 Jamaica received a score of 38.49
The significance of these ratings is the potential impact they may have on
investment. Perception plays a large part in influencing potential investors and, just as
with money laundering and other economic crimes, if a country is perceived to have a
corruption problem it may deter legitimate investors who do not wish to become
embroiled in such activity.
Challenges
Corruption is, in common with other economic crimes, notoriously hard to prosecute,
because of the difficulties in obtaining sufficient evidence. Large-scale corruption
45
http://archive.transparency.org/news_room/faq/corruption_faq.
46
Transparency International, Global Corruption Report (2001).
47
Terrorism, op. cit.
48
Ali, S., “A Tale of Two Regions: the Latin American and Caribbean Money Laundering
Connection” (1998) 2 Journal of Money Laundering Control 21.
49
Transparency International, Corruption Perception Index (2014).
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usually involves sophisticated and complex devices to conceal this activity, making
detection difficult. Since there is rarely a victim who comes forward to report loss, the
exposure of corruption depends on the receipt of verifiable information from those who
encounter such activity, including public administration and the financial services
industry.50
In high-level corruption cases, law enforcement is dealing with “crimes of the
powerful”, and the investigation may face interference from government agencies.
High-profile cases also generate wide media attention, which puts pressure on law
enforcement, and this could undermine impartiality in a trial.
Reducing Corruption
Greater transparency and public participation may help to reduce corruption. Access to
information legislation in Jamaica allows a person, subject to some exceptions, to
request to review information that is held by a government agency.51 This allows the
media, non-governmental organisations (“NGOs”) and civil society to assist in expos-
ing possible acts of corruption.
The reporting of corrupt activity is also a key device in detecting and preventing
corruption. For instance, certain public servants, including the Auditor General52 and
Contractor General,53 have an obligation to report irregularities and breaches falling
within their jurisdiction. Also, the Commission for the Prevention of Corruption
(“CPC”) has a duty to report any act of corruption by public servants.
Under the Corruption (Prevention) Act (“CPA”), public servants who earn the
prescribed amount are required to file an annual declaration of their assets, liabilities
and income to the CPC. This declaration would also cover the assets, liabilities and
income of the public servant’s spouse and children and is useful to detect possible acts
of corruption, including illicit enrichment.
In addition to the anti-corruption legislation, the money laundering laws may be
invoked to reduce corruption through the reporting of suspected laundering of the
proceeds of corruption. Also, under POCA, one may be prosecuted for laundering the
spoils of corruption, and the recovery of such ill-gotten gains may be pursued.
Corruption Offences
The CPA criminalises various forms of corrupt behaviour including where:54
1. a public servant solicits or accepts a benefit for doing, or omitting to do, any act
in the performance of his public functions;
2. a person offers to a public servant any benefit for doing or omitting to do any
such act;
50
http://www.oecd.org/site/adboecdanti-corruptioninitiative/regionalseminars/35143975.pdf.
51
The Access to Information Act.
52
Pursuant to the Financial Administration and Audit Act.
53
Pursuant to the Contractor-General’s Act.
54
Sections 14 and 15 CPA.
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3. a person offers a public servant in a foreign state any benefit for any act to be
performed by him in connection with a commercial transaction;
4. a public servant misuses for his benefit confidential information belonging to the
government;
5. a public servant diverts government property for his own benefit;
6. a public servant fails to file or knowingly makes false statements in a statutory
declaration of assets, liabilities and income;
7. an agent obtains any benefit as an inducement or reward for doing or omitting to
do any act in relation to his principal’s business. Since the definition of agent
includes any person employed by another, liability would also attach to persons
working in the private sector.
The offence of illicit enrichment may occur where a public servant who owns assets
disproportionate to his lawful earnings is unable to provide a satisfactory explanation as
to how he came by such assets. It is a defence for him to show the court that he came
by the assets by lawful means.55
Civil Liability
Apart from criminal liability, a recipient of a bribe may be subject to civil liability. In
AG for Hong Kong v. Reid 56 the defendant accepted bribes which he invested in New
Zealand. On his conviction, a confiscation order was imposed requiring him to pay the
value of the bribes received. However, when it remained unpaid, the Hong Kong
government sought to assert an interest in the property held by the defendant.
The Privy Council agreed that it would be unconscionable for the defendant, as a
fiduciary, to retain a benefit in breach of that duty. They held that he was under a
personal duty to account to his principal for the bribes as soon as he received them.
Since equity sees as done that which ought to have been done, although initially the
government only had a personal right to an account for the bribes, equity would treat
the account as having been made from the time the bribes were received and confer on
the state a proprietary interest in the monies on account. Thus, the court held that the
Crown had a proprietary right in the bribes from the moment of their receipt. As such,
the properties acquired with the bribe money were to be held on constructive trust for
the Crown.
This approach was applied in the Cayman Islands in Corporacion Nacional del
Cobre de Chile v. Interglobal 57 where the defendant received secret payments from a
third party as an inducement to procure the principal company to enter into certain
contracts. It was held that where a fiduciary accepts bribes as an incentive for his
breach of duty, he not only becomes a debtor for the amount of the bribes to the person
to whom the duty was owed but he also holds the bribes and any property acquired on
constructive trust for that person.
55
Section 14(5A).
56
[1994] 1 A.C. 324.
57
[2002] C.I.L.R. 298.
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Since the agent would be deemed to be a constructive trustee of the bribe monies
from the time of receipt of that money, where he purports to launder that money, he
would be in breach of trust since he would not have the principal’s consent. In effect,
he would be misappropriating trust funds. This means that third parties who engage in
a transaction involving the bribe monies could be subject to intermeddler liability.
C. TAX EVASION
A deep-rooted principle of the common law is that everyone “is entitled to arrange his
affairs so that the tax attaching under the appropriate Acts is less than it would
otherwise be”.58 Indeed, a taxpayer may “decrease the amount of what otherwise would
be his taxes, or altogether avoid them, by means which the law permits”,59 but it is
unlawful for a taxpayer to minimise his tax liability through deception.
Tax avoidance and tax evasion are separated by a thin grey line, but where persons
deliberately provide false information to the Revenue, by under-reporting, failing to
declare their income or overstating their deductions, there is unlawful tax evasion.60
Tax evasion is of critical concern since it deprives the state of essential revenue. In
Jamaica tax revenue accounts for about 25 per cent of the country’s GDP and any
reduction in tax collection severely impacts the economy. Tax evasion creates a “tax
gap”, the difference between what the government expects to collect and what it
actually receives. Where the tax gap is wide, the government may impose new taxes,
but this creates a vicious circle as this may encourage more persons to evade the tax
laws, resulting in a net decline in revenue. Where the proceeds of tax evasion are
laundered outside of Jamaica, this contributes to capital flight.
The undeclared income forming the subject-matter of the evaded tax has to be hidden
from the Revenue in order to prevent its detection and the manner in which this wealth
is concealed often mimics that used to launder criminal wealth. Apart from various
penalties for tax evasion under the tax legislation, AML legislation may be invoked to
tackle tax evasion. Similarly, efforts against tax evasion can be useful in dealing with
money laundering since most criminals do not pay taxes on their illicit income.
D. FUNDING FEAR
Terrorism involves acquiring power through force and money provides the means to
achieve this objective. Terrorists need funds to buy weapons and communication
systems, as well as conduct training and campaigns. They also need access to
international payment systems in order to move money to terrorist cells scattered
around the world.
Consequently, the same vehicles used for evading taxes, paying bribes or laundering
money can be used for the secret financing of terrorist activity. Unlike money
58
Per Lord Tomlin in IRC v. Duke of Westminster [1936] A.C. 1.
59
Per Sutherland J. in Gregory v. Helvering 293 U.S. 465 (1935).
60
Ali, S., Money Laundering Control in the Caribbean, op. cit.
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laundering, in many cases the source of terrorist funding is legitimate, such as charities.
A key difference between money laundering and terrorist financing is that with money
laundering it is the origin of the funds that is sinister, whilst with terrorist financing it
is its destination.
The international community has developed several instruments to deal with terrorist
activities. For instance, the United Nations International Convention for the Suppres-
sion of the Financing of Terrorism 1999 and Security Council Resolution 1373 both
impose obligations on UN member states to criminalise the funding of terrorism and
freeze the assets of terrorists and those acting for them.
The Terrorism Prevention Act (“TPA”) of Jamaica seeks to give effect to these
international obligations and capture the varied ways in which terrorist activity may be
financed. For example, a person commits an offence if he wilfully, and without lawful
justification or excuse, collects, provides or makes available, property or financial
related services intending or knowing that they will be used for the purpose of carrying
out any terrorist activity or for the benefit of any terrorist group.61 Furthermore,
liability may be imposed on a person who deals in property that is owned or controlled
by or on behalf of a terrorist group or facilitates any transaction in respect of such
property.62 Essentially, where persons provide any financial related service for the
benefit of a terrorist group they would be liable.63 Apart from creating offences relating
to terrorist financing, the TPA also imposes reporting obligations on financial insti-
tutions and contains provisions dealing with asset forfeiture.
Costs of Crime
Serious crime places severe pressure on the economy through financial loss to victims
and the Revenue. Money used to purchase contraband is drained from the lawful
economy and not used for legitimate purposes, further reducing the economy’s output
and rate of growth. Security and anti-crime measures result in increased production
costs. This drives up the price of goods and makes them less competitive globally.
Scarce resources have to be re-allocated from essential services, such as health and
education, to fight crime, including the implementation of sophisticated AML measures
by law enforcement and the private sector. Overall, regulation imposes real world costs;
the more regulation we have the more expensive it is to obey such regulations.64
Additionally, there exists a direct correlation between crime and tourism and if crime
appears to go unchecked, the income derived from tourism will decline as tourists will
opt to holiday in safer neighbours in the region. Similarly, if crime continues unabated,
many Jamaicans may migrate, contributing to the brain drain through the loss of skilled
workers and professionals.
61
Section 4 TPA.
62
Section 5 TPA.
63
Section 6 TPA.
64
Worstall, T., “HSBC’s $1.9 Billion Money Laundering Fine and the Somalian Cost of
Bank Regulation” http://www.forbes.com/sites/timworstall/2013/08/08/hsbcs-1-9-billion-money-
laundering-fine-and-the-somalian-cost-of-bank-regulation/.
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CONCLUSION
The implementation of effective measures to combat serious criminality must, there-
fore, remain at the top of the government’s agenda. Limited resources and evolving
methodologies will, however, continue to present a challenge for those seeking to battle
the scourge of criminality. Nonetheless, a collaborative approach may provide a key to
success. This requires collaboration among local law enforcement agencies as well as
with their overseas counterparts. It also requires an alliance between law enforcement
and the private sector. Otherwise, those charged with protecting the state’s national
interests and security will find themselves tangled ever after in a web of economic
crime and terror.
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PART III
BUSINESS CRIME
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9. The misuse and abuse of the corporate form

Hans Tjio
Although the corporation is sometimes seen as an unruly horse, it has created enormous
wealth and, for various reasons, other types of business vehicles have not been utilised
as much. Perhaps one reason is political rent-seeking, favouring the use of the
corporate form,1 but there must be some intrinsic advantages to the corporate structure
that other vehicles find difficult to mimic. We see, for example, that UK real estate
investment trusts (REITs) have been required to adopt the corporate form and how
REIT deeds in Singapore typically attempt to replicate the dual property structure of a
company in order to provide artificial entity status to the REIT, in the process creating
a form of non-charitable purpose trust, with the following clause:
The Trust Deed sets out the rights of the Unitholder. Each Unit represents an undivided
interest in the (REIT). A Unitholder has no equitable or proprietary interest in the underlying
assets of the (REIT) and is not entitled to the transfer to it of any asset or of any estate or
interest in any asset of the (REIT). A Unitholder’s right is limited to the right to require due
administration of the (REIT) in accordance with the provisions of the Trust Deed, including
by suit against the Trustee or the Manager.2
Consequently, it is the separate legal status of the corporation, and the ring-fenced fund
that it owns, that is crucial and which Commonwealth trusts do not generally have. Any
study of abuse must necessarily relate to this aspect of separate personality, which
protects the entity in that its assets are insulated from the insolvency of its contribu-
tories. Affirmative asset partitioning (as opposed to defensive asset partitioning, ie,
limited liability) is thus really to facilitate entity lending, as creditors can look to the
segregated fund for priority repayment. The concern is much less with limited liability
for its shareholders, even if that was traditionally seen as a benefit of incorporation but
which was said by Hansmann and Kraakman3 at the start of the millennium to be
something which can be contracted for and came about independently of incorporation.
The latter, as of right and without a Royal Charter or Private Act, was facilitated by the
Joint Stock Companies Act 1844, with the Limited Liability Act 1855 enacted later.
1
Larry Ribstein, “Why Corporations?” [2004] 1 Berkeley Business Law Journal 183.
2
This is a typical clause found in the trust deeds of Singapore REITs. See further, Hans
Tjio and Lee Suet Fern, “Developments in Securities Law and Practice” in Teo Keang Sood (ed)
SAL Conference 2006: Developments in Singapore Law between 2001 and 2005 (Academy
Publishing, 2006). It may be that the beneficiary principle conflicts with any entity status of the
trust.
3
Henry Hansmann and Reinier Kraakman, “The Essential Role of Organizational Law”
(2000) 110 Yale LJ 387.
103
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Today we also see a proliferation of business vehicles offering limited liability as well,
but perhaps not a fully ring-fenced fund.4
The view taken here is that there has been little abuse of the corporate form as a
proprietary institution given that the corporate form is largely reified in a similar way
worldwide. What abuse that there is usually relates to the corporation being used as an
unlawful wealth protection device (which should be the preserve of trusts and their
perpetuity/accumulation restrictions) as opposed to one carrying on a business pro-
ducing goods and services; or perhaps a specific stage in a company’s existence where
the separate fund is violated and/or the corporate nomenclature misused in a way which
benefits one corporate constituent over another. The former is met by the doctrine of
veil piercing and the latter by various rules that reflect the duty to act for proper
purposes, which counters an appeal to the company’s best interests when this is
inappropriate.
PIERCING THE VEIL

There is no public policy that calls for the corporate veil to be pierced. This was
recently confirmed by Beatson LJ (with whom the other judges agreed) in Antonio
Gramsci and Alliance Bank JSC v Lembergs.5 Earlier, Lord Sumption, in the leading
judgment in Prest v Petrodel Resources Ltd, stressed that “if it is not necessary to
pierce the corporate veil, it is not appropriate to do so, because on that footing there is
no public policy imperative which justifies that course”.6
Even if the Justices in Prest did not speak with one voice in relation to veil piercing,
Lord Sumption (and Lord Neuberger) may have stabilised an area of law that the latter
described as not having had a “single instance in this jurisdiction where the doctrine
has been invoked properly and successfully”.7 The case involved a matrimonial dispute.
The wife argued that the husband sought to hide some of his assets by vesting them in
companies that he controlled, and asked that those underlying properties be transferred
to her by way of an order under the Matrimonial Causes Act 19738 section 24(1)(a) as
the husband was “entitled … in possession” to them. The Supreme Court allowed the
wife’s claim as the properties were held by the companies for the husband on “ordinary
resulting trust” principles.9 However, they dismissed the wife’s appeal in relation to
4
Francis Rose, “Raising the Corporate Sail” [2013] LMCLQ 566 at 568 sees the limited
liability partnership as an “intermediate” or “hybrid” form of association that may not fully be a
separate legal entity. But Henry Hansmann, Reinier Kraakman and Richard Squire, “Law and the
Rise of the Firm” (2006) 119 Harvard LR 1333 at 1381 describe English general partnerships as
already having had “weak entity shielding” ever since Craven v Knight (1683) 21 ER 664 (Ch),
and this partly explains the continued relevance of the general partnership form.
5
[2013] EWCA Civ 730; [2013] 2 Lloyd’s Rep 295, [65] (Beatson LJ).
6
Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 WLR 1, [35] (Lord Sumption),
noted Hans Tjio [2014] LMCLQ 19; cf S Ottolenghi, “From Peeping behind the Corporate Veil
to Ignoring It Completely” (1990) 53 MLR 338.
7
Prest, ibid, [64] (Lord Neuberger).
8
1973 c 18.
9
Prest, supra n 6, [49] (Lord Sumption).
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The misuse and abuse of the corporate form 105
both piercing the veil and the statutory claim. The properties had been transferred to the
companies long before the matrimonial dispute and so the husband was not evading any
liability when he sought to protect his assets. In dicta, Lord Sumption thought that the
real purpose for piercing the corporate veil was “depriving the company or its
controller of the advantage that they would otherwise have obtained by the company’s
separate legal personality”.10 There was nothing to pierce if the entity was used simply
to conceal the controller’s identity as this could be revealed in other ways.11 In this
regard, it is perhaps relevant that the UK government has proposed a public register
reflecting the beneficial ownership (25 per cent and above) of the shares in its unlisted
companies and limited liability partnerships.12
Lord Sumption in Prest pointed out that “(i)t is not an abuse to cause a legal liability
to be incurred by the company in the first place. It is not an abuse to rely upon the fact
(if it is a fact) that a liability is not the controller’s because it is the company’s”.13 He
was also quite clear that the “objection would have been just as strong if the liability in
question had not been consensual”,14 even if the ability to bargain for limited liability,
or otherwise, is arguably more constrained in this context.15 Accordingly, true veil
piercing is only applicable “when a person is under an existing legal obligation or
liability or subject to an existing legal restriction which he deliberately evades or whose
enforcement he deliberately frustrates by interposing a company under his control”.16
While the doctrine as suggested by Lords Sumption and Neuberger is narrow (and
the other Justices did not commit themselves without further argument), it does suggest
that the company as an asset protection device remains more vulnerable than one used
to shield a controller from liabilities arising from a business that is owned by the
company. The first could involve persons trying to protect assets from their own
creditors or to escape some immediate liability pressing on them by using the separate
entity of a company to shield assets that would otherwise have been available to those
creditors or obligors. Separately, Hansmann, Kraakman and Squire believe that the next
stage in the evolution of organisational law is to deal with this problem,17 both within
and outside of bankruptcy. Factors to look out for are the time when the relevant
transfer occurred (as in Prest), whether the entity is generating any operating income
for which it pays corporate taxes, and if and how the corporate fund has been violated.
10
11
Prest, supra n 6, [28], where Lord Sumption drew the distinction between concealment
and evasion, and thought that it was only in the latter instance that a corporate veil needed to be
pierced.
12
Department of Business, Innovation and Skills, Transparency and Trust: Enhancing the
Transparency of UK Company Ownership and Increasing Trust in UK Business – Government
Response (April 2014), and now Register of People with Significant Control Regulations 2015
Consultation (June 2015).
13
14
15
See Rose, supra n 4 at 590, pointing out that while contractual liability is determined by
“contractual construction”, “the circumstances in which tortious liability may arise are less
restricted”.
16
17
Hansmann, Kraakman and Squire, supra n 4 at 1401.
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The starting point, though, is that the corporate form should be recognised, particularly
when it has a real business, and was not set up simply to hold assets passively or,
worse, trade them actively. If, as is likely, the rate of return on capital is greater than
income growth,18 then what should be encouraged is capital that is directly locked into
industrial and service sectors that create the most employment.
MISUSING THE PROPERTY CHARACTERISTIC OF THE

COMPANY
The next part deals with two slightly different things: misuse of the company fund and
the corporate label. But they are largely constrained by various doctrines which it is
suggested emanate from the same source. This is the proper purpose rule, which “is the
least discussed and least well understood of the fiduciary obligations affecting a
director”.19 We were recently reminded in Eclairs Group Ltd v JKX Plc Oil and Gas
Ltd 20 that the proper purpose rule (applicable to directors by Companies Act 2006
section 171) imposes different requirements on directors when contrasted with their
duty to act bona fide in the interest of the company (Companies Act section 172),21
although there may be a but-for test which provides a defence for directors where they
would have come to the same conclusion even had they acted properly.22 Mann J
rejected counsel’s argument that imposing voting restrictions (through a power con-
ferred by the company’s articles) at an Annual General Meeting (AGM) on certain
shareholders who did not respond to a notice (served under a power conferred by the
UK Companies Act section 793) to disclose their interests in shares should only be
tested by whether it was in the company’s best interest even if the purpose of the power
was to compel disclosure (and not, as was the case with the majority of the board, to
stop the shareholders from preventing some resolutions from being passed). While the
Court of Appeal,23 by majority, reversed this decision, they did not question the fact
that both duties were different. Instead, Sir Robin Jacob and Lord Justice Longmore
applied a variant of the causation argument by seeing that the “victim” of the decision
could have avoided it simply by disclosing their interests and so was “not a victim of
any improper use of a power of the board of directors” (at [136]). But they also thought
18
Thomas Piketty, Capital in the Twenty-First Century (Harvard, 2014).
19
RC Nolan, “The Proper Purpose Doctrine and Company Directors” in BAK Rider (ed)
The Realm of Company Law (Kluwer Law International, 1998) at 1.
20
[2013] EWHC 2631.
21
See further Mok Cui Ling, “Re-thinking Director’s Duties: An Analysis of the Proper
Purpose Doctrine” (2002) 14 SAcLJ 387; Ross Grantham, “The Powers of Company Directors
and the Proper Purpose Doctrine” (1994–1995) 5 Kings College LJ 16; cf Saul Fridman, “An
Analysis of the Proper Purpose Rule” (1998) 10 Bond LR 164 who does not think that the
proper purpose rule adds much to the duty that directors have to act in the best interest of the
company.
22
As this had not been pleaded, however, the board’s exercise of power was set aside.
23
JKX Plc Oil and Gas Ltd v Eclairs Group Ltd [2014] EWCA Civ 640. The appeal was
heard by the Supreme Court (which reserved judgment) on 18-19 May 2015. Details of the
hearing can be found at <https://www.supremecourt.uk/cases/uksc-2014-0179.html>.
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that the particular power considered here to compel disclosure and/or to disenfranchise
the shareholder was not susceptible to a proper purpose review. This though shows how
difficult the doctrine is as there may be situations where the power is exercised in a
discriminatory way. Indeed, Briggs LJ, who dissented, expressly rejected the argument
that the proper purpose duty is only applicable where this is commercially necessary
(an implied terms argument), and thought that all fiduciary powers have to be exercised
properly. He said (at [122]):
I consider it important that the court should uphold the proper purpose principle in relation to
the exercise of fiduciary powers by directors, all the more so where the power is capable of
affecting, or interfering with, the constitutional balance between shareholders and directors,
and between particular groups of shareholders.
The proper purpose rule usually comes up with decisions that affect the internal
structure of the company, where it is difficult to articulate the duty of directors in terms
of the company’s interest. Here, the exercise of power has to take into account
conflicting interests within the constituencies interested in the outcome of a decision,
usually the shareholders who are affected by a shift in the balance of control, but this
could include creditors and employees of the company as well, as what ostensibly is for
the benefit of the company unjustifiably affects some of them adversely. But as Eclairs
demonstrates, the rule is sometimes hard to pinpoint.
DISGUISED RETURNS OF CAPITAL

There are situations when capital can properly be returned to shareholders in a way not
seen as prejudicing creditors. An example of this would be dividend payments, which is
out of corporate profits. In Singapore, however, Companies Act section 403 only deals
with “dividends” and so disguised forms of capital return may not be captured under
this provision, unlike in some other jurisdictions. In England, for example, a sale of an
asset at an undervalue to a related company was seen as unlawful in Aveling Barford
Ltd v Period Ltd,24 but that was for the purposes of the then section 263 of the UK
Companies Act 1985, which concerned the broader notion of “distributions”. But
Aveling is also seen to reflect older common law cases like Re Halt Garages25 that
frowned upon such acts, particularly when it was carried out at an undervalue.26 These
may be seen either as an unlawful capital return or an abuse of corporate power,27
unless it is a bona fide commercial exchange28 that benefits the company. It has
24
(1989) 5 BCC 677.
25
[1982] 3 All ER 1016.
26
Eva Micheler, “Disguised Returns of Capital – An Arm’s Length Approach” (2010) 69
CLJ 151. See now UK Companies Act 2006 s 830.
27
John Armour, “Avoidance of Transactions as a ‘Fraud on Creditors’ at Common Law” in
John Armour and Howard Bennett (eds) Vulnerable Transactions in Corporate Insolvency (Hart
Publishing: Oxford, 2003).
28
Progress Property Company Limited v Moorgarth Group Limited [2010] UKSC 55.
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recently been suggested that they are examples of the duties on directors to exercise
their powers for proper purposes.29
Ford’s Principles of Corporations Law30 has also observed that the financial
assistance prohibition is a manifestation of the general rule that a company’s resources
should be used for proper corporate purposes, and for the company’s benefit, and not to
assist in the purchase of its shares. These rules, such as those found in the UK
Companies Act 2006 section 678,31 much maligned in modern corporate practice for
hindering corporate reorganisation, could have prevented one problem that arose in the
Enron scandal in the US. This involved the sale of Enron shares to closely related
special purpose vehicles (SPVs) in return for debt in the SPVs (Enron assisted by
providing credit), thus boosting the balance sheets of both parties.32 In this regard,
Singapore has seen a revival of the financial assistance rule in Wu Yang Construction
Group Ltd v Mao Yong Hui33 which was similar in effect to that of Arden LJ’s
judgment in the English Court of Appeal in Chaston v SWP Group Plc,34 in that it
reversed what appeared to be a trend towards reducing the relevant test to whether the
transaction was in the commercial interest of the company. Both decisions signalled the
need for legislative change, if that was what the regulators desired, in order to further
relax the financial assistance rules, but the Ministry of Finance in Singapore recently
decided to preserve the rule for public companies (following the UK), when it had
initially considered removing it altogether.35
29
Joyce Lee, “Making a Case for the Duty to Act for Proper Purposes” [2014] Sing JLS 79.
30
RP Austin and IM Ramsay, Ford’s Principles of Corporations Law (14th ed, Australia:
LexisNexis Butterworths, 2010) at 24.670.
31
Singapore Companies Act (Cap 50, 2006 Rev. Ed. Sing), s 76(1)(a).
32
William W Bratton, “Enron and the Dark Side of Shareholder Value” (2002) 76 Tul L Rev
1275 at 1314–1315.
33
[2008] 2 SLR(R) 350 (CA, Singapore), disapproving its earlier decision in Intraco Ltd v
Multi-Pak Singapore Pte Ltd [1994] 3 SLR(R) 1064 (CA, Singapore).
34
[2003] 1 BCLC 675 where, according to Arden LJ at para 38, “it is clear … that the test
is one of commercial substance and reality”. The Australian position was more objective:
Darvall v North Sydney Brick & Tile Co Ltd (1987) 12 ACLR 537 (NSWSC), aff’d Darvall v
North Sydney Brick & Tile Co Ltd (No 2) (1989) 15 ACLR 230 (NSWCA).
35
Singapore’s Ministry of Finance in October 2012 accepted the Final Report of the
Steering Committee for Review of the Companies Act (June 2011) Recommendation 3.27. The
UK Companies Act 2006, c 46, s 678 still covers the situation in Chaston, ibid, where a private
subsidiary financed the acquisition of shares in its public parent. Where public companies are
concerned, the recommendation in Singapore is to adopt the position in Australia under
Corporations Act 2001 (Cth), s 260A (which applies to all companies incorporated there) to
allow a public company or its subsidiary to provide financial assistance for the acquisition of
shares in the company or holding company, respectively, if the assistance does not materially
prejudice the interest of the company or its shareholders or the company’s ability to pay its
creditors. This confirms that the financial assistance rule, and perhaps even capital maintenance
generally, though largely for creditor protection, also takes into account the interests of
shareholders.
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INSOLVENCY
But what about possible abuses in companies carrying on a business when insolvent,
given that any further losses are borne by creditors only? Possibly because of their
experience with the earlier Asian Financial Crisis, directors have been less worried
when trying to trade a company out of insolvency in Singapore. There is no duty
imposed on directors to prevent insolvent trading and wrongful trading such as exists
under Australia’s Corporations Act 2001 (Cth), section 588G and the UK Insolvency
Act 1986, c. 45, section 214 respectively.36 What is found instead is a relatively weaker
provision which permits a civil claim to be made against the directors under section
340(2) only if there has been a criminal prosecution under section 339(3), and the test
is whether there was a “reasonable or probable ground of expectation … at the time of
the company being able to pay the debt”.
But the general concept of insolvency may have to be revisited in any case given
developments in England seeing insolvency more as a liquidity or cash flow problem.
Partly due to the difficulties of taking contingent and prospective liabilities into
account, it was held, in a case where a trustee of longer dated notes was asked to
declare a contractual event of default mirrored on the tests of insolvency in the UK
Insolvency Act 1986 section 123, by the English Court of Appeal in BNY Corporate
Trustee Services Ltd v Eurosail-UK 2007-3BL plc,37 that a company could not be said
to be insolvent simply because its liabilities appeared to exceed its assets. The
insolvency provisions were meant to identify companies that could not pay their debts,
and this would be so only if there was an incurable deficiency in its assets, where a
“point of no return” had been reached.38 The Supreme Court rejected the need for the
last requirement, but thought that the cash flow test worked for the reasonably near
future only. A balance sheet test was more sensible when looking forward but the Court
thought that this was imprecise and depended on the party asserting it to prove. On the
facts, given that the final redemption of the notes was only in 2045, the Court felt it had
to proceed with caution. Eurosail could pay its debts presently and the Court could not
be sure that it would eventually be unable to do so until a time closer to 2045.
36
Both the Singapore Company Legislation and Regulatory Framework Committee (October
2002) and Steering Committee for Review of the Companies Act (June 2011) made no
recommendation to amend the Singapore Companies Act, ss 339/340. See also Andrew Keay,
“The Duty of Directors to Take Account of Creditors’ Interests: Has It Any Role to Play?”
[2002] JBL 379.
37
[2011] 1 WLR 2524. In contrast, Grimberg JC in Re Great Eastern Hotel (Pte) Ltd [1988]
SLR(R) 276 (HC) held that the Singapore test for insolvency is, first, whether there is a proper
and unsatisfied demand for a debt already due which the company is unable to pay out of its
present liquid resources and, second, whether there is a deficit in terms of the company’s assets
and liabilities. The inter-relationships between the various tests were recently discussed by the
Singapore Court of Appeal in BNP Paribas v Jurong Shipyard Pte Ltd [2009] 2 SLR(R) 949. Cf
Peter Walton, “‘Inability to pay debts’ – beyond the point of no return?” [2013] JBL 212,
pointing out that the meaning in s 123 went beyond winding up and affected other ancillary
areas.
38
BNY Corporate Trustee, ibid at [52], Neuberger MR, and [114], Toulson LJ.
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However, what was said by Neuberger LJ (as he then was) in BNY Corporate
Trustee39 is quite consistent with the position in Singapore with respect to trading in the
vicinity of insolvency. In particular, he cited with approval the part of the Cork
Committee Report which had in turn reflected the views of Professor Goode:40
A balance has to be drawn between the right of an honest and prudent businessman, who is
prepared to work hard, to continue to trade out of his difficulties if he can genuinely see a
light at the end of the tunnel, and the corresponding obligation to “put up the shutters”, when,
by continuing to trade, he would be doing so at the expense of his creditors and in disregard
of those business considerations which a reasonable businessman is expected to observe.
It is a weighing exercise that recognises that there is a shareholder/bondholder conflict

in that residual claimants have an incentive to shift value to themselves from those
ranking about them.41 Shareholders are willing to take the riskiest course of action
given that their claims to the few remaining assets rank last.42 However, courts around
the world have acknowledged that directors owe no duty to creditors (as opposed to the
company) even in insolvency. But to focus on the company as entity here is also
perhaps a proxy for saying that directors have to be even-handed in their treatment of
shareholders and creditors in that particular setting.43 In other words, they have to
exercise their powers properly.
TAKEOVERS
This balancing exercise is also required of directors of target companies in a takeover.
Shareholder interests appear to become paramount in these situations.44 Under UK-type
Takeover Codes, the philosophy is to leave the decision whether to accept or reject the
offer to the shareholders themselves through the provision of adequate information and
advice, and directors must not deny shareholders the opportunity to decide on the
39
Ibid at [54].
40
Report of the Review Committee – Insolvency Law and Practice (1982) (Cmnd 8558) at
216; and now Roy Goode, Principles of Corporate Insolvency Law (4th ed, Sweet & Maxwell,
2011) at [4-06].
41
See Michael C Jensen and William H Meckling, “Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure” (1976) 3 Journal of Financial Economics
305; SC Myers, “Determinants of Corporate Borrowing” (1977) 5 Journal of Financial
Economics 147.
42
This is one of the three agency problems identified by Kraakman, Davies, Hansmann,
Hertig, Hopt, Kanda and Rock, The Anatomy of Corporate Law (Oxford: OUP, 2004).
43
There may also be conflicts between the creditors themselves, and a director cannot prefer
one creditor over another, which is something separate from the unfair preference rules provided
by formal insolvency law: Moulin Global Eyecare Trading Ltd v Olivia Lee Sin Mei (2014) 17
HKCFAR 466, noted Tom KC Ng, “Director’s Duty Not to Prefer One Creditor to Another”
(2015) 74 CLJ 20.
44
See Wan Wai Yee, “The Validity of Deal Protection Devices in Negotiated Acquisition or
Merger Transactions under Anglo-American Law” (2010) 10 JCLS 179 at 189 and 207.
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merits of the bid.45 In the US, however, the position seemed to be the other way round
with the entity’s interest coming to the forefront only when there is a possible change
of control. Director primacy was seen to be a good thing in this situation,46 although it
has been questioned whether this is good for constituencies within the company other
than the directors themselves, particularly in the context of poison pills.47 But the UK
is now considering whether to strengthen the entity focus even more in the takeover
context after the takeover of Cadbury plc by Kraft Foods Inc.48 It was also anticipated
that there would be changes to the English takeover rules following the acceptance of
the 2012 Final Report of the Kay Review of UK Equity Markets and Long-Term
Decision Making in which the overall philosophy appeared directed at disenfranchising
short-term shareholders. Developments in Europe at the same time seemed to focus on
giving long-term shareholders more rights. But it is unlikely that this will allow
corporate interests to be used as an excuse by a target board to prevent a takeover
altogether. Indeed, the UK Government’s response to the Kay Review was that it would
not be practical to disenfranchise some shareholders even if it agreed that the influence
of short-term investors in a takeover bid should be reduced.49
In these situations what is required is a balancing of interests of existing share-
holders, those with short-term interests who are keen to sell, and those with longer-term
interests in the company’s viability, which cannot therefore be seen as a monolithic
whole. At an extreme, we may even require shareholders themselves to act properly in
some situations, even if there are usually no duties imposed on them. This was seen
most controversially in the Australian High Court decision in Gambotto v WCP Ltd,50
which attempted to lay out a proper purpose rule even on the part of shareholders when
it came to voting on an expropriation or even variation of their rights, which was seen
as a high point of court activism. While that decision made no inroads in England, or
indeed even in Australia after that,51 it reflects the difficulty with decisions that are
ostensibly taken for the benefit of the company but which hide the wealth transfers that
may be going on between its contributories.
45
The City Code on Takeovers and Mergers, General Principles 1–3.
46
Lynn A Stout, “Takeovers in the Ivory Tower: How Academics Are Learning Martin
Lipton May Be Right” (2005) 60 Business Lawyer 1435.
47
“The Case of the Poison Pill: Will Leo Strine Re-engineer Takeover Law in America?”
The Economist (11 December 2004). Wan Wai Yee, supra n 43 at 207 believes that there will
continue to be US target board autonomy, although independent directors will increasingly serve
as the will of the company in such situations.
48
The UK regulators are looking to make it harder for bidders to succeed there and allowing
directors to take into account interests other than those of shareholders (or at least short-term
shareholders). They were also considering raising the minimum acceptance condition to 60 per
cent.
49
Business, Innovation and Skills Committee – Second Special Report, The Kay Review of
UK Equity Markets and Long-term Decision Making (October 2013), Annex B, Summary of
analysis of the policy proposal to disenfranchise short-term shareholders during a takeover bid.
50
(1995) 182 CLR 432.
51
Ian Ramsay and Benjamin Saunders, “What Do You Do With a High Court Decision You
Don’t Like? Legislative, Judicial and Academic Responses to Gambotto v WCP Ltd ” (2011) 25
Austl J Corp L 112.
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CONCLUSION
There is little risk of the corporate structure generally being misused. Any possible
abuse as a going concern is met by the doctrine of veil piercing, but that is increasingly
limited to asset transfers to evade existing liabilities of the controller. Prest can perhaps
be seen as an incipient attempt in law to distinguish industrial/service companies from
asset holding entities, whether those are of a long- or short-term nature (which
distinction was itself the focus of the Kay Review). The strength of the corporation is
capital lock-in leading to corporate growth.52 Underpinning all that is a business that
employs people, even if some companies later incur liabilities which cannot be met
from its assets (where insolvency rules intervene). That there is no need to pierce the
veil even in this latter situation is also due to old capital maintenance rules preventing
the violation of the corporate fund which is founded on the duty on directors to
exercise their powers for proper purposes. This doctrine also helps mediate situations in
which it is necessary to see through the corporate entity to the various constituents
behind it where there may be conflict between them, and where recourse to the
company’s best interest can be a refuge for those seeking to take unfair advantage of its
entity status.
52
Margaret M Blair, “Locking In Capital: What Corporate Law Achieved for Business
Organizers in the Nineteenth Century” (2003) 51 UCLA L Rev 387; Lynn A Stout, “On the
Nature of Corporations” (2005) Illinois L Rev 253.
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10. Anti-money laundering regime in Hong Kong

Mark R.C. Sutherland
Honesty is the best policy – where there is money in it

Mark Twain
This chapter focuses on the anti-money laundering regime in Hong Kong with
particular reference to the legislative framework as interpreted by recent case law of the
Courts of Hong Kong. Reference will be made to certain English cases which remain of
persuasive authority in Hong Kong.
Consideration is given to the approach of the Courts to those charged with money
laundering and who elect to remain silent at Trial as well as current sentencing
guidelines.
INTRODUCTION AND RATIONALE

Money laundering is regarded as a very serious offence given that it adversely affects
Hong Kong’s reputation as an international financial centre. Such is the golden thread
which runs through the relevant legislation and has been recognised by the Courts.
In the Court of Appeal case of HKSAR v Xu Xia Li & Anor,1 Woo VP commented as
follows as regards the obvious rationale for the offence:
The prohibition of the offence is in order to strike at those who give assistance to criminals to
dispose of or retain their ill-gotten gains as if they were derived from legitimate activities.
Without the assistance of money launderers, it would be more difficult for criminals to clothe
their illegal proceeds with the same respect as lawful gains and the chances of law
enforcement detection of illegal activities that produce monetary benefits would be enhanced.
Money laundering is therefore treated as a serious offence. If money-laundering activities
were allowed to be carried out in Hong Kong with impunity or treated lightly with minor
penalties, it would mar Hong Kong’s reputation as a world-class financial and banking centre.
SCOPE
Money laundering in general terms involves the conversion of the proceeds of criminal
activity into a form of legitimate currency or other assets. It may also take the form of
terrorist financing whether from the proceeds of crime or otherwise.
The scale of money laundering activities has increased significantly. In 2011, it was
estimated that the proceeds from criminal money laundering activities amounted to no
1
(2004) 4 HKC 16 at 23, paragraph 18.
113
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less than 3.6 per cent of the world’s global Gross Domestic Product with 2.7 per cent
(or US$1.6 trillion) being laundered.2
Money laundering involves three distinctive stages as follows: (a) placement,
(b) layering and (c) integration.
The “placement” stage involves the introduction of funds from illegal activities (or
funds which are intended to support such illegal activities) into the financial system.
The “layering” stage involves the use of a series of parties and/or transactions which
are designed to conceal the source of the illicit funds themselves.
The “integration” stage results in the illicit funds being laundered into the financial
system so that the criminal may extract, and then expend, what on the face of it is
“clean” money.
Money laundering and terrorist financing pose serious threats to life and society as
well as undermining the rule of law.
At the same time, one cannot disregard the gravity of the underlying criminal offence
upon which the money laundering is predicated. This is often described as the
“predicate offence” and may range from gambling or loan sharking to vice.
LEGISLATION
This chapter focuses on the anti-money laundering legislation contained in the
Organized and Serious Crimes Ordinance (Cap. 455 of the Laws of Hong Kong)
(“OSCO”).3
Section 25 (1) of OSCO provides as follows: “Subject to section 25A, a person
commits an offence if, knowing or having reasonable grounds to believe that any
property, in whole or in part, directly or indirectly represents any person’s proceeds of
an indictable offence, he deals with that property.”
The section 25 (1) offence is committed when there has been an act of dealing with
certain property which has certain specified characteristics. “Dealing” includes “receiv-
ing or acquiring” such property and/or “disposing” of the same.4
The property must be property which a person knows or has reasonable grounds to
believe “in whole or in part directly or indirectly represents any person’s proceeds of an
indictable offence”.
The Hong Kong legislation therefore focuses on the broader concept of “dealing” as
opposed to any scrutiny of the underlying offence.
2
A United National Office on Drugs and Crime Report http://www.unodc.org/unodc/en/
press/releases/2011/October.
3
Other principal legislation includes the Drug Trafficking (Recovery of Proceeds) Ordi-
nance (Cap. 405 of the Laws of Hong Kong) and the United Nations (Anti-Terrorism Measures)
Ordinance (Cap. 575 of the Laws of Hong Kong).
4
Section 2 of OSCO.
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Anti-money laundering regime in Hong Kong 115
THE CASE OF OEI HENGKY WIRYO v HKSAR (NO.2)5

The Court of Final Appeal in Oei Hengky Wiryo held that on a proper construction of
section 25(1) of OSCO, the prosecution did not have to prove that the property
represented the proceeds of an indictable offence.
Section 25(1) does not define the actus reus of the offence as dealing with the
proceeds of an indictable offence. It defines it as dealing with “property” which the
defendant knows or has reasonable grounds to believe represents the proceeds of an
indictable offence.
Furthermore, it was likely that the “knowing” limb of section 25(1) could seldom be
relied upon unless the prosecution proved that the property did represent a person’s
proceeds of an indictable offence.6
DEFINITION OF “PROCEEDS”
Section 2(6)(a)(i) of OSCO provides that a person’s proceeds of an offence are “any
payments or other rewards received by him at any time … in connection with the
commission of that offence”.
Therefore, if property is received as a payment or other reward in connection with
the commission of the predicate offence, such property constitutes in law the recipient’s
proceeds of that offence. The recipient may but is not obliged to be the predicate
offender.
Accordingly, if the property meets these criteria, the dealer who subsequently deals
with the property with the requisite mens rea is deemed to be dealing with property
which he knows or has reasonable grounds to believe represents the proceeds of the
indictable offence. This establishes the element of “proceeds”.
DEALING AND THE TWO STAGE TEST

Two separate transactions are contemplated by the concept of dealing with “proceeds of
an indictable offence”.
Firstly, there must have been committed an underlying “indictable” or “predicate”
offence.
Secondly, there must have been an act which amounts to “dealing” with the proceeds
of that underlying predicate offence. There is no requirement in OSCO that the
offender at the predicate level and the dealer are to be one and the same person. They
can be different persons.
At the time of “dealing” with the property, it must have the prescribed characteristic
of representing the proceeds of the predicate offence.
This is the emphasis of the legislative framework.
5
(2007) 10 HKCFAR 98, paragraphs 96 to 100 applying the case of HKSAR v Wong Ping
Shui & Another (2001) 4 HKCFAR 29.
6
Paragraph 106.
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THE CASE OF HKSAR v LI KWOK CHEUNG7

The brief facts of HKSAR v Li Kwok Cheung were these.
Three Defendants were convicted of having conspired to commit a money laundering
offence contrary to section 25(1) of OSCO through the implementation of a scheme to
conceal another conspiracy. The scheme involved circular payments of funds which
belonged to a company and which were intended to be returned to the company after
the deception.
The first Defendant was a link in the payments chain but there was no suggestion
that the funds were derived from the commission of an indictable offence.
The Court of Final Appeal had to consider an attempt by the prosecution to widen
the interpretation of the concept of “proceeds of an indictable offence” contained in
section 2(6)(a)(i) of OSCO.
The gist of the prosecution’s argument was that “proceeds of an indictable offence”
extended to money or property received in circumstances where the receipt may be said
to be “in connection with” the commission of an indictable offence even if that money
or property is known not to be tainted as a benefit received on account of the
commission of such offence. In other words, the argument is that property should be a
payment received “in connection with” the predicate offence. Such money is typically
referred to as “clean”. The Court of Final Appeal held that the prosecution’s wide
interpretation of section 2(6)(a) of OSCO was erroneous.
The Court of Final Appeal referred to the ordinary meaning of the term “proceeds”
of an indictable offence. The Oxford English Dictionary defines proceeds as “That
which proceeds, is derived, or results from something; that which is obtained or gained
by any transaction; produce; outcome; profit.”
HONG KONG LEGISLATIVE FRAMEWORK – THE DUTY TO

REPORT OFFENCES
Section 25A (1) imposes a duty to report suspected money laundering offences where a
person knows or suspects that any property: (a) in whole or in parts directly or
indirectly represents any person’s proceeds of; (b) was used in connection with; or
(c) is intended to be used in connection with, an indictable offence, he shall as soon as
it is reasonable for him to do so disclose that knowledge or suspicion, together with any
matter on which that knowledge or suspicion is based, to an authorised officer.
Section 25A (1) by separately legislating in (b) and (c) for use “in connection with”
and “intended to be used in connection with” provides a clear message that it was not
the legislative intent to give section 2(6)(a) the wide interpretation contended for by the
prosecution.
The Court of Final Appeal held that for section 2(6)(a) to apply, the payment in
question must be envisaged to be received “in connection with the commission of” the
predicate offence. An unspecified or general connection is not enough.
7
(2014) 17 HKCFAR 319.
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The payment in question must be in the nature of a “reward”. It must be a payment

which has the quality of a reward received in connection with the commission of the
relevant offence.
The payment must therefore derive from or be generated by, or be received on
account of, commission of the predicate offence. Any such money so received is tainted
by its criminal origin and will be treated as proceeds of an indictable offence. “Clean
money” which is not so paid or received in the nature of reward in connection with the
commission of the predicate offence does not qualify as the proceeds of such an
offence for the purposes of section 25 (1) of OSCO.
LONG TITLE
Due regard should also be had to the central purpose of OSCO which is to target the
proceeds of crime. Accordingly, useful reference may be made to the Long Title.
OSCO is:
An Ordinance to create new powers of investigation into organized crimes and certain other
offences and into the proceeds of crime of certain offenders; provide for the confiscation of
proceeds of crime; make provision in respect of sentencing of certain offenders; create
offences relating to the proceeds of crime or property representing the proceeds of crime; and
for ancillary and connected matters.
The aim of the confiscation legislation is to deprive a convicted defendant of the

proceeds of the relevant offence, to the extent that he has benefited from such an
offence. A confiscation order can be made against a defendant who has been convicted
of, and is so sentenced for, a specified offence.
LEGISLATION – BENEFIT
Section 8(4) of OSCO imposes a requirement on the Courts to first of all determine that
a person has “benefitted from the specified offence” and that “his proceeds of that
specified offence or offences are in total at least [HK]$100000”.
Once “benefit” has been established, the Court then looks to ordering the defendant
to pay8 an appropriate amount by reference to his realisable means.
The significance of “benefit” to a defendant is demonstrated by case law. The Court
of Final Appeal in Li Kwok Cheung considered a number of English authorities in this
regard.
8
Section 8(6) OSCO.
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(i) R v May (Raymond George) 9
This is a leading House of Lords decision involving what is known as a VAT “carousel”
or “missing trader” fraud.
Lord Bingham of Cornhill gave the opinion of the Appellate Committee and
explained that the regime
requires the court, before making a confiscation order, to address and answer three questions:
… The first question is: has the defendant (D) benefited from the relevant criminal conduct?
If the answer to that question is negative, the inquiry ends. If the answer is positive, the
second question is: what is the value of the benefit D has so obtained? The third question is:
what sum is recoverable from D?
In an “Endnote”, Lord Bingham set out a summary of the broad principles which are
applicable in confiscation cases as follows:
The legislation is intended to deprive defendants of the benefit they have gained from relevant
criminal conduct, whether or not they have retained such benefit, within the limits of their
available means. It does not provide for confiscation in the sense understood by school
children and others, but nor does it operate by way of fine. The benefit gained is the total
value of the property or advantage obtained, not the defendant’s net profit after deduction of
expenses or any amounts payable to co-conspirators.
In order to determine whether a defendant has obtained property or a pecuniary

advantage and, if so, the value of any property or advantage so obtained, the Court
should apply ordinary principles to the facts as found.
Lord Bingham went on to say that
the exercise of this jurisdiction involves no departure from familiar rules governing
entitlement and ownership … D ordinarily obtains property if in law he owns it, whether
alone or jointly, which will ordinarily connote a power of disposition or control, as where a
person directs a payment or conveyance of property to someone else. He ordinarily obtains a
pecuniary advantage if (among other things) he evades a liability to which he is personally
subject. Mere couriers or custodians or other very minor contributors to an offence, rewarded
by a specific fee and having no interest in the property or the proceeds of sale, are unlikely
to be found to have obtained that property. It may be otherwise with money launderers.
(ii) Jennings v Crown Prosecution Service 10
The question of benefit was also considered in the case of Jennings v Crown
Prosecution Service. In this case, the fraud involved the extraction of “advance fees”
from victims of £584,000 compared to the £50,000 the defendant had obtained by way
of salary and a few minor payments.
9
[2008] 1 AC 1028.
10
[2008] 1 AC 1046.
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Lord Bingham, again giving the opinion of the Appellate Committee, held that the
object of the legislation is to deprive the defendant of the product of his crime or its
equivalent, not to operate by way of fine. The rationale of the confiscation regime is the
defendant is deprived of what he has gained or its equivalent. He cannot, and should not, be
deprived of what he has never obtained or its equivalent, because that is a fine. This must
ordinarily mean that he has obtained property so as to own it, whether alone or jointly, which
will ordinarily connote a power of disposition or control, as where a person directs a payment
or conveyance of property to someone else.
Accordingly, the obtaining had to involve the gaining of a benefit and not just a
participation in the fraud.
(iii) R v Waya (Terry) 11
The more recent case of R v Waya, which was a decision of a panel of nine judges of
the UK Supreme Court, again focuses on the legislative purpose of imposing a severe
regime to remove from them the proceeds of their crime.
By majority judgment, Lord Walker of Gestingthorpe JSC and Hughes LJ stated as
follows:
The purpose of the legislation is plainly, and has repeatedly been held to be, to impose upon
convicted defendants a severe regime for removing from them their proceeds of crime. It is
not to be doubted that this severe regime goes further than the schoolboy concept of
confiscation, as Lord Bingham explained in R v May. Nor is it to be doubted that the severity
of the regime will have a deterrent effect on at least some would-be criminals. It does not,
however, follow that its deterrent qualities represent the essence (or the “grain”) of the
legislation. They are, no doubt, an incident of it, but they are not its essence. Its essence, and
its frequently declared purpose, is to remove from criminals the pecuniary proceeds of their
crime.
Their Lordships added:
… the scheme of the Act, and of previous confiscation legislation, is to focus on the value
of the defendant’s obtained proceeds of crime, whether retained or not. It is an important part
of the scheme that even if the proceeds have been spent, a confiscation order up to the value
of the proceeds will follow against legitimately acquired assets to the extent that they are
available for realization.
(iv) R v Mackle (Patrick) 12
In the case of R v Mackle (Patrick), the issue of “benefit” was relevant.

The defendants had been convicted on their own plea of value added tax and duty
evasion which led to confiscation orders against them. It was subsequently discovered
that the defendants had not been liable to pay such tax and duty in the first place.
11
[2013] 1 AC 294 at paragraph 27.
12
[2014] AC 678 at paragraph 64.
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Accordingly, the defendants had not evaded liability and the pecuniary benefit they
allegedly obtained did not exist.
Lord Kerr of Tonaghmore JSC gave the opinion of the Court and referred to the
principles set out in R v May and stated:
The focus must be, as Lord Bingham has said, on what benefit the defendant has actually
gained. Simply because someone has embarked on a joint criminal enterprise, it does not
follow that they have obtained an actual benefit. Being engaged in a conspiracy does not, of
itself, establish that each conspirator has obtained the property which is the product of the
conspiracy.
APPLICATION TO HONG KONG’S LEGISLATIVE CONFISCATION

REGIME
The Court of Final Appeal in Li Kwok Cheung were of the view that, given that the
United Kingdom’s confiscation regime employs closely comparable concepts to those
in Hong Kong, the above decisions of the House of Lords and Supreme Court provided
persuasive guidance in the purposive construction of the concepts contained in OSCO
and, in particular, the interpretation of the words “proceeds of an indictable offence”.
The Court of Final Appeal held that the section 25 (1) OSCO offence is committed
where a person deals with property knowing or having reasonable grounds to believe
that the same represents the proceeds of the predicate offences. The predicate offender
is benefited by obtaining those proceeds. The property he obtains is his payment or
other reward received in connection with his commission of the predicate offence.
However, the Court of Final Appeal emphasised that before a confiscation order can
be made against such persons, they must also be shown to have benefited from those
proceeds as required by section 8(4) of OSCO.
The Court of Final Appeal held that the “uncoupling” of the concept of “payment”
on the one hand and “reward” or “benefit” on the other should not be adopted in Hong
Kong. Principally, the case of R v Osei Gertrude13 preceded the decisions of the House
of Lords in R v May and Jennings v Crown Prosecution Service and the decisions of the
UK Supreme Court in which the significance of “benefit” was highlighted.
The Court of Final Appeal also referred to other legislation, namely the Anti-Money
Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap.
615 of the Laws of Hong Kong)14 which contains a definition of money laundering
which refers to the proceeds obtained from the commission of an indictable offence
which is quite distinct from the definition of “terrorist financing” which refers to the
provision of property “with the intention that the property will be used”. A similar
concept exists in Cap. 575.15
The Court of Final Appeal also considered the relevant policy consequences and
considerations of adopting the wide interpretation submitted by the prosecution and
13
(1988) 10 Cr App R (S) 289.
14
Schedule 1, Part 1, Section 1.
15
See footnote 3.
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concluded that such policy would be likely to have highly detrimental consequences.
Furthermore, money laundering would become an offence of great and uncertain width.
Payments would constitute the offence without having to be payments which the
defendants knows or has reasonable grounds to believe are in the nature of a reward
received in connection with the commission of an offence.
Given such a low threshold, the prosecution would merely have to prove the receipt
of a payment and show reasonable grounds to believe that such payment has an
undefined and uncertain connection with an indictable offence. Such a wide interpret-
ation would place lenders at risk and impose onerous burdens on them.
The Court of Final Appeal stated the following:
It is one thing to criminalise dealing with funds where the dealer knows or has reasonable
grounds to believe that they are the proceeds of crime, it is quite a different matter to
stigmatise as a money launderer, a lender dealing with its own “clean” funds because of what
the borrower does or intends to do with them.16
The Court of Final Appeal also concluded that such a wide interpretation would be
likely to distort the practice of prosecutors. They would understandably find it hard to
resist the temptation of bringing money laundering charges made easy to prove
whenever it is possible to prove a payment and some broad connection with some
indictable offence, whatever might be the underlying criminality involved.
The Court of Final Appeal concluded that the Courts below were wrong to construe
the expression “proceeds of an indictable offence” in section 25 (1) of OSCO as
extending to cover money used as an instrument furthering the conspiracy charge when
there is no evidence that the appellants knew or had reasonable grounds to believe that
such money represented the proceeds an indictable offence.
RIGHT OF SILENCE
Article 1117 of the Bill of Rights preserves the right of silence for an accused charged
and tried with a criminal offence. The Bill of Rights is enshrined in the Hong Kong Bill
of Rights Ordinance (Cap. 383 of the Laws of Hong Kong).
Money laundering offences in Hong Kong raise significant issues as regards a
suspect and/or a defendant facing criminal charges, in particular, as regards his
constitutionally preserved right of silence. What therefore is the status of a defendant
who has pleaded not guilty and elects not to give evidence in the face of a money
laundering Trial?
This matter was considered by the Court of Final Appeal in Li Defan & Another v
HKSAR18 where it was held that, as a general rule, in cases where the accused elected
not to give evidence, a failure to do so should not be treated as an admission of guilt.
Lord Hoffmann NPJ held that in appropriate cases:
16
Paragraph 84.
17
Paragraph 2(g).
18
(2002) 5 HKCFAR 320.
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There is unquestionably power to comment that the jury may – but need not – consider that
the prosecution case on a particular issue relevant to guilt is strengthened by the absence of
the accused from the witness box. But the cases in which such comment is permissible and,
even if permissible, necessary, will be exceptional.19
Each case must depend upon its own facts.

The Court of Final Appeal adopted the dicta of Lord Taylor of Gosforth CJ in the
case of R v Martinez-Tobon20 as follows:
(3) Provided those essentials are complied with, the judge may think it appropriate to make
a stronger comment where the defence case involves alleged facts which (a) are at
variance with the prosecution evidence or additional to it and exculpatory, and (b) must,
if true, be within the knowledge of the defendant.
(4) The nature and strength of such comment must be a matter for the discretion of the judge
and will depend upon the circumstances of the individual case. However, it must not be
such as to contradict or nullify the essentials of the conventional direction.
The Court of Final Appeal referred to a similar practice in Hong Kong. A case in which
a stronger comment by a judge was found to be permissible was that of HKSAR v Ewan
Quayle Launder 21 in which Lugar-Mawson J gave the jury the following direction:
You may agree with me – you are not obliged to – but you may agree with me that on a
matter perhaps as fundamental as this it is surprising that Mr Launder did not want to give
you his explanation. These are matters that are particularly within his knowledge. If there are
any accounts or records, he is the one who kept them or had his secretary keep them, and he
is the one who must know where they are.Without his explanation, you may find – you are
certainly not obliged to – but you may find that you are the more ready to draw the inferences
that the prosecution … ask you to draw from the evidence.
Although the conviction in that case was quashed by the Court of Appeal for other
reasons, the Court of Appeal held the judge was entitled to make the comments because
of the particular facts of the case: “the applicant’s failure to give evidence was … a
circumstance which had a bearing on the probative value of the evidence”.22
The Court of Final Appeal in Li Defan concluded that the judge, having rejected the
explanation by the accused as a pack of lies, was perfectly entitled to regard the failure
of the accused to offer any explanation on oath as strengthening the inference to be
drawn from the prosecution case.
In the case of HKSAR v Pang Hung Fai,23 the defendant was found guilty of money
laundering contrary to section 25(1) and (3) of OSCO. Mr. Justice Spigelman NPJ,
giving the judgment of the Court of Final Appeal, held that, in addition to the objective
facts relating to the Appellant’s dealing, the judge and jury are entitled to take into
account the Appellant’s perception and evaluation of those facts as constituting
19
Paragraph 29.
20
[2004] 1 WLR 388.
21
Unrep., CACC No. 147/2000, [2001] HKEC 521.
22
Page 41 of the Court of Appeal judgment.
23
FACC No. 8 of 2013.
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reasonable grounds for believing that the property does not represent such proceeds.
That does not however mean that any such “perception” or evaluation is entitled to
weight, let alone determinative weight.
Mr. Justice Spigelman NPJ relied on the Court of Final Appeal decision of Seng Yuet
Fong v HKSAR24 in which Litton PJ said as follows:
To convict, the jury had to find that the accused had reasonable grounds for believing; and
there was the additional requirement that the grounds must be reasonable: That is, anyone
looking at those grounds objectively would so believe. [Emphasis added]
Mr. Justice Spigelman held as follows:
By the imposition of the same penalty, the mental element of the “reasonable grounds
alternative” is regarded as being at the same level of moral obloquy as actual knowledge. A
test that propounds a relationship between the existence of “grounds” and a state of “belief”
in terms of possibility does not do that. Only a test which states that those “grounds” would
lead to the “belief” does so.
In the Court of Final Appeal decision of HKSAR v Yan Suiling,25 Chan PJ, allowing the
appeal, held as follows:26
We take view that the Judge’s reasons for rejecting the appellant’s evidence cannot be
supported … If the appellant’s evidence and documents were properly and fairly considered,
it would have provided compelling grounds for concluding that her explanation as to how she
came to receive the cheque in question at least might be true and that would have created a
reasonable doubt in the prosecution case. The Judge should not have proceeded on the basis
that the receipt of the cheque was unexplained. It follows that he could not have concluded
that there was an irresistible inference that she had reasonable ground to believe the cheque
was the proceeds of an indictable offence.
But even if the Judge was right to reject the Appellant’s evidence, that is, even if the receipt
of the cheque was unexplained, we are not satisfied that in the circumstances of this case, the
only reasonable inference is that the appellant must have reasonable grounds to believe that
the cheque in question represented the proceeds of an indictable offence.27
The situation was certainly unusual, but there could be a number of explanations and possible
consequences of her inaction. The money might have come to her by mistake and she might
be held answerable in a civil action for its return … However, we do not think that without
more, an unexplained receipt points irresistibly to money laundering.28
24
[1999] 2 HKC 833 at 836 E–F.
25
(2012) 15 HKCFAR 146.
26
Paragraph 44.
27
Paragraph 46.
28
Paragraph 48.
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SENTENCING
The sentencing regime is a reflection of the underlying objectives of the legislative
framework and it is realistically applied by the Courts.
A leading authority on sentencing considerations for the Court in money laundering
cases is HKSAR v Boma.29
Stock VP (as Stock NPJ then was), giving the judgment of the Court of Appeal, held
that “it is neither realistically possible nor desirable to attempt guidelines”. Neverthe-
less, the following may be considered: the nature of the predicate offence, the state of
knowledge of the offender, existence of an international dimension, sophistication of
the offence, syndicate and role of the offender and the acts performed by him. For
example, the director of a laundering operation would attract a greater sentence than a
person engaged by him. In relation to a person down the chain, the Court will have
regard to the benefit received and its size and nature.30
Any sentencing exercise must recognise the maximum sentence is 14 years’
imprisonment.
Furthermore, the sentencing Court must have regard to deterrence which is para-
mount. The English authority of R v Basra31 was applied by the Hong Kong Courts
where it was held: “It is to be remembered that the criminality in laundering arises
from the encouragement and nourishment it gives to crime in general. Without it many
crimes would be rendered much less fruitful and perhaps more difficult to perpetrate.”32
CONCLUSION
The Courts maintain a pragmatic approach to combating money laundering offences in
Hong Kong in line with the legislative intent. It will be interesting to see how this area
of the law develops as money-laundering techniques grow in sophistication.
Mark Twain was right.
29
[2012] 2 HKLRD 33.
30
Paragraph 40.
31
[2002] 2 Cr App R (S) 469 at 472.
32
Paragraph 36.
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11. Unfair competition and crime

Shirley Quo
INTRODUCTION
On 3 April 2009, Belinda Barnett, senior counsel to the Deputy Assistant Attorney
General for Criminal Enforcement, Antitrust Division, United States (“US”) Depart-
ment of Justice (“the DOJ”) said:1
It is well known that the Antitrust Division has long ranked anti-cartel enforcement as its top
priority. It is also well known that the Division has long advocated that the most effective
deterrent for hard core cartel activity, such as price fixing, bid rigging, and allocation
agreements, is stiff prison sentences.
Price-fixing, bid-rigging, and other forms of collusion are illegal and are subject to
criminal prosecution by the DOJ.2 The US Sherman Antitrust Act (“the Sherman Act”)
prohibits any agreement among competitors to fix prices, rig bids or engage in other
anticompetitive activity.3
In 2003, the Dawson Committee recommended the introduction of criminal sanctions
for hard-core cartel conduct.4 Cartel conduct became a criminal offence under Part IV
of the Australian Competition and Consumer Act 2010 (Cth) (“the Competition Act”)
on 24 July 2009. In New Zealand, the Commerce (Cartels and Other Matters)
Amendment Bill (“the Cartel Bill”) was introduced in October 2011.5 The Cartel Bill
passed its second reading on 24 June 2014, and the amendments to the New Zealand
Commerce Act (“the Commerce Act”) are expected to become law sometime in 2015.
1
Joint Federal Court of Australia/Law Council of Australia (Business Law Section)
Workshop, Adelaide, 3 April 2009: see http://www.justice.gov/atr/public/speeches/247824.htm
accessed 1 August 2014.
2
Antitrust Division, US Department of Justice, “Price Fixing, Bid Rigging, and Market
Allocation Schemes: What They Are and What to Look For” at http://www.justice.gov/atr/public/
guidelines/211578.htm accessed 3 August 2014.
3
Violation of the Sherman Act is a felony punishable by a fine of up to $10 million for
corporations, and a fine of up to $350,000 or 3 years’ imprisonment (or both) for individuals, if
the offence was committed before 2004. If the offence was committed after 2004, the maximum
fine is $100 million for corporations and $1 million for individuals, and the maximum jail
sentence is 10 years.
4
Trade Practices Review Committee, Review of the Competition Provisions of the Trade
Practices Act, 2003 (“the Dawson Committee”). From 1 January 2011, the Trade Practices Act
1974 (Cth) was renamed as the Competition and Consumer Act 2010 (Cth). There were no
substantive changes to the competition law provisions set out in Part IV.
5
New Zealand, Commerce (Cartels and Other Matters) Amendment Bill (“the Cartel
Bill”), see http://www.legislation.govt.nz/bill/government/2011/0341/15.0/DLM4090009.html
125
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Like Australia, it introduces criminalisation of hard-core cartel activity. The Cartel Bill
defines a “cartel provision” as a contract, arrangement or understanding that has the
purpose, effect or likely effect of price-fixing, restricting output or market allocating.
Each of these three types of collusive conduct is separately defined:
+ price-fixing – this is an arrangement between competitors to fix, control or

maintain the price of goods or services that they supply or acquire in competition
with each other;
+ restricting output – this is an arrangement between competitors to prevent, restrict
or limit the supply of goods or services by any or all of the parties to the
arrangement; and
+ market division – this is an arrangement between competitors to divide between
them the customers to whom they will supply goods or services or the
geographical areas in which they will supply goods or services.
There are specific exemptions for collaborative activity, vertical supply arrangements,
joint buying and promotion agreements. There is also a clearance mechanism to reduce
the risk of prosecution and parallel civil and criminal sanctions with “intention” as the
trigger to criminal liability.
Like the Australian provisions, the Cartel Bill creates a parallel regime in which
there is a single set of provisions which can attract either criminal or civil liability
depending upon:
+ the level of seriousness of the offending (whether it constitutes “hard core” cartel
conduct); and
+ the intention of the offender.
Under the Cartel Bill, there are both civil and criminal consequences for individuals
and companies alike. Companies can face civil penalties of the greater of $10 million
per contravention, three times the commercial gain from the cartel activity or 10 per
cent of the company’s turnover in the accounting period in which the contravention
occurred. Individuals can face civil penalties of up to $500,000 and, if found criminally
liable, they can also be imprisoned for a term not exceeding 7 years.6 Only intentional
cartel conduct has criminal consequences.7 Criminal sanctions should be reserved for
conduct that is truly culpable.8 A person should have intended to engage in the conduct
in question or at the very least have been reckless as to its consequences, to attract such
sanctions. There is an honest belief defence that would apply to a defendant involved in
a collaborative activity if the cartel provision of the contract was reasonably necessary
6
There will be a two year transition period before the criminal sanctions come into effect.
7
To establish a conviction, the Commerce Commission, the competition watchdog in New
Zealand, will need to prove beyond reasonable doubt that the breach was intentional.
8
Under the Cartel Bill, cartel conduct will be treated as a category four offence, the most
serious possible and the same category as murder, treason and terrorism.
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Unfair competition and crime 127
for the purpose of the collaborative activity.9 A person can still be civilly liable even if
they did not intend to participate in cartel conduct.
In Australia, there has not been a cartel case which has been prosecuted criminally
by the Australian Competition and Consumer Commission (“the ACCC”), the com-
petition watchdog. Perhaps the ACCC has been reticent in initiating criminal proceed-
ings because of the uncertainties which appear to be inherent in the criminal provisions.
Judicial interpretation should gradually reduce these uncertainties. The recent US
antitrust price-fixing case, US v Apple Inc may provide some practical guidance in this
regard.10 The US antitrust experience shows that reliance is necessarily placed upon the
courts to refine the terms in which the legislation is cast in order to achieve its object.
This chapter discusses the different types of cartel conduct including the difficulty in
determining where to draw the dividing line between a criminal offence and a civil
contravention. In Australia, the Dawson Committee identified this as a critical issue that
would need to be resolved before criminal sanctions could be implemented.11 Various
commentators have argued that the current criminal provision for cartel conduct in
Australia is flawed for this reason.12 The difficulty lies, in part, on the role of intent or
mens rea in establishing criminal liability for cartel conduct. This criticism can also be
applied to the New Zealand Cartel Bill which is based on the Australian provisions. In
Australia, various alternatives were canvassed including introducing an element of
“intention to dishonestly obtain a benefit” in the cartel offences to discriminate between
those offences and the civil prohibitions.13 Ultimately it was decided that there would
be a requirement for certain fault elements for criminal liability with reliance otherwise
on prosecutorial discretion to determine which matters should be dealt with as potential
criminal offences.14
The fault elements required for the cartel offences do differentiate between criminal
and civil liability for cartel conduct under the Competition Act but, in practice, the
elements of intention and knowledge or belief required for criminal liability typically
9
A “collaborative activity” is defined as an activity in trade carried on in co-operation
between two or more competitors that does not have the dominant purpose of lessening
competition between them. The arrangement must be reasonably necessary for the purpose of
the “collaborative activity” e.g. a joint venture to manufacture a new product where the
competitors then set the price of the new product.
10
United States v Apple Inc (“US v Apple”), 952 F.Supp.2d 638, SDNY, 2013.
11
Dawson Committee, see above n 4.
12
See e.g. Beaton-Wells & Fisse, Australian Cartel Regulation: Law, Policy and Practice in
an International Context (2012), 19.
13
The requirement of an intention dishonestly to obtain a benefit in the Trade Practices
Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth) was removed in response to
overwhelming criticism. The dishonesty element for the equivalent cartel offence in the UK has
also been deleted. See United Kingdom (“UK”) Department for Business Innovation & Skills,
Enterprise and Regulatory Reform Act 2013 policy paper, June 2013 at https://www.gov.
uk/government/uploads/system/uploads/attachment_data/file/209896/bis-13-905-enterprise-and-
regulatory-reform-act-2013-policy.pdf accessed 4 August 2014. The UK government noted that
the inclusion of a requirement to prove an individual’s dishonesty made the offence particularly
difficult to prosecute. There has yet to be a successful criminal prosecution for cartel conduct in
the UK. The new criminal cartel offence came into effect on 1 April 2014.
14
Beaton-Wells & Fisse, see above n 12, p 19.
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will also be present in civil cases.15 The introduction of criminal sanctions for cartel
conduct does not mean that the current jurisprudence surrounding cartel conduct is lost.
The criminalisation of cartel conduct was considered to be in the interests of
competition or consumers, but it will take some time before a new jurisprudence is
developed. In the interim, price-fixing cases such as the Apple case offer a real prospect
of developing a better understanding of the true scope of the antitrust provisions. This
chapter proposes to discuss the Apple case in the light of the criminal sanctions for
price-fixing in Australia and New Zealand.
CRIMINALISATION OF CARTEL CONDUCT IN AUSTRALIA

Part IV of the Competition Act deals with restrictive trade practices. Division 1 sets out
parallel offences and civil penalty provisions relating to cartel conduct. In essence, a
corporation must not make, or give effect to, a contract, arrangement or understanding
that contains a “cartel provision”.16
A “cartel provision” is a provision relating to:
+ price-fixing; or
+ restricting outputs in the production and supply chain; or
+ allocating customers, suppliers or territories; or
+ bid rigging;
by parties that are, or would otherwise be, in competition with each other.17
These are indictable offences – if convicted, natural persons are punishable by a term
of imprisonment of up to 10 years.18 The physical elements of the cartel offences are
the same as those of the civil per se prohibitions against price-fixing, reduction of
output, market allocation and bid-rigging.19 The main difference between the cartel
15
Ibid, p 28.
16
Sections 44ZZRF(1) & 44ZZRG(1) of the Competition Act.
17
The definition of a “cartel provision” is set out in s 44ZZRD which is discussed in more
detail later.
18
Section 6(5B) provides that if a person other than a body corporate is convicted of an
offence against ss 44ZZRF & 44ZZRG, the offence is taken to be punishable on conviction by a
term of imprisonment not exceeding 10 years or a fine not exceeding $340,000 or both.
19
In New Zealand, it was decided to delete the provision in relation to bid-rigging on the
basis that such conduct would also be included in the definition of a cartel provision and that
prohibiting other categories of cartel conduct (price-fixing, restricting output and market
allocating) would adequately prevent anticompetitive bidding practices – see Commerce (Cartels
and Other Matters) Amendment Bill, as reported from the Commerce Committee, 20 May 2013,
at http://www.legislation.govt.nz/bill/government/2011/0341/latest/DLM4090009.html accessed
on 4 August 2014. Bid-rigging is an arrangement between one or more competitors whereby, in
relation to a request for bids or tenders to supply goods or services, they agree in advance that
one party bids but the other parties will refrain from bidding so that the designated winning
competitor’s bid will be accepted. Essentially, competitors agree in advance who will submit the
winning bid on a contract being tendered through the competitive bidding process. As with
price-fixing, it is not necessary that all bidders participate in the conspiracy. Almost all forms of
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offences and the civil per se prohibitions is that the former has additional fault
elements. These additional fault elements are:
+ for the offence of making a contract, arrangement or understanding containing a

cartel provision, intention to make such a contract, arrangement or understanding
and knowledge or belief that the contract, arrangement or understanding contains
a cartel provision;20 and
+ for the offence of giving effect to a cartel provision, knowledge or belief that a
cartel provision is contained in a contract, arrangement or understanding and
intention to give effect to the cartel provision.21
Under the civil per se prohibitions, there is no corresponding requirement of intention,

that is, the default fault element of intention under the Australian Criminal Code Act
1995 (Cth) (“the Criminal Code”)22 does not apply to the conduct element of making a
contract, arrangement or understanding (s 44ZZRJ(1)) or giving effect to a cartel
provision (s 44ZZRK(1)).23 However, the elements of consensus and commitment
required for a contract, arrangement or understanding are substantially equivalent to an
intention to agree.24 It is immaterial to liability under the civil per se prohibitions
whether the defendant knew or believed that the contract, arrangement or understanding
contained a cartel provision.25
“Intention” is defined in the Criminal Code:26 “A person has intention with respect to
conduct if he or she means to engage in that conduct.” The fault elements of intention,
knowledge or belief may be established by inference from the defendant’s conduct or
from other relevant circumstances. This includes circumstantial evidence, including
evidence that the defendant was aware of the likely existence of the physical elements
of the offence.27 However, the particular fault element required must be established
beyond reasonable doubt – the criminal legal burden of proof. Presumably, if there is a
bid-rigging schemes have one thing in common: an agreement among some or all of the bidders
which predetermines the winning bidder and limits or eliminates competition among the
conspiring parties.
20
Section 44ZZRF(2) Competition Act. Intention is required in relation to making a
contract, arrangement or understanding. No fault element is specified; however, intention is
required by operation of the default fault provisions of the Criminal Code. The fault element is
knowledge or belief that the contract, arrangement or understanding contains a cartel provision.
21
Section 44ZZRG(2) Competition Act. Intention is required in relation to giving effect to
the cartel provision. No fault element is specified; however, intention is required by operation of
the default fault provisions of the Criminal Code. As in s 44ZZRF(2), the fault element is
knowledge or belief that the contract, arrangement or understanding contains a cartel provision.
22
Criminal Code Act 1995 (Cth) (the “Criminal Code”). Chapter 2 of the Criminal Code
sets out the general principles of criminal responsibility – the Criminal Code applies to all
offences against the Competition Act: s 6AA(1).
23
Section 44ZZRK is the civil equivalent to s 44ZZRG; s 44ZZRJ is the civil equivalent to
s 44ZZRF.
24
25
Ibid.
26
Section 5.2(1) Criminal Code.
27
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credible alternative explanation for the defendant’s conduct, there will be reasonable
doubt.28 Where there is some form of valid collaborative activity between competitors,
the method of inferring intention, knowledge or belief is unlikely to be clear-cut.29
Under the Cartel Bill, if a defendant involved in a collaborative activity honestly
believed that the cartel provision was reasonably necessary for the purpose of the
collaborative activity, they would not be criminally liable.
The definition of a “cartel provision” is set out in section 44ZZRD of the
Competition Act as follows:
A provision of a contract, arrangement or understanding is a cartel provision if the following

conditions are satisfied in relation to the provision:
+ the purpose/effect condition; or
+ the purpose condition;
AND
+ the competition condition.
The “purpose/effect condition” is satisfied if the provision has the purpose, or has or is
likely to have the effect, of fixing, controlling or maintaining the price of goods or
services that are supplied by any or all of the parties to the contract, arrangement or
understanding (price-fixing).30
The “purpose condition” is satisfied if the provision has the purpose of:
+ preventing, restricting or limiting the supply of goods or services by any or all of

the parties to the contract, arrangement or understanding (restricting output);
+ allocating between any or all of the parties to the contract, arrangement or
understanding the customers to whom they will supply goods or services or the
geographical areas in which they will supply goods or services (market alloca-
tion); or
+ ensuring that in relation to a request for bids or tenders by customers to supply
goods or services, any or all of the parties to the contract, arrangement or
understanding agree in advance as to whom will submit the winning bid
(bid-rigging).31
The “competition condition” is satisfied if at least two of the parties to the contract,
arrangement or understanding are or are likely to be in competition with each other in
relation to the supply of those goods or services.32
The above definition of a cartel provision applies to both the civil per se prohibitions
and the criminal provisions. One of the aims of this chapter is to examine the role of
28
Ibid.
29
Ibid.
30
s 44ZZRD(2).
31
s 44ZZRD(3).
32
s 44ZZRD(3).
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intent or purpose which is central to satisfying the definition of a cartel provision.33 It

is also linked to the mens rea requirement which is necessary in order to establish
criminal liability for cartel conduct. Although the criminal burden of proof is higher
(beyond reasonable doubt), the role of intent or purpose is clearly relevant to both the
civil and criminal provisions. Knowledge or belief is required in relation to, inter alia,
the existence of a cartel provision, that is, the existence of facts sufficient to satisfy the
“purpose/effect condition” required in the case of price-fixing, or the “purpose
condition” required in the case of restricting output, market allocating or bid-rigging.
Given the complexity of the “purpose/effect condition” and “purpose condition” under
section 44ZZRD, this element is likely to be an attractive target for defence counsel.34
As stated earlier, price-fixing, bid-rigging and other forms of collusive conduct are
subject to criminal prosecution in the US by the DOJ. The Sherman Act allows the US
government to prosecute antitrust cases civilly or criminally. It is therefore proposed to
analyse the recent US v Apple price-fixing case to determine the elements necessary to
establish both civil and criminal liability in cartel cases. The US antitrust experience
provides useful lessons which can be translated to Australia and New Zealand.
Academics, practitioners and commentators have noted that the role of intent evidence
is particularly useful to identify or distinguish between anticompetitive or exclusionary
(unlawful) conduct and pro-competitive (lawful) conduct in antitrust cases covering the
spectrum from unilateral conduct to collateral conduct. Whilst there is an important
distinction between civil and criminal offences, it is submitted that intent or purpose is
the fulcrum to establishing antitrust liability under both provisions.
The raison d’être of the relevance of the role of intent or purpose may derive from
the common law requirement that there be a consciousness of wrongdoing before
adverse legal consequences attach to that conduct. It also ensures that liability will only
attach to intentional conduct not inadvertent conduct. Judging the impugned conduct in
this manner reduces the risk of deterring pro-competitive conduct and harming
competition. There is therefore an analogy to the requirement for mens rea in criminal
law.
Like Australian and New Zealand competition law, the principal objective of US
antitrust law is to protect competition to enhance consumer welfare. The judgments of
the Australian High Court (the Supreme Court is the equivalent court in the US in
terms of hierarchy) have shown an increasing recognition of the relevance of antitrust
law from the US jurisdiction. For example, the persuasiveness of the US reasoning can
be seen in the Boral Besser Masonry Ltd v ACCC (“Boral”) decision.35
The existence of mens rea is a necessary component of Australian, New Zealand and
American criminal jurisprudence. The general rule that intent is an indispensable
element of a criminal offence is as true in a sophisticated criminal antitrust case as in
one involving any other criminal offence.36
33
Under the “purpose/effect condition” requirement for price-fixing or the “purpose
condition” requirement in the case of restricting output, market allocating or bid-rigging.
34
35
Boral Besser Masonry Ltd v ACCC (“Boral”) (2003) 215 CLR 374. This was a predatory
pricing case.
36
US v US Gypsum Co (“Gypsum”), 438 US 422, 437 (1978).
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In United States v United States Gypsum Co (“Gypsum”), the US Supreme Court

stated that
a defendant’s state of mind or intent is an element of a criminal antitrust offense which must
be established by evidence and inferences drawn therefrom and cannot be taken from the trier
of fact through reliance on a legal presumption of wrongful intent from proof of an effect on
prices.37
However, action undertaken with knowledge of its probable consequences and having
the requisite anticompetitive effects can be a sufficient ground for a finding of criminal
liability under the antitrust laws.38
In terms of the cartel provisions, to establish a conspiracy in violation of the US
Sherman Act’s prohibition of unreasonable restraints of trade or commerce, the plaintiff
must show a combination or some form of concerted action between at least two
legally distinct economic entities that constituted an unreasonable restraint of trade
either per se or under the rule of reason.39 Even for per se illegal offences such as
price-fixing, restricting output, market allocating or bid-rigging under the Sherman Act,
purpose is a necessary element of the offence, as interpreted by the courts.40
Under section 1 of the Sherman Act, a combination formed for the purpose and with
the effect of raising, depressing, fixing, pegging or stabilising the price of a commodity
in interstate or foreign commerce is illegal per se. This provision is substantially
equivalent to the price-fixing provisions in the Competition Act and the Commerce
Act.41 To support a claim for an agreement in violation of the Sherman Act’s
prohibition of unreasonable restraints of trade or commerce, circumstances must reveal
a unity of purpose or a common design and understanding, or a meeting of minds in an
unlawful arrangement. This reveals the importance of the role of purpose or intent in
establishing a conspiracy in terms of price-fixing, that is, a common understanding or
arrangement to fix prices. To prove a conspiracy in contravention of the Sherman Act’s
prohibition of unreasonable restraints of trade or commerce, the plaintiff must present
direct or circumstantial evidence that reasonably tends to prove that the defendant and
others had a conscious commitment to a common scheme designed to achieve an
unlawful objective and that the defendant had the intent to adhere to such an
agreement.
37
Ibid, 423.
38
Ibid.
39
Sherman Act, § 1, 15 USCA § 1.
40
Per se illegal agreements are certain agreements or practices which because of their
pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to
be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have
caused or the business excuse for their use: see United States v Reicher, 983 F.2d 168, 170 (10th
Cir. 1992); United States v Mobile Materials, Inc, 881 F.2d 866, 869 (10th Cir. 1989), cert.
denied, 493 US 1043 (1990); United States v Metro. Enters., Inc, 728 F.2d 444, 449–50 (10th
Cir. 1984).
41
Sections 44ZZRG & 44ZZRF.
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UNITED STATES v APPLE INC (“THE APPLE CASE”)

The relevance of intent or purpose is illustrated in the recent price-fixing case – the
Apple case – which involved a conspiracy orchestrated by Apple to illegally set the
prices of electronic books (e-books).42 The primary statutory provision applicable to
cartels is section 1 of the Sherman Act, which prohibits every contract, combination or
conspiracy in restraint of trade.
The plaintiffs, comprised of the US DOJ and 33 US states and territories (collec-
tively “the Plaintiffs”) filed antitrust suits on 11 April 2012, alleging that the defendant,
Apple Inc (“Apple”) and five book publishing companies conspired to raise, fix and
stabilise the retail price for newly released and bestselling trade e-books in violation of
section 1 of the Sherman Act, 15 USC § 1, and various state laws. The publishers were
Hachette Book Group, HarperCollins Publishers, Holtzbrinck Publishers/Macmillan,
Penguin Group and Simon & Schuster (collectively “the Publishers”). The Publishers
settled with the Plaintiffs and Apple proceeded to trial.43
According to the court, even if analysed under the rule of reason, evidence showed
that Apple, the company that manufactured tablet computers and distributed e-books,
committed a violation of the Sherman Act’s prohibition of unreasonable restraints of
trade or commerce via a horizontal price-fixing conspiracy with several book publishers
to raise e-book prices.44 Evidence showed that agreements were intended to remove the
company’s competitors’ ability to set e-book prices and relieve the company of the need
to compete on price, and allowed the Publishers to raise e-book prices, which resulted
in fewer sales.
Examining whether a firm has valid business reasons for its exclusionary conduct
necessarily requires an examination of its purpose or intent. In the Apple case, the court
held that purported independent business reasons proffered by Apple to create an
e-bookstore, and for adopting an agency model to do so, did not prevent a finding that
the company committed a per se violation of the Sherman Act by participating in and
facilitating a horizontal price-fixing agreement with several book publishers to raise
e-book prices.45
Appropriate, and even admirable, motives articulated by Apple, specifically to
present innovative software on devices offering new features, did not preclude a finding
that the company intentionally engaged with the Publishers in a scheme to raise e-book
prices, in breach of the Sherman Act’s prohibition of unreasonable restraints of trade or
commerce, in light of the overwhelming evidence that the company knew of the
unlawful aims of the conspiracy and joined that conspiracy with specific intent to help
it succeed.46
42
United States v Apple Inc (“US v Apple”), 952 F.Supp.2d 638 (2013).
43
As part of their settlements, the Publishers were ordered to terminate agreements that
prevented e-book retailers from lowering the prices at which they sell e-books to consumers and
to allow for retail price competition in renegotiated e-book distribution agreements.
44
US v Apple, 952 F.Supp.2d 638, 694 (2013).
45
Ibid.
46
US v Apple, 952 F.Supp.2d 638, 700 (2013).
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Apple and the Publishers shared one overarching interest – that there be no price
competition at the retail level. Apple did not want to compete with Amazon (or any
other e-book retailer) on price; and the Publishers wanted to end Amazon’s $9.99
pricing and increase significantly the prevailing price point for e-books. With a full
appreciation of each other’s interests, Apple and the Publishers agreed to join forces to
eliminate retail price competition in the e-book market and raise the price of e-books
above $9.99.47
Working together and equipped with Apple’s agency agreements, Apple and the
Publishers moved the largest publishers of trade e-books and their distributors from a
wholesale to agency model, eliminated retail price competition, and raised e-book
prices.48
To prove an antitrust conspiracy, “the antitrust plaintiff should present direct or
circumstantial evidence that reasonably tends to prove that the [defendant] and others
had a conscious commitment to a common scheme designed to achieve an unlawful
objective”.49 The evidence must also “prove defendants had the intent to adhere to an
agreement that was designed to achieve an unlawful objective; specific intent to restrain
trade is not required”.50
Proof that a combination was formed for the purpose of fixing prices and that it
caused them to be fixed or contributed to that result is proof of the completion of a
price-fixing conspiracy under section 1 of the Sherman Act.
One of Apple’s arguments was that it never intended to conspire with the Publishers
to raise e-book prices. Apple also argued that it had legitimate, independent business
reasons for executing the agency agreements with the Publishers, and that these
independent business reasons necessarily rendered any evidence of its participation in a
conspiracy ambiguous.51 Because the Plaintiffs have been unable to show that Apple
did not have legitimate reasons for acting as it did, Apple asserted that the Plaintiffs
failed to exclude the possibility that Apple acted lawfully.52
Apple’s Intent or Purpose
Based on the evidence, the court held that Apple clearly intended that its relationship
with the Publishers have the elements required for a contract, arrangement or
understanding, including the requirements of consensus and commitment.53
Apple argued that it was the Publishers who raised the prices and Apple should not
be found liable just because those Publishers used Apple’s agreements as a tool to force
an industry change to the agency model and then used their newly acquired price-
setting authority to raise the retail prices of e-books.54 Apple claimed that it was only
47
US v Apple, 952 F.Supp.2d 638, 647 (2013).
48
US v Apple, 952 F.Supp.2d 638, 693 (2013).
49
Monsanto Co v Spray–Rite Service Corp (“Monsanto”), 465 US 752, 764 (1984).
50
Geneva Pharms. Tech. Corp v Barr Labs. Inc (“Geneva Pharms”), 386 F3d 485, 507
(2004).
51
US v Apple, 952 F.Supp.2d 638, 696 (2013).
52
Ibid.
53
Ibid.
54
US v Apple, 952 F.Supp.2d 638, 699 (2013).
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focused on accomplishing its core business objectives and on providing the best
possible e-reading experience for consumers.55 Apple identified those business object-
ives as the development of an iBookstore with comprehensive content and competitive
pricing.56 At trial, its witnesses stressed the advantages that accrued to readers from its
iPad (colour functionality, backlit screen and video capability) and from the iBookstore
e-reader software (landscape view option, an attractive page-curl function and an
end-to-end platform to browse, buy and read an e-book in one seamless interface).57
However, the court found that Apple’s legitimate motives did not preclude a finding
that Apple also intentionally engaged with the Publishers in a scheme to raise e-book
prices.58
Understanding that no one publisher could risk acting alone in an attempt to take
pricing power away from Amazon, Apple created a mechanism and environment that
enabled them to act together in a matter of weeks to eliminate all retail price
competition for their e-books. The evidence was incontrovertible that Apple knew of
the unlawful aims of the scheme and joined that conspiracy with the specific intent to
help it succeed.59 Apple’s desire to create a profitable iBookstore on a superior e-reader
did not negate the substantial evidence that Apple made a commitment to act as the
Publishers’ partner in raising e-book prices materially above $9.99.60
Apple argued in conclusion that if the agency agreements had both illegal and legal
purposes, then the existence of a lawful purpose would prevent a finding of liability.61
In Australia, Professor Corones has similarly noted the importance of providing a
legitimate business justification for conduct that appeared to be prima facie exclusion-
ary.62 For example, Queensland Wire Industries Pty Ltd v BHP Pty Ltd (“QWI”)
illustrates that the failure to adduce evidence showing a good business justification for
the impugned conduct will entitle a court to draw an adverse inference with regard to
purpose.63 Australian authorities indicate the importance of the legitimate business
justification defence in relation to both refusal to deal and exclusive dealing cases.64
Similarly, the US courts have treated valid business justifications as a defence to
55
Ibid.
56
Ibid.
57
US v Apple, 952 F.Supp.2d 638, 700 (2013).
58
Ibid.
59
Ibid.
60
Ibid.
61
US v Apple, 952 F.Supp.2d 638, 701 (2013).
62
Stephen Corones, “The Characterisation of Conduct under Section 46 of the Trade
Practices Act” (2002) 30 Australian Business Law Review 410, 417.
63
Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (“QWI”) (1989) 167 CLR
177 – this was a misuse of market power case.
64
See e.g. Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd (1975) 5 ALR
465, 468; Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) ATPR ¶40–809, ¶48,800;
APRA v Ceridale Pty Ltd (1990) 97 ALR 497, 510–11; Petty v Penfold Wines Pty Ltd (1994) 49
FCR 282, 291; Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR
¶41–752, ¶40,734; Melway (2001) 205 CLR 1; ACCC v Boral (1999) 166 ALR 410.
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antitrust liability.65 It has also been used to refute evidence of a proscribed anti-
competitive purpose. Of course a valid business justification does not necessarily mean
that the conduct is not anticompetitive. This is where the defendant’s business
justification for its conduct is helpful in determining its intent or purpose. Apple
provided some business justification for its conduct but it was still found to have
contravened section 1 of the Sherman Act. It is submitted that the existence of a
pro-competitive business purpose for the impugned conduct may act as a defence or a
probative tool in establishing whether a firm had an improper or colourable purpose.
Characterisation of the Evidence
Apple argued that it had made several innocent vertical distribution agreements whose
only purpose was to facilitate Apple’s pro-competitive entry into the e-book market.
The district court said that that characterisation of the relevant events could not be
reconciled with the evidence, which demonstrated that Apple had conspired with the
Publishers to achieve their shared goal of eliminating e-book retail price competition
and raising e-book prices.66 The district court properly found that Apple had partici-
pated in a horizontal price-fixing conspiracy that had the purpose and effect of raising
e-book prices. The purpose and effect of the charged conspiracy were to prevent that
expansion of the market from resulting in price competition among e-book retailers.
Acts that exhibit a consciousness of guilt, such as false exculpatory statements, may
also tend to prove knowledge and intent of a conspiracy’s purpose.67 The purpose of the
conspiracy was not to expand retail price competition, but to eliminate it.
Confronted with the substantial evidence of its participation in a conspiracy with the
Publishers, Apple offered a counter-narrative of the relevant events that transpired in
late 2009 and early 2010.68 Apple contended that the trial record showed that Apple
acted independently and as a lawful participant in a series of negotiations that would be
unexceptional for any new market entrant.69
However, there was incriminating “smoking gun” evidence of Apple’s participation
in the conspiracy, namely, the words uttered by Steve Jobs, Apple’s founder and CEO.70
For example, Jobs told one of the Publishers that Amazon’s $9.99 sales were “eroding
the value perception” of its products, and that Apple would be trying higher price
65
See e.g. Aspen Skiing Co v Aspen Highland Skiing Corp (“Aspen”) 472 US 585, 602
(1985); Christy Sports LLC v Deer Valley Resort Co 555 F.3d 1188, 1197 (10th Cir, 2009);
LePage’s Inc v 3M 324 F.3d 141, 163 (3rd Cir, 2003); Morris Communication Corp v PGA Tour
Inc 235 F.Supp.2d 1269, 1288 (MD Fla, 2002); General Industrial Corp v Hartz Mountain Corp
810 F.2d 795, 804 (8th Cir, 1987); Continental TV Inc v GTE Sylvania Inc 433 US 36, 55
(1977); Consultants & Designers v Butler Service Group 720 F.2d 1553, 1559 (11th Cir, 1983);
United States Football League v National Football League 842 F.2d 1335, 1360 (2nd Cir, 1988).
These were mainly monopolisation cases.
66
US v Apple, 952 F.Supp.2d 638, 702 (2013).
67
US v Apple, 952 F.Supp.2d 638, 694 (2013).
68
US v Apple, 952 F.Supp.2d 638, 702 (2013).
69
Ibid.
70
US v Apple, 952 F.Supp.2d 638, 705 (2013).
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points.71 This was confirmed at the media launch of its iBookstore. Jobs’ purchase of
an e-book for $14.99 at the launch, and his explanation to a reporter that day that
Amazon’s $9.99 price for the same book would be irrelevant because soon all prices
will “be the same” was further evidence that Apple understood and intended that
Amazon’s ability to set retail prices would soon be removed.72 Jobs’ statements, Cote J
said, “remain powerful evidence of conspiratorial knowledge and intent”.73
To conclude, the district court for the southern district of New York found that Apple
violated section 1 of the Sherman Act by conspiring to raise e-book prices and end
e-book retailers’ freedom to compete on price. After carefully weighing the evidence,
the court agreed with the Justice Department and 33 state attorneys general that
executives at the highest levels of Apple perpetrated a conspiracy with five major
publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster – to
raise e-book prices.
It has been reported that Apple will pay $450 million as part of an out-of-court
settlement with class action lawyers and state district attorneys over e-book price-
fixing.74 The settlement is subject to court approval and contingent on a pending
appeals case Apple filed in February 2014. Should Apple’s appeal be successful, the
company will pay out $50 million to settle consumer damages claims. If the appeals
court reverses the initial decision entirely, Apple will pay no damages.
ANALYSIS
The enforcement guidelines issued by the US DOJ confirm that although violations of
the Sherman Act may be prosecuted as civil or criminal offences, conduct that the DOJ
prosecutes criminally is limited to traditional per se offences of the law, which typically
involve price-fixing, customer allocation, bid-rigging or other cartel activities that
would also be violations of the law in many countries.75 In other words, the DOJ
focuses on collateral conduct that involves “naked” agreements in restraint of trade
under section 1 of the Sherman Act. Somewhat surprisingly, Apple was prosecuted as a
civil case despite satisfying the DOJ’s own enforcement guidelines which indicate that
such price-fixing conspiracies constitute felony violations of antitrust federal law.76
71
US v Apple, 952 F.Supp.2d 638, 704 (2013).
72
Ibid.
73
US v Apple, 952 F.Supp.2d 638, 705 (2013).
74
http://www.macrumors.com/2014/07/16/apple-ebook-price-fixing/ accessed on 29 July
2014.
75
See US DOJ, Antitrust Division, “An Antitrust Primer for Federal Law Enforcement
Personnel”, August 2003, revised April 2005 at http://www.justice.gov/atr/public/guidelines/
209114.htm accessed on 4 August 2014.
76
It is unclear why the DOJ decided to initiate civil proceedings against Apple instead of a
criminal prosecution which is at odds with the DOJ’s own enforcement policy. It has been
suggested that the decision may be a one-off exception – see Evan D Brewer, “The E-Books
Price Fixing Litigation: Curious Outlier or Harbinger of Change in Antitrust Enforcement
Policy” (2014) 6(1) Hastings Science and Technology Law Journal 43.
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Whilst the US Supreme Court in Gypsum clearly established that intent is an element
of a Sherman Act offence,77 it is well recognised that in a criminal prosecution of a
Sherman Act conspiracy such as price-fixing, the DOJ need not prove that the
defendants intended to restrain trade or violate the law. In cases involving per se
violations of the Sherman Act, proof of the defendants’ knowing participation in an
agreement to fix prices satisfies the intent requirement. Although price-fixing and other
cartel offences under the Sherman Act are not strict liability crimes, the intent required
to prove a criminal violation of the Sherman Act is simply the general intent to agree to
fix prices, not a specific intent to restrain trade or violate the law. In US v Smith
Grading & Paving,78 a bid-rigging criminal case, the court stated that the US
government must prove the defendants’ intentional participation in the conspiracy to rig
bids. The US government did not have to prove the defendants’ specific intent to
unreasonably restrain trade. In US v Society of Independent Gasoline Marketers of
America, a price-fixing criminal case, the court noted that since in a price-fixing
conspiracy the conduct is illegal per se, further inquiry on the issues of intent or the
anticompetitive effect is not required.79 The mere existence of a price-fixing agreement
establishes the defendants’ illegal purpose.80 The defendants may not defend or excuse
their knowing participation in the charged conspiracy by arguing or offering evidence
that they did not intend to violate the law or restrain competition. This proof would be
nothing more than an excuse or justification for participating in the per se unlawful
conduct and “would reopen the very questions of reasonableness which the per se rule
is designed to avoid”.81
Accordingly, when a defendant knowingly engages in per se unlawful conduct, intent
to restrain trade is presumed.82 Therefore, because proof of specific intent to restrain
trade is not relevant to a determination of the defendants’ guilt or innocence, evidence
or arguments regarding the absence of specific intent is excluded as a matter of law.
To prove a price-fixing conspiracy under section 1 of the Sherman Act, the plaintiff
must present evidence that the defendant and others had a conscious commitment to a
common scheme designed to achieve an unlawful objective, that is, to fix prices, and
that the defendants had the intent to adhere to an agreement that was designed to
achieve this objective – specific intent to restrain trade is not required.83
In the Apple case, the court said that even if analysed under the rule of reason84 the
evidence showed that Apple had conspired via horizontal price-fixing agreements with
77
United States v United States Gypsum Co, 438 US 422, 435 (1978).
78
760 F.2d 527, 533 (4th Cir. 1985).
79
624 F.2d 461, 465 (4th Cir. 1979).
80
Ibid.
81
United States v Koppers Co Inc (“Koppers”), 652 F.2d 290, 296 (1981).
82
See United States v Coop. Theatres of Ohio Inc (“Coop”), 845 F.2d 1367, 1373 (1988);
United States v Gillen (“Gillen”), 599 F.2d 541, 545 (1979).
83
United States v Smith Grading & Paving Inc (“Smith Grading & Paving”), 760 F.2d 527,
533 (4th Cir. 1985).
84
Under the rule of reason, the plaintiffs in a Sherman Act suit for conspiracy to engage in
unreasonable restraints of trade or commerce bear an initial burden to demonstrate the
defendants’ challenged behaviour had an actual adverse effect on competition as a whole in the
relevant market.
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the Publishers to raise e-book prices. Apple failed to show any pro-competitive effects
of its agreements with the Publishers, and the evidence proved that the agreements
were intended to remove Apple’s competitors’ ability to set e-book prices and relieve
the company of the need to compete on price and allowed the Publishers to raise
e-book prices which resulted in fewer sales.
In Gypsum, whilst the US Supreme Court’s analysis focused on the elements of a
criminal offence under the antitrust laws, the court acknowledged that even in civil
cases, consideration of intent may play an important role in divining the actual nature
and effect of the alleged anticompetitive conduct.85
In a conspiracy, two different types of intent are generally required – the basic intent
to agree, which is necessary to establish the existence of the conspiracy, and the more
traditional intent to effectuate the object of the conspiracy.86 The discussion in Gypsum
focused only on the second type of intent.87 The US Supreme Court also stated that if
the defendants’ carefully planned and calculated conduct was undertaken with know-
ledge of its probable consequences and having the requisite anticompetitive effects, this
can be a sufficient basis for a finding of criminal liability under the antitrust laws.88
The element of intent in the criminal law has traditionally been viewed as a
bifurcated concept embracing either the specific requirement of purpose or the more
general one of knowledge or awareness.89 It is now generally accepted that a person
who acts (or omits to act) intends a result of his or her act (or omission) under two
quite different circumstances: (1) when he or she consciously desires that result,
whatever the likelihood of that result happening from his or her conduct; and (2) when
he or she knows that the result is practically certain to follow from his or her conduct,
whatever his or her desire may be as to that result.90 Generally this limited distinction
between knowledge and purpose has not been considered important since “there is
good reason for imposing liability whether the defendant desired or merely knew of the
practical certainty of the results”.91 In either circumstance, the defendants are con-
sciously behaving in a way the law prohibits, and such conduct is a fitting object of
criminal punishment.92
Applying the Gypsum test for a finding of criminal liability under the antitrust laws,
it is submitted that there was sufficient evidence that Apple’s actions also constituted a
criminal violation of the Sherman Act. However, it is unclear whether Apple’s
impugned conduct would satisfy the default fault element of intention required under
the Australian provisions for criminal liability, that is, intention to make or give effect
to an arrangement containing a cartel provision.93
85
Gypsum, 438 US 422, 436 (1978); Chicago Board of Trade v US, 246 US 231, 238
(1918).
86
Gypsum, 438 US 422, 444 (1978).
87
Ibid.
88
Gypsum, 438 US 422, 446 (1978).
89
Ibid, 445.
90
Ibid.
91
Ibid.
92
Ibid.
93
Section 44ZZRF(1) & RG(1) of the Competition Act.
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The dominant US antitrust paradigm in civil cases is to disregard intent evidence.

This is based on the antitrust minimalists’ view that anticompetitive exclusionary
conduct is exceedingly rare.94 However, the application of economic theories to identify
anticompetitive behaviour is not ideologically neutral.95 As Areeda and Hovenkamp
said, “there is no shortage of theories but a frightening inability of courts to assess
them”.96
No consensus has been reached on the proper role of intent evidence in the antitrust
context in relation to civil cases. In the author’s view, the question of intent or purpose
should be an indispensable element of any antitrust provision, civil or criminal. The
relevance of intent or purpose was particularly evident in the Apple case. Even antitrust
minimalists have agreed that knowledge of an impugned firm’s intent may help to
illuminate the effect of its actions in ambiguous cases. In other words, anticompetitive
effect may be proven inferentially from anticompetitive intent. Evidence of intent is
also relevant to the question of whether the impugned conduct is properly characterised
as exclusionary or anticompetitive. Intent evidence, if it can be found, is particularly
probative of the reasons behind the exclusionary conduct. Evidence of intent is no more
unreliable than the equally inexact nature of economic evidence and the ambiguity
involved in sorting out the conflicting expert testimony in antitrust cases. It is in areas
where conduct may be equivocal, but in which intent plays a role, that the judicial
forum is most appropriate.
This chapter argues that purpose or intent should be the sine qua non for
distinguishing between pro-competitive and anticompetitive conduct. Intent or purpose
would provide a theoretically complete definition of all antitrust claims as well as an
important limiting principle on the scope of the competition law.97 It is submitted that
the judgment in the Apple case implicitly supports an intent requirement in price-fixing
cases, and this requirement is similar to the purpose requirement in the Australian
price-fixing provisions.98 The role of intent or purpose is also relevant to other cartel
cases such as restricting output, market allocating and bid-rigging, especially where the
conduct is equivocal.99 Collusion among competitors has been referred to as “the
supreme evil of antitrust”.100 The US is the only country that has a history of actively
94
The role of the intent requirement became diminished when the Chicago School of
antitrust analysis emerged in the late 1970s and early 1980s. See e.g. Marina Lao, “Reclaiming
a Role for Intent Evidence in Monopolisation Analysis” (2004) 54 American University Law
Review 151, 165.
95
Kathryn McMahon, “Competition Law, Adjudication and the High Court” (2006) 30
Melbourne University Law Review 782, 820.
96
Phillip Areeda & Herbert Hovenkamp, Antitrust Law (2nd ed, 2002) vol 5 [601], [749b]
323 (Supp. 2006).
97
See e.g. Dustin Sharpes, “Reintroducing Intent into Predatory Pricing Law” (2012) 61
Emory Law Journal 903.
98
See earlier discussion under the heading, “Criminalisation of Cartel Conduct in Aus-
tralia”. There is a requirement to satisfy the “purpose/effect condition” in price-fixing cases:
s 44ZZRD(2).
99
Ibid. There is a requirement to satisfy the “purpose condition” in restricting output,
market division and bid-rigging cases: s 44ZZRD(3).
100
Verizon Communications Inc v Law Offices of Curtis Trinko LLP (“Trinko”), 540 US 398,
414 (2004).
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prosecuting cartels criminally and the only jurisdiction in which jail sentences for
individuals convicted of cartel offences are common. Criminal penalties are now
perceived as necessary to provide effective general deterrence of cartel activity.
Australia introduced jail terms for cartel conduct in 2009 with a maximum of 10 years
imprisonment for individuals involved in the contravention. There is a clear trend
towards criminalisation in many jurisdictions, although there is evidence that there
needs to be a change in the public perception to the moral reprehensibility of cartel
conduct.101 For example, one commentator stated that criminalisation makes the
morality of serious cartel activity a relevant consideration in the design and application
of the Australian law.102 Recognition of the moral dimension will enhance the prospects
of the criminal regime securing the support necessary for its effective enforcement.103 It
should also boost the regime’s deterrence value by facilitating internalisation of
relevant moral norms in the business community.104 Offences lacking in mens rea are
said not to be truly criminal because they do not involve the culpability or “subjective
blameworthiness” traditionally associated with the criminal system of justice.105 In this
regard, it is noted that the civil per se price-fixing prohibition applies to provisions that
have the purpose or likely effect of substantially lessening competition (the “purpose/
effect condition”) and the civil per se prohibitions applying to other types of cartel
conduct such as market division, restricting output or bid-rigging apply to provisions
that have the purpose of substantially lessening competition (the “purpose condition”).
To this extent, it is submitted that the civil prohibitions may be likened to a culpability
requirement.
CONCLUSION
According to the US Antitrust Division, price-fixing, bid-rigging and market allocation
are “economic crimes” with potentially devastating effects on the US economy.106
The law has long considered a person’s intent for specific actions. As stated by
Jackson J in Morissette v United States (“Morissette”):107
The contention that an injury can amount to a crime only when inflicted by intention is no
provincial or transient notion. It is as universal and persistent in mature systems of law as
101
See Christine Parker, “The Compliance Trap: The Moral Message in Responsive
Regulatory Enforcement” (2006) 40 Law and Society Review 591; Caron Beaton-Wells,
“Capturing the Criminality of Hard Core Cartels: The Australian Proposal” (2007) 31(3)
Melbourne University Law Review 675.
102
Caron Beaton-Wells, see above n 101.
103
Ibid.
104
Ibid.
105
Ibid, 684.
106
US Department of Justice, Antitrust Division, “An Antitrust Primer for Federal Law
Enforcement Personnel”, August 2003, revised April 2005, at http://www.justice.gov/atr/public/
guidelines/209114.htm accessed 4 August 2014.
107
Morissette v US (“Morissette”), 342 US 246, 250–51 (1952).
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belief in freedom of the human will and a consequent ability and duty of the normal
individual to choose between good and evil.
In Gypsum, the court stated that “we start with the familiar proposition that ‘the
existence of a mens rea is the rule of, rather than the exception to, the principles of
Anglo-American criminal jurisprudence’”.108
This chapter argues that, besides criminal liability, intent or purpose is also relevant
in antitrust civil actions, as demonstrated in the Apple case. In the US, specific intent is
required to establish antitrust liability for an attempt to monopolise under section 2 of
the Sherman Act. But the role of intent in other antitrust cases has been unsettled and
controversial.109 However, courts, commentators and practitioners have recognised that
intent evidence is relevant in predicting consequences and interpreting facts.110 The US
Supreme Court has also recognised the relevance of the antitrust defendant’s intent,
which can be inferred from its anticompetitive conduct or lack of a valid non-pretextual
justification.
Despite the Chicago School assumption that intent evidence is irrelevant, the US
federal antitrust agencies generally believe that intent evidence is relevant, especially in
relation to mergers.111 Likewise, in evaluating collaboration among competitors, US
federal antitrust agencies consider intent evidence may aid in evaluating market power,
the likelihood of anticompetitive harm and claimed pro-competitive justifications where
an agreement’s effects are otherwise ambiguous.112
There is also support for the role of intent evidence in relation to its probative value,
that is, anticompetitive intent or purpose is strong corroborative evidence that the
impugned conduct is anticompetitive.113 Further, as in the Apple case, anticompetitive
intent is relevant to the question of whether the challenged conduct is fairly character-
ised as exclusionary (unlawful) or pro-competitive (lawful).
This is not to say that the mens rea required to establish a criminal cartel offence is
the same as the concept of purpose under the civil per se prohibitions. A higher
standard of proof, beyond reasonable doubt, will apply. Criminal intent will therefore
be more difficult to prove than anticompetitive purpose. For example, the presumption
that a person intended the natural and probable consequences of his or her act would
not be allowed.114 In this regard, it appears that the criminal test for antitrust liability in
the US is less onerous.115 Further, in inferring intention from the relevant conduct and
surrounding circumstances, the jury must be satisfied that the evidence bears out no
108
United States v United States Gypsum Co, 438 US 422, 436 (1978).
109
Maurice Stucke, “Is Intent Relevant?” (2012) 8 Journal of Law, Economics and Policy
801. See also Lao, above n 94.
110
Ibid.
111
Stucke, see above n 110.
112
Ibid.
113
Ibid.
114
Beaton-Wells, see above n 101, 686.
115
See Gypsum, 438 US 422, 444 (1978), where the US Supreme Court indicated that action
undertaken with knowledge of its probable consequences and having the requisite anti-
competitive effects can be a sufficient ground for a finding of criminal liability under the
antitrust laws.
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other reasonable explanation. This construction is at odds with the Gypsum formulation
for criminal antitrust liability. Perhaps the formulation of the Australian criminal
provisions for cartel conduct reflects Parliament’s attempt to ensure that only conduct
that is sufficiently culpable, harmful and wrongful is caught. The prohibitions against
price-fixing have been the subject of numerous proceedings by the ACCC, and since
July 2009, may attract criminal sanctions. A number of these proceedings have resulted
in multi-million dollar penalties, which have been extensively and widely publicised.116
However, until there is a criminal prosecution for cartel conduct in Australia, there
remains considerable uncertainty as to how the fault elements of intention, knowledge
or belief will be judicially interpreted and applied.
116
See ACCC v Visy Industries Holdings Pty Ltd & Ors (No 3) (2007) 244 ALR 673. A
record penalty of AUD$36 million was ordered against Visy and its owner, Richard Pratt,
following findings by the Australian Federal Court that the company had engaged in illegal
price-fixing and market-sharing agreements with its rival, Amcor Ltd. In New Zealand, the
Commerce Commission took similar proceedings against Visy in relation to the trans-Tasman
market. On 8 April 2014, it was reported that Visy had been ordered by the High Court to pay a
penalty of NZ$3.6 million for breaching the cartel provisions: http://www.comcom.govt.nz/the-
commission/media-centre/media-releases/2014/commission-completes-long-running-trans-tasman-
cartel-case/ accessed 8 August 2014.
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12. Transparency and responsibility: recent

developments in the regulation of hedge funds in
the US and the EU
Thomas R. Hurst
Following the financial turmoil which swept through markets worldwide in 2007 and
2008 the role of hedge funds in contributing to this crisis has been widely debated. This
is due in part to the collapse in June 2007, of two hedge funds managed by Bear
Stearns.1 These funds, which were heavily invested in securities backed by sub-prime
mortgages, were forced to mark down the value of these mortgages due to increasing
defaults sparked by the decline in the housing market in the US and elsewhere. While
these hedge funds were liquidated without causing serious market disruptions, they
served to alert investors to the immense financial clout which they possessed and
played a part in the collapse of Bear Stearns in March 2008. Since that time, many
financial analysts have noted that hedge funds have played a major role in the
increasing volatility in the financial market which occurred throughout 2008 and may
have contributed to the “flash crash” of 6 May 2010 in which shares on US exchanges
dropped dramatically in a matter of minutes with some blue chip shares briefly trading
for mere pennies per share.2 Although the crash was ultimately determined to have
been caused mainly by rapid high frequency computerized trading, some commentators
initially blamed it on liquidation of the large holdings by hedge funds.3 Since hedge
funds historically have been shrouded in secrecy, due to the fact that they have not been
subject to the disclosure requirements of most regulated investment companies and
mutual funds, they have been made a convenient scapegoat for both the flash crash and
the earlier 2008–2009 bear market. Although hedge funds generally survived the
financial turmoil unscathed, their lack of transparency has led to increased calls for
additional regulation. This chapter will briefly trace the origin of hedge funds and their
role in the modern financial system. It will conclude with a discussion of recent
legislation increasing the accountability and transparency of hedge funds in the US and
the EU.
1
See generally “The Collapse of Bear Stearns: Five Years On,” Financial News 19 March
2013.
2
See “What Caused the Flash Crash? One Big Bad Trade,” The Economist Online
1 October 2010, http://www.economist.com/blogs/newsbook/2010/10/what_caused_fhash_crash.
3
Id.
144
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Developments in the regulation of hedge funds in the US and the EU 145
HEDGE FUNDS DEFINED

Hedge funds are one significant component of what has been termed the “shadow
banking system,” that is, financial institutions not subject to the extensive regulatory
and disclosure obligations of commercial banks, investment banks and insurance
companies. While not subject to a precise definition, most hedge funds share most of
the following characteristics:4 First, they are investment companies in which a number
of investors pool their capital to invest in various types of securities under the direction
of one or more managers. In this respect they are similar to regulated mutual funds or
investment trusts. Second, unlike mutual funds, they are subject to little or no
regulation by governmental regulatory bodies. Third, hedge funds may invest in a
greater variety of securities than is generally allowed for regulated mutual funds,
including options, warrants, commodities and various types of derivatives. Fourth,
hedge funds often lack the diversification required of regulated investment companies
and may concentrate their investment capital in one or a small number of types of
securities. Fifth, hedge funds may leverage their investments in an attempt to magnify
their returns, often borrowing an amount many times in excess of their equity capital.
Sixth, investors in hedge funds may be subject to strict withdrawal rights and may be
locked into their positions in the hedge fund for periods as long as one year. Seventh,
managers of hedge funds may receive generous incentive compensation contracts under
which they share in the returns of the fund.
HEDGE FUND STRATEGIES

Hedge funds may engage in a variety of strategies which are generally not authorized
for regulated investment companies.5 Among the most commonly used strategies are
the following:6
1. “Equity long-short” strategies in which one basket of stocks thought to have

superior capital appreciation potential is purchased while another basket of stocks
which are expected to under-perform the market averages is sold short.
2. “Managed futures strategies” in which a commodities trading advisor invests in a
managed pool of commodities futures or options.
3. “Global macro strategies” in which managers invest on both the long and short
side in various countries worldwide based on their assessment of the likely effect
on markets of governments’ monetary, fiscal and general economic policies.
4. “Merger arbitrage strategies” involving investments in companies subject to actual
or expected merger or take-over activities, seeking to capitalize in the spread
4
See Stuart A. McCrary, “Introduction to Hedge Funds,” in How to Create and Manage a
Hedge Fund: A Professional’s Guide (Hoboken, NJ: John Wiley & Sons 2002), pp. 1–18.
5
Sam Kirschner, Eldon C. Mayer and Lee Kessler, An Investor’s Guide to Hedge Funds
(Hoboken, NJ: John Wiley & Sons 2006).
6
Id.
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between market price and the anticipated merger or take-over price of the
company’s securities.
5. “Distressed securities strategies” in which managers purchase equity or debt
securities of companies subject to threatened bankruptcy or other difficulties
where the manager believes that the markets have over-reacted to the announced
problems so the securities are undervalued.
6. “Market neutral strategies” in which an equal dollar value of securities is
purchased and also sold short.
7. “Convertible arbitrage strategies” in which the manager attempts to capture a
perceived value discrepancy between convertible bonds and the underlying
common shares by purchasing the shares and selling the bonds short, or vice
versa.
8. “Fixed income arbitrage strategies” in which the manager attempts to capitalize
on small discrepancies in value between different fixed income securities by
selling one short and purchasing the other.
9. “Funds of hedge funds” involving managers who attempt to capitalize on the
expertise of the managers of various hedge funds while diversifying the risk by
investing in several different hedge funds employing different strategies.
DANGERS POSED BY HEDGE FUNDS TO INVESTORS

Despite their popularity, financial observers have expressed concern that hedge funds
may pose a danger, both to individual investors and to the financial markets. First, there
is a danger for individual investors of incurring substantial losses in a short period of
time, for which they are both financially and emotionally unprepared. Because hedge
funds frequently utilize a considerable degree of leverage, they tend to be riskier than
most conventional mutual funds.7 Because the name “hedge funds” may imply that they
are immune to general systemic market risks, investors may assume that they are
relatively stable and conservative investments. While some funds do utilize hedging
strategies, many funds employ risky unhedged strategies which are nothing more than a
speculation on the direction of a particular market. When these predictions go awry, as
occurred with Amaranth Advisors LLC in September 2006, large losses may result in a
short period of time. Furthermore, even with funds which are fully hedged, the
assumptions on which the hedges are based may prove to be mistaken so that the hedge
does not prevent losses. This was the case with the Long Term Capital Management
(LTCM) fund which collapsed when interest rates failed to behave according to
historical patterns. The rapid market decline in the fall of 2008 exposed the inability of
many hedge funds to successfully protect investors from overall market declines.
According to Morningstar, the average hedge fund declined by 7.9 percent in
September and 9.4 percent in October 2008, which is almost as much as the decline in
popular stock market averages. This evidence, along with a study by Asness, Krail and
7
See Alexander Ineichen, Absolute Returns: The Risks and Opportunities of Hedge Fund
Investing (Hoboken, NJ: John Wiley & Sons, 2002), pp. 441–4.
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Liew of AQR Capital Management, indicates that, contrary to their name, hedge funds
frequently are not successful in hedging against market volatility.8
Second, as the Bernard Madoff case illustrates, because hedge funds in most
countries are generally free from regulation, they may be particularly tempting targets
for fraudulent schemes.9
Third, since investment advisors may serve both regulated investment companies as
well as hedge funds, there is the potential for conflicts of interest to arise. The large
performance based fees typically paid to hedge fund managers coupled with the fact
that the manager may have a large equity stake in the fund provides an incentive for the
manager to favor the hedge fund over the regulated investment company. For example,
the manager may engage in short sales of a security for the hedge fund while
maintaining a long position in the same security for the registered investment company.
Fourth, the lack of transparency in valuation of hedge fund holdings poses risks to
investors. Registered investment companies are required to price securities at market
value, assuming a liquid market exists, or at fair value, if there is not. Hedge fund
managers are not subject to these restrictions and may take advantage of this to utilize
more speculative forward-looking measures of value. This is a particular problem for
hedge funds which invest in complex derivative instruments where there is no liquid
market and for which there are no generally accepted guidelines for valuation.
Fifth, the recent development of “funds of hedge funds” which invest in a variety of
different types of hedge funds have increased the availability of hedge funds to small
investors. While these funds of funds provide the benefit of diversification to low net
worth investors, they also have the potential detriment of attracting investments by less
experienced investors who may not adequately appreciate the risks involved in such
investments.
Sixth, although hedge funds are widely touted as being “market neutral” and able to
achieve above average returns over the entire market cycle, empirical evidence does not
support such claims. A recent study by Presidio Wealth Management of San Francisco
compared the performance of a diversified portfolio to the Hedge Fund Research Fund
of Funds Composite Index, which is the industry benchmark for hedge fund of funds.
For a six year period from 2000 to 2006 the diversified portfolio generated an average
annualized return of 6.2 percent while the hedge fund index gained only 5.2 percent.10
Furthermore, over an even longer period from 1990 when the Hedge Fund Index was
started, the diversified portfolio’s average annual return was 10.6 percent annually as
opposed to 10.1 percent annually for the hedge fund index.11 Even over shorter periods
of time, comparisons do not strongly favor hedge funds. An index of hedge funds
compiled by Hedge Fund Research gained 8.91 percent after fees in 2004 and 9.35
percent in 2005. In comparison, the Standard & Poors 500 Index was up 8.99 percent
8
Mark Hulbert, “No Place to Hide” (4 December 2008) at www.marketwatch.com/news/
story.lessons-learned-harvard-3.
9
Nick Kochan, “Hedge Fund Fraud: Hedge of Darkness” (1 July 2009) at http://
www.risk.net/operationalrisk-and-regulation/feature/1516866/-fund-fraud-hedge-darkness.
10
Chuck Jaffe, “Luxury Vehicle Average Ride, Despite All the Hype Hedge Funds Likely to
Disappoint” (11 June 2006) at www.Marketwach.com/news/story/June 11, 2006.
11
Id.
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in 2004 and 10 percent in 2005.12 Thus the potential downside risk posed by highly
leveraged hedge funds may not be justified by the insignificant rewards which, as a
group, they have achieved.
Seventh, because they are not subject to the disclosure requirements or registered
investment companies, hedge funds may be an attractive vehicle for use by organized
criminals or terrorists engaged in money laundering or insider trading. The US Treasury
has proposed regulations which would require hedge funds to establish anti-money
laundering programs.13 Also, in 2002 the Securities and Exchange Commission (SEC)
issued a report to Congress dealing with the use of hedge funds in money laundering.14
DANGERS OF HEDGE FUNDS: SYSTEMIC RISK

Perhaps a more troubling danger posed by hedge funds is systemic risk to the financial
system overall. Commentators have voiced concern that the degree of leverage utilized
by hedge funds together with their highly speculative trading activities raises the
possibility of a financial meltdown. Such an occurrence could result from a variety of
causes such as (1) sudden unexpected changes in interest rates, (2) a currency crisis
such as a major collapse of the US Dollar, (3) rapid changes in the prices of a major
commodity such as oil or natural gas, (4) a major terrorist event or (5) the sudden onset
of a significant economic recession or depression.
Fortunately, the secondary effects of hedge funds which have collapsed in recent
years have been minimal. The most notable incident to date which many analysts
thought posed a serious risk of financial meltdown was the collapse in 1998 of LTCM,
an US based hedge fund.15 LTCM had borrowed large amounts of money from several
major New York City banks and engaged in a complex interest rate arbitrage process
involving several different currencies. The strategy which was developed by two Nobel
prize winning economists was in theory perfectly hedged so that the possibility of
substantial losses seemed to be remote. However, when interest rates rapidly increased,
they did not follow the pattern predicted by the economists at LTCM, with the result
that the hedge fund lost hundreds of millions of dollars in a few days. When the full
extent of the leverage employed was disclosed, several major banks had exposure to
LTCM large enough to threaten their solvency if the fund defaulted on its loans. As a
result of negotiations organized by the Federal Reserve Bank of New York, several
large banks and brokers loaned LTCM sufficient funds to prevent an immediate default.
This permitted LTCM to liquidate its holdings on an orderly basis, thus avoiding a
financial meltdown. As a result, the crisis was resolved without any losses to major
financial institutions except for the investors in LTCM. However, the incident did
expose several weaknesses in the system and demonstrated that even the best financial
12
Barron’s National Business and Financial Weekly, 31 January 2005 at F3.
13
67 F.R. 60617 (26 September 2002).
14
“A Report to Congress in Accordance with Section 356c of the USA Patriot Act” (31
December 2002) available at www.sec.gov.
15
See About.com US Economy, “What Was the Long Term Capital Hedge Fund and LTCM
Crisis?” at http://useconomy.about/com/od/themarkets/f/LTCM.htm.
Barry Rider - 9781783475780

theorists are not able accurately to predict the extent of the risks which a particular
strategy poses to a fund when its underlying assumptions do not come to pass. Thus,
the LTCM debacle may have had the salutary effect of causing major lenders to hedge
funds to act more conservatively in subsequent transactions.
Another incident raising the possibility of systemic risk occurred from May through
August 1998. It involved a concerted attack on the Hong Kong Dollar market by
several hedge funds which caused interest rates to rise and eventually contributed to a
38 percent decline in share prices on the Hong Kong stock market during this time. To
end the crisis and stabilize the stock market, the Hong Kong government was forced to
purchase about $15 million in shares.16
In 2006, KBC Alternative Investment Management employed a complex convertible
bond arbitrage strategy which went awry. This resulted in a decline in the fund’s assets
from approximately $5 billion to less than $1 billion in less than a year. While its
investors suffered substantial losses, there were no adverse effects on the markets
overall.17
Another collapse occurred in September 2006, when a large US based hedge fund,
Amaranth Advisors LLC, incurred substantial losses because it failed to adequately
hedge against rapid declines in natural gas prices the previous month. An examination
of the Amaranth collapse provides cause for both optimism and concern. Amaranth
described its strategies as “Convertible arbitrage (buying a convertible bond and selling
short a percentage of the stock into which the bond is convertible); statistical arbitrage
(exploiting ‘anomalies’ in markets compared with historical trends); energy trading;
merger arbitrage, and stock trading.”18 Commodities trading is riskier than stock
trading because the margin requirements are lower than for exchange traded stocks.
The chief trader for Amaranth responsible for the large losses reportedly had over
100,000 positions in a single commodities contract. While US exchanges have limits on
the size of an individual trader’s position, they apply only during the last three days
prior to a contract’s expiration on the New York Mercantile Exchange.19 Amaranth’s
returns fluctuated widely during the first nine months of 2006. In late April Amaranth
reported returns for the year to date of 12 percent, primarily from energy trades, but it
lost 10 percent, also primarily on energy trades, during the sell-off in the markets
which occurred in May 2006.20 The chief trader for Amaranth engaged primarily in
buying and selling spread contracts on natural gas futures as well as purchasing
options, both of which, theoretically, should have been considerably less risky than
taking outright long or short positions. Unfortunately, the relationship between natural
gas contracts in various months did not follow the historical patterns on which
Amaranth based its strategy. When Amaranth’s trades began to lose money, instead of
liquidating the positions to limit losses, the firm “doubled down” on its positions
hoping for a return to historical patterns. Unfortunately, that did not occur in time to
rescue Amaranth. The large size of its positions coupled with rapid price changes
16
Wall St. J. 22 June 2006 at C5.
17
Id. at C1.
18
Wall St. J. 20 September 2006 at C1.
19
Id. at C2.
20
Id.
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caused Amaranth to lose close to $5 billion in the space of a single week, reducing its
net assets from over $9 billion to less than $4.5 billion.21
In retrospect it appears that Amaranth’s risk management strategy proved deficient as
it failed to correctly measure the potential downside risk of its strategies and also to
adequately set stops to prevent large losses from becoming catastrophic in size. At that
point, the solvency of Amaranth was questionable and the firm enlisted the assistance
of other institutions to assist it in conducting an orderly liquidation of its positions in
the markets. Profiting from lessons learned from the LTCM liquidation in 1998,
Amaranth’s creditor banks were prepared to extend credit and make arrangements for
the orderly liquidation of Amaranth’s losing positions thus preventing significant
market disruptions. J.P. Morgan Chase & Co. and the hedge fund Citidel Investment
Group, LLC were able to assume Amaranth’s investment portfolio in the space of a
mere 48 hours.22
The fact that private institutions were able to step in and promote an orderly
liquidation of the bulk of Amaranth’s portfolio provides encouraging evidence support-
ing those who argue against extensive government regulation of hedge funds. On the
other hand, the Amaranth case does provide disturbing evidence of how quickly large
losses can mount when a highly leveraged fund misjudges the market. Finally, the case
illustrates how extreme leverage can quickly magnify the impact of trading losses and
threaten a firm’s very solvency.
A study by Mercer Oliver Wyman postulates several reasons why recent hedge fund
liquidations have been more orderly than those in the past.23 First, most hedge funds
have made it more difficult or impossible for investors to withdraw money from the
funds on short notice. Thus, forced liquidations are less likely to occur. These
limitations were imposed by many hedge funds during the severe market decline in the
fall of 2008 and may have served to limit the volatility of markets to some extent. Also,
many hedge funds have arranged for back-up emergency lines of credit with brokerages
or other lenders, which have provisions that make it difficult for such lenders to back
out of these agreements. Nonetheless, because many funds appear to have made bets
similar to one another, there is concern that if there is a quick rush to the exits by all
funds the market could easily collapse due to an absence of buyers. Most risk
management models in the past have underestimated this type of risk. The failure of
“portfolio insurance” to protect investors from large losses in the Wall Street 1987
crash is evidence of this difficulty. Another concern lies with the use of so-called
structured products, a form of corporate debt security often purchased by hedge funds.
These products raise questions of valuation and liquidity which could cause liquidity
and solvency concerns in a rapid market decline such as occurred in late 2008.24
The lack of regulatory data regarding hedge funds makes it difficult to draw
conclusions concerning the effect of hedge funds on the financial markets. However,
commentators have speculated that the extreme volatility which financial markets
worldwide have experienced during the fall of 2008 was due, at least in part, to massive
21
Id.
22
Wall St. J. 5 October 2006 at C3.
23
Id. at C3.
24
Id.
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liquidations of securities by hedge funds. The high degree of leverage utilized by many
hedge funds magnifies their effects on the markets far beyond what one might expect
based on their equity capital. Also the rapid spread of computerized high frequency
trading may raise the dangers of a financial meltdown occurring seemingly out of thin
air. Fortunately, to date no major hedge funds have been forced into bankruptcy, but
given continuing market instability, one cannot predict with confidence that hedge fund
bankruptcies will not arise in the future.
RECENT REGULATORY DEVELOPMENTS: THE UNITED STATES

Although hedge funds generally do not appear to have been a major cause of the
2007–2008 crisis, nonetheless political pressures in the US and the EU have led to
significant new legislation introducing additional transparency into the operation of
hedge funds. In the US, this consists of the Dodd-Frank Act25 and the JOBS Act.26 The
Dodd-Frank Act requires most investment advisors to hedge funds with assets over
$100 million to register with the SEC, which results in public reporting of significant
information regarding their operations. Also, the Act requires the SEC to gather
confidential information from fund advisors to enable the SEC to evaluate the
risk-profile of the funds they manage. These changes may assist the SEC in evaluating
potential systemic risk. The JOBS Act ordered the SEC to lift the longstanding ban on
general solicitation of investors by funds making private securities offerings under Rule
506 of Regulation D which exempts such offerings from detailed registration require-
ments under the Securities Act of 11933. As a result hedge fund managers now have a
new freedom to speak openly with investors, and with the press at conferences, without
fear of violating the securities laws. Dodd-Frank also confers upon the Federal Reserve
and the Financial Stability Oversight Council (FSOC) the power to regulate “systemic-
ally important financial institutions, a term which may include larger hedge funds.”27
Due to the Dodd-Frank Act registration requirements an additional 1500 hedge fund
and other private investment advisors have registered with the SEC in addition to the
2500 who had previously registered on a voluntary basis.28 Thus, the SEC is in a much
better position to evaluate and communicate with all investment advisors than they
were in the pre-Dodd-Frank era. Thus, what has historically been an industry operating
outside of the public eye has suddenly come into the limelight, with the potential
benefit of overcoming what was formerly a shadowy reputation and enhancing investor
confidence in the industry. It also enables the SEC to better evaluate the risk-profiles of
both individual companies; and the industry in general, perhaps aiding regulators in
evaluating trends which may pose systemic risk to the financial system. Funds are now
25
Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. No. 111-203, 124
Stat. 1376 (2010) (hereinafter “Dodd-Frank”).
26
P.L. No. 112-106, 126 Stat. 306 (2012).
27
Dodd-Frank, Title I-Financial Stability, Sub. A, sec. 113.
28
Mary Jo White, “Hedge Funds – A New Era of Transparency and Openness” (18 October
2013) at http://www.sec.gov/News/Speech/Detail/Speech/1370539892574.
Barry Rider - 9781783475780

required to file with the SEC a new Form PF disclosing on a confidential basis the
holdings of each fund.
The adoption of these disclosure requirements was controversial. Hedge fund
managers argued that the registration and disclosure requirements would be overly
costly and burdensome. Also, the disclosure of sensitive proprietary information would
be unfair. However, to date the fears of the opponents of the Dodd-Frank disclosure
requirements seem to be unjustified. A recent academic study has found statistical
evidence that the registration requirements of Dodd-Frank have actually had a positive
effect on hedge fund performance, although this effect is most pronounced in the
months immediately following registration and tapers off after a few months.29
REGULATION OF HEDGE FUNDS: THE EUROPEAN

COMMISSION
The European Commission has also been active in adopting new regulatory require-
ments governing “Alternative Investment Funds,” a term which includes hedge funds.
The EU Alternative Investment Fund Managers Directive, which was adopted on 8
June 2011 and was required to be incorporated into the national laws of all EU member
states by 22 July 2013, introduces several requirements for managers of alternative
investment funds (AIFs).30 It applies to all EU-domiciled funds with assets under
management in excess of €100 million or, if there is no leverage and a lock-in period
exceeding five years, in excess of €500 million. Under the Directive EU domiciled AIF
managers (AIFMs) may be marketed on a cross border basis to all EU member states.
In addition to hedge funds, the EU Directive covers a multitude of pooled investment
vehicles including investment trust companies, retail funds, venture capital trusts and
pension fund pooling vehicles. The Financial Services Authority (FSA) of the UK
estimated that approximately 1000 firms based in the UK would be covered. Although
the new Directive is based in the EU, it will also apply to non-EU based AIFMs
seeking to manage and market both EU and non-EU based AIFs in EU member states.
A much debated provision of the AIFM Directive dealt with the degree to which
AIFMs can delegate performance of some of their functions; in particular, delegating
investment management functions, including portfolio management and risk manage-
ment, is severely restricted.31 All AIFs must establish a permanent risk management
function and adopt specific policies to identify, monitor and control all risks relating to
the AIFs investment strategy.32 Also, all AIFs, other than unleveraged closed end funds,
must adopt an appropriate liquidity management system and adopt procedures to
monitor the fund’s liquidity risk to ensure that the fund’s investments comply with all
underlying obligations.33 In addition funds must also either carry professional liability
29
Wulf A. Kaal, Barbara Luppi and Sandra Paterlini, “Did the Dodd-Frank Act Impact
Hedge Fund Performance?” (2014) papers.ssrn.com/sol3/papers.cfm?abstract_id=2389416.
30
Directive 2011/61/EU of 8 June 2011 (hereinafter the “AIFM Directive”).
31
AIFM Directive, Article 9(7).
32
Id. Articles 38–45.
33
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insurance or hold additional segregated owned funds to cover potential liabilities

arising from their investment activities.34 Finally, the AIFM regulation provides that the
AIFM has a duty to act in the best interests of each AIF which they manage, the
investors in these AIFs and the “integrity of the market.”35
A key provision of the AIFM Directive deals with leverage. Each AIFM is required
to set maximum leverage limits and contains detailed requirements for the calculation
of leverage.36 The Directive imposes special reporting requirements on AIFMs that
employ leverage on a “substantial basis.”37 It authorizes appropriate regulatory author-
ities to impose limits on leverage where necessary to lessen systemic risk in the
financial system and to reduce the risk of disorderly markets.38 Also, AIFMs will be
required to designate a single depository for each AIF which it manages.39 Depositories
have the responsibility to monitor AIF cash flows and will be liable for negligent or
intentional failure to perform its obligations, including loss of a financial instrument in
its custody.
The Directive introduces several safeguards designed to inform and protect investors,
including requirements designed to boost transparency to actual and potential investors
and regulatory institutions.40 Data must generally be provided to authorities on a
quarterly basis, a requirement significantly more stringent than that provided for US
AIFs under Dodd-Frank.
The Directive requires that EU member countries enter in to cooperation agreements
with non-EU member states which meet minimum requirements contained in the
Directive. In the event this does not occur, EU AIFMs will be prohibited from
marketing the non-EU AIFs under management within EU member states.41
Although AIFMs have objected to the costs imposed by the new regulations, it seems
unlikely that these objections will be sufficient to prevent adoption by the European
Parliament and member states. In the UK, the FSA (now the FCA) and HM Treasury
have supported the adoption of the Directive into the laws of the UK.42
IMPLEMENTATION OF AIFM DIRECTIVE IN THE UK

On 16 May 2013 Her Majesty’s Treasury published its implementing regulations
incorporating the AIFM Directive into UK law. Although the regulations are generally
faithful to the language of the Directive, it does incorporate some transitional
provisions, notably a proposal to permit existing AIFMs a one year transitional period
34
Id. Article 9(7).
35
36
Id. Article 4(1)(v), 15(4).
37
Id. Article 24(4).
38
Id. Article 25(3).
39
Id. Article 21.
40
Id. Articles 22–24; 103–111.
41
Id. Articles 34–37, 40, 42.
42
“FSA Implementation of Alternative Investment Fund Managers Directive: Part 1”
(November 2012), Consultation Paper CP12/32 at http://www.fsa.gov.uk/static/pubs/cp/cp12-
32.pdf.
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which gives covered firms until 22 July 2014 to get authorized and registered with the
Financial Conduct Authority (FCA) and to comply with relevant provisions of the
Directive. More specifically the regulations grandfather non-EU AIFMs which were
marked in the UK prior to 22 July 2013, allowing them to continue marketing under the
old rules until 22 July 2014 without making specific application to do so. Thus, UK
authorities appear to be supporting full implementation of the Directive, but the
flexibility shown by adopting a one year transitional period shows a willingness to
avoid disrupting existing businesses.
Aside from implementing the Directive, the FCA has increased scrutiny of the hedge
fund industry generally and of the activities of US based hedge funds in particular.43
The FCA is said to be particularly concerned that US based hedge fund executives
understand that they have a primary responsibility to the FCA and not their superiors in
the US.
CONCLUSION
To summarize, the 2008–2009 financial crisis led to increased political pressure for
increased regulation of hedge funds worldwide. These pressures reflected concerns that
increased regulation was needed, not only to protect individual investors but to ensure
the integrity of the financial system itself. Despite the lack of convincing evidence that
hedge funds themselves bore significant responsibility for the 2008–2009 financial
crisis, commentators have expressed concern that, in the future, failure of a large player
in the hedge fund industry could result in a financial crisis. These concerns have caused
both the EU and many of its individual members along with the US to act. In the US
this legislation consists primarily of the Dodd-Frank Act and in the EU in the Directive
of 8 June 2011.
Supporters of additional regulation of hedge funds argue that the case for regulation
of hedge funds is similar to that for government regulation of commercial and
investment banking. Just as banks which fail can damage the financial system and the
economy as a whole, hedge funds have the potential to have the same negative
externalities on the financial system and deserve to be regulated for that reason alone,
if for none other. The mere fact that the failure of funds such as Amaranth Investors,
LLC in 2006 or LTCM in 1998 did not cause major disruptions to the financial markets
should not be cause for complacency. Because many hedge funds are simultaneously
engaged in similar transactions, the potential exists for unanticipated market volatility
to cause multiple failures of many hedge funds. The use of a high degree of leverage by
many funds increases the magnitude of market disruptions when speculative plans are
upset by unanticipated market developments. While the costs imposed on the industry
are undeniably large, it is entirely possible that these regulations which take hedge
funds out of the shadows will generate increasing public confidence in this industry
which, in the long run, will benefit its growth and prosperity.
43
See Sam Jones, “UK Authority Extends Scrutiny of Hedge Funds” (19 June 2013) at
http://www.ft.com/intl/cms/s/0/485adba0-d8fl-11e2-84fa-00144feab7de.html.
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13. Corporate governance and responsibility

Chizu Nakajima
INTRODUCTION
The financial turmoil that began in 2007 and the ensuing financial crisis prompted calls
for remedial measures which, in turn, led to a spate of regulatory reforms on both sides
of the Atlantic. The world of corporate governance has not escaped political and media
scrutiny, and resulting consultation documents and interim and final reports with
various recommendations for change have been countless.
Nevertheless, one fundamental issue that has not been addressed in much depth in
the ongoing debate is shareholder primacy, which appears to have dominated the
thinking of both business leaders and academics for the last few decades.1 It has been
pointed out that ‘Throughout the 1980s and 1990s in the U.S. and U.K., the logic of
shareholder value maximization became the guiding principle, informing the top
management strategic decision making in listed firms as well as (and because of) the
way institutional shareholders evaluated their performance.’ Indeed, shareholder pri-
macy, shareholder value maximization and profit maximization have been used
synonymously and interchangeably in many discussions. And those pushing this cause
often refer to the article by Professor Milton Friedman, a Nobel laureate economist,
published in 1970, in which he famously states, ‘there is one and only one social
responsibility of business – to use its resources and engage in activities designed to
increase its profits’. However, what is often omitted is what follows in the same
sentence, which states: ‘so long as it stays within the rules of the game, which is to say,
engages in open and free competition without deception or fraud’.2 In other words,
Professor Friedman was not advocating the type of behaviour manifested in many
corporate collapses, such as Enron and Worldcom earlier this century, and bank failures
and ongoing revelations of unacceptable practice in the financial services sector.
Nevertheless, as has been observed by scholars, ‘the concept of shareholder primacy
and the concomitant insistence that the only real purpose of the corporation is to deliver
shareholder value has become an almost universal principle of corporate governance
and often goes unchallenged’,3 thus becoming a ‘rational myth’.4 A number of law
1
J. Lok, ‘Institutional Logics and Identity Projects’ (2010) 53 Academy of Management
Journal 1305–1335, at 1305.
2
M. Friedman, ‘The Social Responsibility of Business Is to Increase Its Profits’, The New
York Times Magazine, 13 September 1970.
3
T. Clarke, International Corporate Governance: A Comparative Approach (2007) Rout-
ledge, London, at 69.
4
On rational myth, see, for example, L.B. Edelman, C. Uggen and H.S. Erlanger, ‘The
Endogeneity of Legal Regulation: Grievance Procedures as Rational Myth’ (1999) 105 American
Journal of Sociology 406.
155
Barry Rider - 9781783475780
scholars have questioned this trend, pointing out that the company law of these
countries, where shareholder primacy is perceived to be dominant, does not require
directors to maximize shareholder value.5
Nevertheless, as has been observed,6 those who have entered the corporate govern-
ance debate in the last few decades, given the predominant message found in
mainstream academic commentary and discussions in the business media, would easily
have been led to believe that shareholders are the raison d’être of the company, and that
the board’s sole duty is to serve the interests of the company’s shareholders and the
best way to fulfil this is to maximize the value of the company’s shares. Some leading
corporate lawyers in the US have even gone as far as to claim that it is ‘the end of
history for corporate law’ by stating that a global consensus is converging on this
approach;7 that is, to make ‘corporate managers strongly accountable to shareholder
interests and, at least in direct terms, only to those interests’,8 in order to maximize
social welfare on the part of business enterprises.
DRIVERS OF CORPORATE GOVERNANCE DEBATE AND

UNINTENDED CONSEQUENCES
What has been the driver of the corporate governance debate in the last few decades?
Much of the policy, advocated by various inter-governmental organizations, emphasises
the importance of corporate governance on the basis that ‘quality corporate governance
5
See, for example, M. Blair and L. Stout, ‘Director Accountability and the Mediating Role
of the Corporate Board’ (2001) 79 Washington University Law Quarterly 403, in regard to the
US. In regard to the UK, see, for example, D. Collison, S. Cross, J. Ferguson, D. Power and L.
Stevenson, Shareholder Primacy in UK Corporate Law: The Exploration of the Rationale and
Evidence (2011) Council of the Association of Chartered Certified Accountants, London, and A.
Keay, ‘Moving towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value
and All That: Much Ado About Little?’, available at http://ssrn.com/abstract=1530990 (accessed
6 May 2012). In regard to Australia, for example, see M.A. Anderson, M. Jones, S. Marshall, R.
Mitchell and I. Ramsay, ‘Shareholder Primacy and Directors’ Duties: An Australian Perspective’
(2008) 8 Journal of Corporate Law Studies 161.
6
M. Blair and L. Stout, ibid., at 405.
7
Although the application of the institutional theory to corporate governance research has
moved some scholars away from pursuing a universal corporate governance model by enabling
them to identify various institutions that result in different corporate governance practices and
their outcomes, shareholder primacy remains central to their discussion. For discussion of
institutional approaches to corporate governance research, see, for example, I. Filatotchev and C.
Nakajima, ‘Internal and External Corporate Governance: An Interface between an Organization
and Its Environment’ (2010) 21 British Journal of Management 591 and I. Filatotchev, G.
Jackson and C. Nakajima, ‘Corporate Governance and National Institutions: A Review and
Emerging Research Agenda’ (2012) 30 Asia Pacific Journal of Management 965.
8
H. Hansmann and R. Kraakman, ‘The End of History for Corporate Law’ in J.N. Gordon
and M.J. Roe (eds). Convergence and Persistence in Corporate Governance (2004) Cambridge
University Press, Cambridge, at 42–43.
Barry Rider - 9781783475780

Corporate governance and responsibility 157
contributes to thriving financial markets’, which, in turn, ‘contribute to national

economic success’.9
Indeed, based on this logic, incentive mechanisms, such as executive share options,
have been introduced to align the interests of the management with those of the
company’s shareholders. They have, nevertheless, brought about a number of ‘un-
intended consequences’, such as short-termism on the part of management10 and more
egregious practices, including executive share option backdating.11
The post-mortem of the financial crisis and global economic downturn has pointed to
short-termism that permeates throughout the business sector,12 caused by business
decisions being made increasingly on the basis of short-term shareholder value
maximization.13 Indeed, in the ongoing debate as to whether bank lending or equity
markets is a better source of corporate finance, that predates the most recent financial
crisis, concern has been expressed that reliance on equity markets might fuel com-
panies’ short-term focus. It has, nevertheless, been dismissed on the basis that
‘empirical research generally bears out the importance of developed and free equity
markets’.14 Therefore, the majority of post-crisis measures that have been introduced
thus far appear to revolve around shareholder primacy. One such example of counter-
measures to short-termism is the UK Stewardship Code. While encouraging institu-
tional shareholders, who look after individuals’ wealth such as pension funds, to take a
longer term view on their investments is a welcome move, institutional investors
themselves have been judged on a shorter term basis in terms of their performance,15
and their ability to engage with the companies in which they invest is questioned.16
9
F.B. Cross and R.A. Prentice, Law and Corporate Finance (2007) Edward Elgar,
Cheltenham, UK and Northampton, MA, at 7.
10
See, for example, R.A. Posner, ‘Are American CEOs Overpaid, and, If So, What If
Anything Should Be Done About It?’ (2009) 58 Duke Law Journal 1013, at 1026–1027, pointing
out that share options have the effect of making executives focus on the short term.
11
See, for example, N. Bishara and C. Schipani, ‘Strengthening the Ties that Bind:
Preventing Corruption in the Executive Suite’ (2009) 88 Journal of Business Ethics 765.
12
See, for example, remarks by Sheila C. Bair, Chairman of the US Federal Deposit
Insurance Corporation to the National Press Club, Washington, DC, 24 June 2011, http://
www.fdic.gov/news/news/speeches/chairman/spjun2411.html (accessed 5 May 2012).
13
See D. Krehmeyer, M. Orsagh and K.N. Schacht, Breaking the Short-Term Cycle:
Discussion and Recommendations on How Corporate Leaders, Asset Managers, Investors, and
Analysts Can Refocus on Long-Term Value (2006), CFA Institute, quoting a survey, published in
J.R. Graham, C.R. Harvey and S. Rajgopal, ‘The Economic Implications of Corporate Financial
Reporting’ (2005) 40 Journal of Accounting and Economics 3, of more than 400 financial
executives, in which 80 per cent of the respondents indicated that they would decrease
discretionary spending on such areas as research and development, advertising, maintenance and
hiring in order to meet short-term earnings targets and more than 50 per cent stated they would
delay new projects, even if it meant sacrifices in value creation.
14
F.B. Cross and R.A. Prentice, supra n 9, at 5.
15
The Kay Review of the UK Equity Markets and Long Term Decision Making: Interim Report
(February 2012) BIS, UK: available at www.bis.gov.uk/kayreview (accessed 6 May 2012).
16
See C. Nakajima as quoted in M. Cauchi, ‘EU Banks, Insurers Brace for Contentious
Annual Meetings’ Wall Street Journal, 6 May 2012, available at http://www.wsj.com/articles/
SB10001424052702304451104577387891779994890 (accessed 14 June 2015).
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The counterbalancing voices against the singular focus on shareholder primacy have
often been dismissed as lacking in substance to be viable alternatives to the shareholder
primacy model.17 They may be further muted as a result of the continuing economic
woes in Japan and the deepening Eurozone crisis impacting negatively on the
economies of those countries that represent the Rhenish model of corporate govern-
ance, such as Germany, France, Italy and Spain, where more attention is given to the
interests of a wider group of stakeholders and more focus is on sales, market share,
headcount and long-term ownership.18
It has been argued that there is politically and economically motivated opposition to
moving away from shareholder centric corporate governance in the countries where
shareholder primacy prevails, due to the focus on the company as an economic entity,
the function of law as enhancer of trade freedom, the political policy to promote
competition and the market for corporate control facilitated by hostile takeovers.19 As
has been mentioned earlier, the support for shareholder primacy has been further
reinforced by law and economics literature, following the logic that good corporate
governance enhancing shareholder value will lead to thriving financial markets which
in turn will ensure economic growth,20 a view which has been very much endorsed, at
least in the past, by inter-governmental organizations, such as the World Bank.21
ONGOING REVIEWS
Post-financial crisis, there have been signs of ‘AGM revolt’ where shareholders voted
against executive remuneration that attracted much media attention. And the UK
government in the Queen’s Speech in May 2012 included a proposal for legislation to
make shareholders’ votes in regard to remuneration binding.22 Shareholders remain a
focus of attention in the current debate on corporate governance reform, and given not
only the media and political attention but the persistence of academic research focused
on shareholder wealth maximization, this trend is set to continue. In the current
economic climate, there appears to be no sign that the debate will shift its attention to
more fundamental questions, such as in whose interests should a company be run23 and
17
See, for example, H. Hansmann and R. Kraakman, supra n 8, at 36–42.
18
M. Blowfield and A. Murray, Corporate Responsibility: A Critical Introduction (2008)
Oxford University Press: Oxford, at 19.
19
A. Keay, supra n 5, at 52.
20
See, for example, F.B. Cross and R.A. Prentice, supra n 9, at 7.
21
See, for example, A. Demirguc-Kunt and V. Maksimovic, ‘Law, Finance and Firm
Growth’ (1998) 53 Journal of Finance 2107.
22
Department for Business and Innovation, Queen’s Speech 2012 (9 May 2012) available at
http://www.bis.gov.uk/news/topstories/2012/May/queens-speech-2012 (accessed 10 May 2012).
23
See, for example, C. Nakajima and W. Harry, ‘Is the Desire to Embed Corporate Social
Responsibility within Organizations at a Crossroads?’(2012) 42(3) International Studies of
Management and Organization 3.
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what is a company for?24 And notwithstanding the criticism of ‘audit capture’ or the
‘financialization’ of corporate governance, the dearth of literature addressing these
fundamental issues post-financial crisis, and the lack of proper soul searching in regard
to, for example, UK company law and governance, continue. Rare exceptions can be
found in a report, published by the Council of the Association of Chartered Certified
Accountants (ACCA) in 2011,25 in which it recommends ‘a re-examination of central
aspects of company law in the UK’, on the basis that the findings from the extensive
literature review and empirical work suggest that the question ‘in whose interests
should companies be run?’ was not seriously examined as part of the Company Law
Review (CLR).26 It argues that Maximising Shareholder Value (MSV)
as an established corporate objective, and the accompanying shareholder-value rhetoric have

arguably contributed to the recent financial crisis through the pursuit of a single objective at
the expense of long-term prosperity and wider social considerations. In particular, there is
evidence to suggest that Anglo-American countries have a ‘case to answer’ in regard to their
consistently poor measures of social well-being relative to those of other developed
economies that typically pursue a ‘stakeholder’, rather than a ‘shareholder’ model of
capitalism. This evidence was not considered as part of the CLR.27
The report raised a further four issues as meriting re-examination in the future review
of UK company law. First, the need for greater corporate accountability and for
reconsidering the introduction of the Operating and Financial Review. Second, a
recommendation made by the CLR, but not adopted by the government, for a standing
body keeping company law under review. The third and fourth issues were ‘linked to
potentially perverse consequences of maximising shareholder value’, namely the
regulations governing the market for corporate control in the UK, and the level of
directors’ remuneration.28
Another initiative in soul searching has been lead by the Institute of Chartered
Accountants for England and Wales (ICAEW), in the form of Dialogue in Corporate
Governance: New Challenges, which launched in April 2013 and comprises five
fundamental questions in regard to corporate governance in the UK,29 the first question
being, ‘What should companies be responsible for?’ The primary concern of the first
question, as the ICAEW states,
is the responsibilities of companies rather than the mutual responsibilities between com-
panies, boards and shareholders that are defined for example in the UK Companies Act 2006
and the UK Corporate Governance and Stewardship Codes. The range of companies
24
C. Handy, ‘What is a Company For?’ Michael Shanks Memorial Lecture (5 December
1990), available at http://www.growthinternational.com/resources/Charles+Handy+1990.pdf
(accessed 10 May 2012).
25
D. Collison, S. Cross, J. Ferguson, D. Power and L. Stevenson, supra n 5.
26
Ibid., at 6.
27
Ibid.
28
Ibid.
29
ICAEW, Dialogue in Corporate Governance: New Challenges, available at http://www.
icaew.com/~/media/Files/Technical/Corporate-governance/dialogue-in-corporate-governance/
icaew-tl-q1-web.pdf (accessed 31 May 2013).
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considered here is broader than is usual in corporate governance discussions which focus on
publicly listed companies.30
The question is reminiscent of the lecture on ‘What is a company for?’ given by

Professor Charles Handy in 1990, who stated that the systems required reform in such
a way as to allow each ‘corporate community’ to decide its own purpose.31 His lecture
also included the following prophetic statement which resonates with many post-
financial crisis comments:
My long-term worry is that property prevails over community. As the world shrinks and
companies aim for global reach, property will inexorably annex communities … the
Anglo-American system which, I have argued, works less well for everyone than the German
or Japanese models, may prevail, driving the whole world into a fever of short-term
speculation, forcing companies to become asset traders rather than wealth producers …
The ICAEW initiative may also immediately provoke the recital of Professor Milton
Friedman’s oft-quoted statement, which has been mentioned earlier.
The ICAEW paper identifies four fundamental responsibilities owed by companies,
namely achieving a business purpose; behaving in a socially acceptable way; meeting
legal and regulatory requirements; and stating how responsibilities are met. The
ICAEW, while accepting that compared to ‘a responsibility to serve shareholders
alone’, addressing multiple responsibilities ‘makes life too complicated’, the primary
reason for which the CLR decided against the pluralist approach and in favour of
shareholder primacy (albeit with the additional introduction of ‘enlightened shareholder
value’), asserts that ‘Life, whether for individuals or organisations, is complicated
because it involves accepting the need to balance different responsibilities.’
Indeed, the present author concurs with the ICAEW’s view and would ask why
simplicity should be a matter of priority. We live in a complex world of globalization
and interdependence. While there is outrage against spiralling executive pay, those who
think they deserve astronomical sums surely should, at least, be expected to justify their
enormous pay packages on the basis that they are an extremely rare breed of
extraordinarily gifted individuals, who can deal with complex issues and prioritize and
balance different interests that are both internal and external to the organizations which
they are charged to lead.
Furthermore, it is respectfully submitted that the current tendency to keep ‘corporate
governance’ and ‘corporate (social) responsibility’ as distinctly separate subjects to be
studied independently requires careful review.32 This may well suit advocates of agency
theory who wish to focus solely on the relationship between management and
shareholders, dismissing relationships with and interests of other stakeholders as
outside the remit of corporate governance and an unnecessary distraction to managerial
focus and therefore to their own research agenda. On the other hand, advocates of
Corporate Social Responsibility (CSR) or Corporate Responsibility (CR), particularly
those who see this area as purely voluntary, find it of crucial importance to keep
30
Ibid., at 3.
31
C. Handy, supra n 24.
32
For further discussion, see C. Nakajima and W. Harry, supra n 23.
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corporate governance debate outside their remit of discussion and consideration. While
a certain degree of categorization may be useful when it comes to academic course
delivery and therefore the sale of appropriately titled textbooks, it may serve as
unnecessary hindrance to ascertaining what companies (and their management) need to
be taking into consideration in running their businesses.
Looking at issues that company management now faces from the perspective of those
who are concerned with legal risks and their implications confronting contemporary
business, the debate in regard to whether shareholder primacy or stakeholder theory
should prevail in corporate governance, or whether C(S)R should remain in the realm
of voluntary action, seems a matter of relative insignificance nowadays. Indeed, even if
we confined our argument to the initial definition that ‘corporate governance is about
the system by which companies are directed and controlled’,33 which formed the basis
of the current UK Corporate Governance Code, it would be tolerably clear that such a
system could not be concerned solely with shareholder interests, let alone shareholder
value maximization. Furthermore, one only needs to look at the areas listed as those
covered by CSR standards, such as natural environment, labour, money laundering,
bribery and corruption, and human rights,34 to realize that these areas are highly
regulated and therefore no longer ‘voluntary’, particularly if the management does not
wish the company to engage in illegal activities, to be subject to regulatory sanctions.
PARADIGM SHIFT
Those who wish to continue to pursue CSR purely as voluntary often refer to the
pronouncement made by the European Commission in 2001 that CSR is ‘a concept
whereby companies integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on a voluntary basis’.35 This
is now superseded by the Commission’s new definition, which states it as ‘the
responsibility of enterprises for their impacts on society’.36 The Commission goes on to
emphasize,
Respect for applicable legislation, and for collective agreements between social partners, is a
prerequisite for meeting that responsibility. To fully meet their corporate social responsibility,
enterprises should have in place a process to integrate social, environmental, ethical, human
rights and consumer concerns into their business operations and core strategy in close
collaboration with their stakeholders …37
33
Committee on the Financial Aspects of Corporate Governance (Cadbury Committee),
Report of the Committee on the Financial Aspects of Corporate Governance (1992) London, at
15.
34
See generally, for example, M. Blowfield and A. Murray, Corporate Responsibility (2011,
2nd edn) Oxford University Press, Oxford.
35
European Commission, Green Paper COM (2001) 366, at 6.
36
European Commission, A renewed EU strategy 2011–14 for Corporate Social Respons-
ibility COM (2011) 681 final, at 6.
37
Ibid.
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This resonates with the observation made by a leading scholar in corporate governance,
stating that ‘Bridging the great divide between corporate governance and corporate
social and environmental responsibility is the next great challenge for business.’38 And
‘that only a fundamental redesign of corporate forms, objectives and value measures
can fully meet the realities of responsibility’.39
This brings us back to the aforementioned Professor Handy’s lecture in 1990, in
which he challenged the existing corporate forms, objective and performance metrics
and advocated an overhaul that allows companies to be run in a sustainable manner so
as not to ‘endanger our children’s future’.40
And, as for the ICAEW initiative, it also casts the net wider and distinguishes it from
‘conventional corporate governance thinking which tends to view companies in terms
of their responsibilities to shareholders and investors’.41 It supports its approach of
setting a broad range of corporate responsibilities on the basis that this would better
address various challenges to corporate behaviour and culture in recent years, such as
in regard to executive remuneration, short-termism, distrust of the listed company
model, aggressive tax avoidance, lack of diversity and legislative delays.42 The ICAEW
also anticipates challenges to their proposal on the basis that it will make life too
complicated (as mentioned above), companies will not be able to fill expectation gaps
created by irreconcilable responsibilities owed to different parties forcing them to make
difficult decisions, it deviates from the enlightened shareholder value enshrined under
the Companies Act 2006, and intermediaries focused on short-term financial gains will
value companies pursuing responsibilities at the expense of financial gains.43
Those concerns notwithstanding, the ICAEW asserts that taking on a broad range of
responsibilities will enable a company to remain ‘agile in adapting to the environments
where it does business and should be better at anticipating and even eliminating
potential expectation gaps’ and to benefit from ‘a solid foundation for building and
maintaining trust’.44 The present author fully supports this approach which challenges a
number of rational myths, discussed earlier, such as shareholder primacy.45
Another post-financial crisis initiative that is worthy of note is a report presenting a
case for the establishment of a Standing Commission on Responsible Capitalism,
addressing the crisis in trust between society, business and government. It has been led
by a group of individuals drawn from different professions, political and non-political,
industry groups and academy, concerned for the future of the current economic and
social systems. It is, therefore, not representing solely the interests of the investor
community and the professions which serve it. In so many debates of this nature, it has
been asserted that everyone relies on the good performance of capital markets for
financial stability, particularly given that almost everyone depends on their pensions
38
T. Clarke, supra n 3, at 267.
39
Ibid.
40
C. Handy, supra n 24, at 7.
41
ICAEW, supra n 29, at 5.
42
Ibid., at 4–5.
43
Ibid., at 5–6.
44
Ibid., at 6.
45
See also C. Nakajima, ‘Shareholder Primacy Revisited’ (2012) 33 The Company Lawyer
193.
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after retirement, and, therefore, discussion relating to corporate governance, for

example, should focus solely on measures to enhance the performance of capital
markets, returning to the aforementioned argument.46 One concern is that because of
the initiative’s broad remit, it may result in the definitional debate over ‘responsibility’,
particularly given the sectarian approach to the various relevant topics. It may also be
appropriate to highlight the need for certain distinctions to be drawn, in the discussion,
between responsibilities owed by individuals and organizations.
CORPORATE GOVERNANCE AND RESPONSIBILITY IN A

GLOBAL SETTING
International political moves to draw attention to business impact on the triple bottom
line47 have produced a plethora of international and regional agreements, which, in
turn, have encouraged governments to implement CSR through the introduction of
national legislation. The resulting laws and regulations, imposing increasing and
wide-ranging business obligations concerning environmental, social and governance
issues, have formalized what were once mainly voluntary corporate actions into legal
requirements.
This significant shift, although exploited by non-government organizations to put
pressure on misbehaving corporations, is not widely appreciated by corporate manage-
ment and academic researchers, as it continues to emphasize the voluntary nature of
CSR.48 Nevertheless, judicial recognition and acceptance of the importance of CSR as
a matter of public policy have been progressing just as fast as legislative developments
in this area. As a result, corporations’ voluntary initiatives in CSR can have significant
legal implications. For example, codes of conduct and compliance programmes can set
the standards of care that are legally expected of businesses.
Equally, when these CSR initiatives are publicized, the courts may hold them to be
binding on the corporation and, if what has been publicized is found to be untrue, the
corporation in question may incur liability for misrepresentation and false advertising.
It is argued that legislation influences the substance, implementation and communi-
cation of CSR and that the current normative CSR may constitute preformal law.49
Others recognize the role of law as ‘metaregulation’,50 which attempts to make
46
F.B. Cross and R.A. Prentice, supra n 9, at 7.
47
See J. Elkington, Cannibals with Forks: The Triple Bottom Line of the 21st Century
Business (1998) New Society, Stony Creek, CT.
48
T. Dyllick and K. Hockerts, ‘Beyond the Business Case for Corporate Sustainability’
(2002) 11(2) Business Strategy and the Environment 130–141 and R. Steurer, M.E. Langer A.
Konrad and A. Martinuzzi, ‘Corporations, Stakeholders and Sustainable Development: A
Theoretical Exploration of Business–Society Relations’ (2005) 61(3) Journal of Business Ethics
263–281.
49
K. Buhmann ‘Corporate Social Responsibility: What Role for Law? Some Aspects of Law
and CSR’ (2004) 6(2) Corporate Governance 188–202.
50
C. Parker, J. Braithwaite, C. Scott and N. Lacey, Regulating Law (2004) Oxford
University Press, Oxford.
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corporations ‘want to do what they should do’.51 These relatively recent developments
call for further theory building within the field of CSR by integrating previous strategy-
and governance-focused research with elements of institutional theory that are related
to policy, law and regulation. The legal foundations of CSR may create institutional
constraints on managerial discretion in this field and shift emphasis from strategic
choices to compliance elements. However, by legally internalizing CSR, management
may convert these institutional constraints to facilitators of corporate goals that are
aligned with the interests of a wider community of stakeholders and consideration for
environmental and longer term corporate interests. The pursuit of goals may previously
have been constrained by a narrower perspective on shareholder primacy.
Currently, differences between private commerce and government interests are
non-existent in certain countries. Therefore, ‘pretending that corporate governance will
somehow be good enough to protect the interest of developed world investors is, in
some cases, laughable’.52
What is important for twenty-first-century business is to respond to the global move
toward the control of misbehaving organizations by implementing ‘legally embedded’
CSR policy and practice.
In the past few decades, research on corporate governance has been dominated by
agency theory,53 the central premise of which has been that managers as agents of
shareholders as their principals can engage in self-serving behaviour that may be
detrimental to shareholders’ wealth maximization because of the difference in access to
firm specific information. It is, therefore, primarily concerned with efficiency outcomes
of various corporate governance mechanisms from the perspective of shareholders, who
invest resources and seek maximum return on their investment. Institutional theory has
contextualized the universalistic agency perspective by studying corporate governance
as a system of interdependent elements supported or undermined by various other
institutions,54 and some argue for a more holistic, institutionally embedded governance
framework to analyse organizational outcomes of various governance practices.55
Although the development of institutional perspective in corporate governance
research has complemented the more universalistic agency perspective by recognizing
the differences in national institutions from country to country that may affect
corporate governance outcomes, we should not be too quick to condemn countries that
lack national institutions that are complementary to efficient corporate governance
outcomes. Countries with national institutions that are complementary to efficient
51
P. Selznick, The Communitarian Persuasion (2002) Woodrow Wilson Center Press,
Washington, DC, at 102.
52
K.D. King, Losing Control (2011) Yale University Press, London, at 89.
53
See E.F. Fama, ‘Agency Problems and the Theory of the Firm’, (1980) 88(2) Journal of
Political Economy 288–307; E.F. Fama and M.C. Jensen, ‘Separation of Ownership and Control’
(1983) 26(2) Journal of Law and Economics 301–325; and M.C. Jensen and W.H. Meckling,
‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’ (1976) 3(4)
Journal of Financial Economics 305–360.
54
R.A. Aguilera, I. Filatotchev, H. Gospel and G. Jackson, ‘An Organizational Approach to
Comparative Corporate Governance: Costs, Contingencies, and Complementarities’ (2008) 19(3)
Organization Science 475–492.
55
I. Filatotchev and C. Nakajima, supra n 7.
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corporate governance outcomes may not be so forthcoming in joining forces with the
rest of the world. For example, in global environmental protection, for domestic
economic or political reasons, countries may well turn a blind eye to other countries
and corporations that are ‘misbehaving’, as it is not in their national interests to
criticize these ‘rogue’ countries and organizations. The institutional analysis of cor-
porate governance framework shows that legal institutions, at least in Europe and North
America, uphold shareholder primacy. At the same time, the international and regional
moves to push sustainability and CSR agendas to the fore have resulted in a plethora of
national laws and judicial decisions that encourage, and in many cases require,
corporations to act in the interests of a wider community of stakeholders and to
consider their longer term interests and the environmental and social impact of their
actions.56
Given the ongoing crisis in the Eurozone and political instability in many regions in
the world, dominance of shareholder value maximization in the mainstream corporate
governance debate is likely to remain ‘unquestioned’ for a while to come, but we have
to recognize that if it is unquestioned, it may be to the detriment of wider stakeholder
interests and at the peril of future corporate malfeasance, failures and crises.57 In the
meantime, some scholars are pushing for a more joined-up approach to corporate
governance and responsibility.58
56
See, for example, s 172, Companies Act 2006 of the UK.
57
For further discussion on corporate accountability and responsibility post-financial crisis,
see C. Nakajima and W. Harry, supra n 23.
58
See, for example, I. Filatotchev and C. Nakajima, ‘Corporate Governance, Responsible
Managerial Behavior, Corporate Social Responsibility: Organizational Efficiency versus Organ-
izational Legitimacy’ (2014) 28(3) Academy of Management Perspectives 289.
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14. Good corporate governance and corporate social

responsibility in Indonesian banking institutions:
a pathway to preventing financial crime
A. Suhartati Lukito
INTRODUCTION1
The significant growth of Indonesian financial institutions, both in banking and
non-banking establishments, requires effective supervision and monitoring from the
Indonesian government, as an external controlling body, in order to prevent financial
crime. However, given the amount of corporate crime in Indonesia, it appears this body
has shortfalls. Indonesia is one of the Asian Pacific’s most vibrant democracies, which
has maintained political stability and emerged as a confident middle-income country. It
had a population of 249.9 million people, GDP US$ 868.3 billion and GDP growth of
5.8 per cent in 2013. Based on the Indonesia Financial Services Authority report of
May 2014, 120 commercial banks and 1,635 rural banks in Indonesia handled total
assets of IDR 5,008,095 billion and IDR 79,159 billion respectively.2 With such a
wealth of public funds involved, it is clear why supervision and monitoring plays an
important part in creating good financial institutions.
As a result of illegal activities and financial crimes within corporations, internal
controls should be encouraged through Good Corporate Governance. Good Corporate
Governance and Corporate Social Responsibility should be developed to build business
ethics inside corporations. The Coordinating Minister for Economic Affairs of the
Republic of Indonesia in 2006 stated that Good Corporate Governance is an important
pillar of a market economy as it relates to the investors’ confidence both in the
companies and in the overall business environment. Implementation of Good Corporate
Governance encourages fair competition and a good business climate, leading to
sustainable economic growth and stability.3
The 1997–1998 Asian Financial Crisis was a turning point in realizing the necessity
for, and creating, corporate governance reforms in many parts of Asia, including
Indonesia. Countries affected by the financial crisis introduced multi-pronged initiatives
to strengthen their corporate governance regulatory and institutional frameworks. While
this was key in ensuring the success of these early efforts, which were mainly focused
on strengthening the existing regulatory infrastructure, institutions and enforcement, it
1
This chapter is based on a presentation that was delivered at the 32nd International
Symposium on Economic Crime, Jesus College, University of Cambridge, UK.
2
http://www.ojk.go.id/en/indonesia-banking-statistics-may-2014 (accessed 15 August 2014).
3
National Committee on Governance (2006), Indonesia’s Code of Good Corporate
Governance, www.ecgi.org/codes/documents/indonesia_cg_2006_en.pdf, pp. i (accessed 13
August 2014).
166
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Good corporate governance and corporate social responsibility 167
resulted in the continued expectation that the government and its institutions should be
primarily responsible for ensuring Good Corporate Governance. Indonesia has focused
on nurturing a culture of corporate governance through, among others things, promot-
ing shareholder activism, strengthening boards, emphasizing the role of gatekeepers
and agents of good repute, encouraging institutional shareholders to take a leadership
role and promoting independent and active financial journalism. The financial crisis
triggered an awareness for the need to practise Good Corporate Governance. Since
then, Good Corporate Governance has been continuously conducted by the regulator,
companies and the public. In the past ten years, the reforms have also emphasized that
financial establishments, such as banking and non-banking institutions, state-owned
enterprises and public companies, have a key role in economic development.
The Indonesian government has become more aware of the necessity for Good
Corporate Governance to be successfully implemented and the requirement for public
support and the existence of good public governance. Consequently, in November
2004, the government established the National Committee on Governance (NCG) by
Decree of the Coordinating Minister for Economic Affairs Number: KEP/49/M.EKON/
11/2004, consisting of a Public Sub-Committee and Corporate Sub-Committee. The
Decree on the establishment of the NCG replaces the Decree of the Coordinating
Minister for Economy, Finance and Industry Number: 10/M.EKUIN/08/1999 and the
Decree of the Coordinating Minister for Economy, Finance and Industry Number:
KEP/31/M.EKUIN/08/2000 regarding the establishment of the National Code for
Corporate Governance.
The principles of Good Corporate Governance conducted by corporations in Indone-
sia emerged alongside Corporate Social Responsibility. But there were several issues
with Good Corporate Governance. For example, it only applied to occasional activities
instead of long-term sustainable action. Corporate Social Responsibility in several
corporations in Indonesia was still based on charity and philanthropy. In fact the reality
was that corporations failed to understand what Corporate Social Responsibility was
attempting to achieve, instead viewing it only as a legal obligation.
Despite adopting the correct philosophy in Corporate Social Responsibility, com-
panies generally view Corporate Social Responsibility not as mandatory, but only as a
legal obligation as stipulated in Indonesian Law No.40/2007 concerning Limited
Liability Companies. Moreover, the purpose is to encourage companies to perform
corporate social and environmental responsibilities; company law mandates companies
whose businesses are related to natural resources to initiate programmes related to
Corporate Social Responsibility and report the programmes in the annual report. Efforts
to improve Corporate Social Responsibility practice also involve the public, including
Non-Governmental Organizations (NGOs) and the media. The difficulty is that
Corporate Social Responsibility is regarded as a waste of money and as shifting the
government’s obligation on to others. This chapter explores and analyses the regu-
lations on Good Corporate Governance and Corporate Social Responsibility in Indone-
sia and the important role both have in preventing financial crime.
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GOOD CORPORATE GOVERNANCE AND CORPORATE SOCIAL

RESPONSIBILITY IN INDONESIAN REGULATIONS
Law and regulation, as well as cultural considerations, play a big role in governing the
corporation.4 In Indonesia, there are several regulations that implement Good Corporate
Governance: (1) Indonesian Law No.7/1992 and Indonesian Law No.10/1998 concern-
ing Banking; (2) Indonesian Law No.19/2003 concerning State-Owned Enterprise;
(3) Indonesian Law No.25/2007 concerning Investment; (4) Indonesian Law No.40/
2007 concerning Limited Liability Companies; (5) Bank Indonesia Regulation No.8/4/
PBI/2006 and Bank Indonesia Regulation No.8/14/PBI/2006 and several Decision
Letters by the Minister of State-Owned Enterprise.
In particular, Article 2 Indonesian Banking Law No.7/1992 stipulates banks in
Indonesia shall conduct their business according to the principle of economic democ-
racy, applying the prudential principle. Moreover, Article 4 Indonesian Banking Law
No.7/1992 states that banks in Indonesia shall have the objective of supporting national
development for the purpose of improving equitable distribution, economic growth, and
dynamic sustainable growth and national stability, aimed at improving the people’s
welfare. These regulations should be the basic principles of banking institutions within
their business activities.
The Indonesian government enacted Indonesian Law No.40/2007 concerning Limited
Liability Companies. This law has explicitly enacted the corporation’s obligation under
Chapter V Article 74 sub section (1) which states that companies doing business in the
field of and/or in relation to natural resources must put into practice Environmental and
Social Responsibility.
According to Article 1 point 3 Indonesian Law No.40/2007, Environmental and
Social Responsibility could be defined as a company’s commitment to taking part in
sustainable economic development in order to improve quality of life and the
environment, which will be beneficial for the company itself, the local community and
society in general. But the path was not easy. Two approaches have driven the
implementation of Good Corporate Governance in Indonesia. One is an ethics-based
approach and the other is a regulatory-based approach. The regulatory-based approach
is driven by the government to force companies to comply with defined regulations.
The ethics-based approach, on the other hand, is predominantly driven by the conscious
decision that doing business is not just about the pursuit of short-term profits, but more
about sustainability and healthy long-term relationships with stakeholders.
It is easy to understand why international investors are increasingly keen on
companies meeting Good Corporate Governance requirements. Companies adhering to
corporate governance codes are viewed as less risky. They also conform to the demand
by an increasingly vociferous public for greater social responsibility on the part of
corporations. Still more needs to be done to achieve a proper balance. Greater
interaction and dialogue between government, business and public is needed to
encourage companies to implement Good Corporate Governance principles further.
4
Nordberg, Donald (2011), Corporate Governance-Principles and Issues, SAGE Publica-
tions, London, p. 25.
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Also, as clearly mentioned in Article 2 of Indonesian Law No.40/2007, companies

must have a purpose and objective and business activities which do not conflict with
the provisions of legislative regulations, public order and/or morality. In the context of
this regulation, therefore, business activities conducted by any legal entity should
consider the regulations, public order and morality. Business should not only be based
on profit, but also ethics. Ethics should be implemented in Good Corporate Governance
and Corporate Social Responsibility.
Principles of Good Corporate Governance as stipulated in Indonesian Law No.40/
2007 are transparency, accountability, responsibility, independence and fairness.
Specifically with banking institutions, the principles of Good Corporate Governance are
regulated under Bank Indonesia Regulation No.8/14/PBI/2006, as this regulation also
meets the Principles of the OECD Recommendations.
Furthermore, the NCG has been established. Good Corporate Governance, according
to the NCG policy, is about proper corporate management of companies, with its five
main pillars being transparency, accountability, responsibility, independence and fair-
ness. The NCG’s goal is to propagate the acceptance and application of Good
Corporate Governance principles nationwide and establish Indonesia’s reputation as a
country where high standards of corporate governance are firmly embedded throughout
the economy in public and corporate administrations. Corporate governance affects all
levels of society. Codes and principles have political, legal, economic and social
repercussions. The NCG conducts research into a wide variety of aspects of governance
and monitors application and dissemination through its control systems.
The Code of Good Corporate Governance states that Good Corporate Governance is
a living instrument offering standards as well as guidance for companies to implement
Good Corporate Governance with the purpose of:
1. Achieving sustainable growth of the company through a management system

based on the principles of transparency, accountability, responsibility, independ-
ence and fairness.
2. Empowering the function and independence of each company organ, namely, the
Board of Commissioners, the Board of Directors and the General Meeting of
Shareholders.
3. Encouraging shareholders, members of the Board of Commissioners and mem-
bers of the Board of Directors to take decisions and actions based on high moral
values and that are compliant with the law and regulations.
4. Stimulating company awareness of social responsibilities, in particular, the
environmental and societal interests of the communities in which a company
operates.
5. Optimizing the value of a company for its shareholders by also taking into
consideration the interests of other stakeholders.
6. Enhancing the competitiveness of a company, both nationally and internationally,
in order to enhance market confidence which may promote investment flow and a
sustainable national economic growth.5
5
National Committee on Governance, op.cit., p. 9.
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Publicly listed companies, state-owned enterprises, province- and region-owned com-

panies, companies that raise and manage public funds, companies of which products or
services are widely used by the public, and companies with extensive influence on the
environment are expected to become pioneers in implementing the Good Corporate
Governance Code. Regulators/policy makers are also expected to use the Good
Corporate Governance Code as a reference for developing related regulations and
applicable sanctions. A sound corporate governance system should provide effective
protection for shareholders and creditors, so that they can assure themselves of getting
a proper return on investment. It should therefore also help to create an environment
conducive to the efficient and sustainable growth of the corporate sector.
Good Corporate Governance is necessary to enhance the creation of an efficient and
transparent market that is consistent with the laws. Hence, the implementation of Good
Corporate Governance needs to be supported by three inter-related pillars, namely the
regulatory, supervisory and enforcement authorities as regulators/policy makers, the
business community as market participants and the public as users of products and
services of the business community. The basic principles that must be implemented by
each pillar are:
1. The regulatory, supervisory and enforcement authorities develop laws and regu-
lations that will promote the creation of a healthy, efficient and transparent
business climate, implement and maintain it, and support it with a consistent law
enforcement.
2. The business sectors as market participants implement Good Corporate Govern-
ance as the foundation in conducting business.
3. The public as users of the products and services of the business sectors and as the
party impacted by the existence of a company demonstrates its concern and
exercises an objective and responsible social control.
Several considerations on conducting Good Corporate Governance in banking insti-

tutions were explicitly drawn in Bank Indonesia Regulation No.8/14/PBI/2006: (1) an
improvement in the quality of Good Corporate Governance implementation is among
the efforts to strengthen the internal condition of national banks pursuant to the
Indonesian Banking Architecture (IBA); (2) the Board of Commissioners and Board of
Directors play a very important role in the implementation of Good Corporate
Governance; (3) checks and balances from independent parties with the concerned
Controlling Shareholders will enhance the implementation of Good Corporate Govern-
ance of the bank; (4) the dynamic factor in the implementation of Good Corporate
Governance should have a proportional response in order to optimally perform a Good
Corporate Governance of the bank.
Furthermore, Bank Indonesia Regulation No.8/14/PBI/2006 states that every bank
should have Good Corporate Governance within their corporate management through
the application of transparency, accountability, responsibility, independence and fair-
ness principles. Based on that regulation, it was explicitly enacted that Good Corporate
Governance is an important element in banking institutions. All banking activities
should reflect the Good Corporate Governance principles.
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PRINCIPLES OF GOOD CORPORATE GOVERNANCE

As mentioned earlier, the principles of Good Corporate Governance generally include
(1) transparency, (2) accountability, (3) responsibility, (4) independence and (5)
fairness. These principles are necessary to attain a company’s sustainability and, as a
result, will increase public trust. Every financial institution, both banking and non-
banking, must ensure that the principles of Good Corporate Governance are imple-
mented in all business activities.
The transparency principle has the main purpose of preserving and maintaining
objectivity in practising business. Banking institutions, as part of financial institutions,
must provide material and relevant information that is easily accessible and understand-
able by stakeholders. The banking institution must provide timely, appropriate, clear,
accurate and comparable information accessible to stakeholders that is commensurate
with their rights. Moreover, the transparency principle as aforementioned stipulates
banking institutions should incorporate the principle into its structure and mechanism at
compliance level.
The transparency principle adopted by a company does not lessen its obligation of
fulfilling provisions on confidentiality in accordance with laws and regulations,
occupational confidentiality and personal rights, as stipulated in Law No.5/1999 on
Prohibition on Unfair Business Competition. This regulation should be adhered to and
applies to the corporation’s business activities.
The second principle is accountability. This principle requires the banking institution
to be accountable for its performance, transparency and fairness. Thus, a company must
be managed in a proper and measured manner, so that it not only considers the interests
of the company, but also that of the shareholders and other stakeholders; especially
given that banking institutions manage public funds. Accountability is a prerequisite in
achieving sustainable performance. A banking institution must clearly define the job
description and responsibilities of each company organ and all employees that are in
line with the vision, mission, values and strategy of a company. Therefore, banking
institutions must ensure the existence of an effective internal control system within a
company. Furthermore, the banking institution must have performance indicators for all
members of the Board of Directors and the Board of Commissioners as well as the
employees that are consistent with the company’s objectives, and have a reward and
punishment system. In executing its duty and responsibility, each organ of a company
and all employees must uphold the business ethics and agree upon a code of conduct.
The third principle is responsibility. The banking institutions shall abide by laws and
regulations and fulfil their responsibility to the communities and environment for the
purpose of maintaining long-term sustainability of the business and to be recognized as
a good corporate citizen. The organs of a company must be prudent in decision making
and in their actions, and ensure compliance with laws and regulations, the company’s
articles of association and by-laws.Thus the banking institutions must fulfil their social
responsibility by having, inter alia, an awareness of the environmental and societal
interests of the communities in which the banks operate, through appropriate planning
and implementation to address the issues.
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The principle of independence is to accelerate the implementation of the Good

Corporate Governance principles; the banking institutions must be managed independ-
ently with an appropriate balance of power, in such a manner that no single company’s
organ shall dominate the other and that no intervention from another party shall exist.
Each company’s organ must avoid the occurrence of domination by any party, must not
be influenced by any particular interest, must be free from conflict of interests and any
influence or pressure, so that the decision making can be carried out objectively. Each
company’s organ must exercise its function and duty in accordance with the articles of
association and rules and regulations, not dominating each other and/or shifting the
responsibility from one to the other.
The principle of fairness stipulates that in conducting its activities, a banking
institution must always consider the interests of shareholders and other stakeholders
based on a fairness principle. A company must provide the opportunity for stakeholders
to give input and opinions in the interest of a company, and establish access to the
company’s information in accordance with the transparency principle and within the
scope of their respective capacities. The banking institutions must provide fair and
equitable treatment to stakeholders in accordance with benefit and contribution given to
the institution. The banking institutions must provide equal opportunities in recruitment
of employees, in career development and for employees to carry out their duty
professionally.
The improvement of quality in Good Corporate Governance implementation is
necessary due to the increasing complexity of risks and challenges faced by the
banking industry, both internally and externally. Internally, the Board of Commission-
ers and Board of Directors are expected to be able to act as role models and motivators
so that banks will implement optimally the principles of Good Corporate Governance.
The structure of the Board of Commissioners and Board of Directors consists of
independent parties as well as parties affiliated with the Bank Controlling Shareholders.
With the existence of both mentioned parties, it is expected that the enhancement of
checks and balances will eventually lead to implementing and optimizing Good
Corporate Governance in every banking institution. In supporting the implementation
of banks’ Good Corporate Governance, the bank shareholders will be able to appoint
representatives to become members of the Board of Commissioners or Board of
Directors to ensure the supervisory function of banks and bank business groups
performing non-banking activities.
Awareness of the OECD Principles of Corporate Governance is now high in the
region. In fact, all Asian economies are using the OECD Principles of Corporate
Governance and outputs of the Asian Roundtable as referenced in the development of
their regulations, corporate governance codes, listing rules, scorecards, as well as
academic works. Most importantly, Asian jurisdictions are committed to improving
corporate governance across the region. This commitment to excellence in corporate
governance matters not only to Asia. The growing economic influence of the region
and the important role played by China, India and Indonesia in the G-20 Summit, the
Financial Stability Board and the OECD Corporate Governance Committee give
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corporate governance developments in Asia global relevance.6 This will give strong
encouragement to implement Good Corporate Governance and Corporate Social
Responsibility in banking institutions.
FOSTERING GOOD CORPORATE GOVERNANCE AND

CORPORATE SOCIAL RESPONSIBILITY IN PREVENTING
FINANCIAL CRIME
Indonesia has formulated a long-term development plan, to take place from 2005 to
2025. It is segmented into five-year medium-term plans, each with different develop-
ment priorities. The current medium-term development plan covering 2009–2014 is the
second phase and focuses on: (1) promoting quality of human resources; (2) develop-
ment of science and technology; and (3) strengthening economic competitiveness.
Good Corporate Governance and Corporate Social Responsibility will encourage good
business ethics and economic competitiveness. Through Good Corporate Governance
there will be a shifting paradigm from mainly profit oriented to corporate concern or
good corporate conduct. Therefore Good Corporate Governance and Corporate Social
Responsibility should be maintained and conducted in sustainability actions. Good
Corporate Governance and Corporate Social Responsibility will develop business ethics
and bring economic development to the local community. Corporate Social Respons-
ibility is a business commitment to society and the nation. This pathway should be built
within the corporations with the following basic considerations: (1) Corporate Social
Responsibility as an effort of harmonizing corporations with the environment; (2)
improved business performance and improved economic performance as a medium-
term and long-term achievement; (3) countries and companies with Good Corporate
Governance will have better access to international capital than those without Good
Corporate Governance and recognizing the increasing importance of corporate govern-
ance, government and business associations in many countries, both industrialized and
developing, have started to develop or improve national systems of corporate govern-
ance; (4) the development of corporate governance is an important part of the economic
reforms that are essential in overcoming the economic crisis.
The financial crisis of 2008 had a devastating impact on the economy of many
countries. Numerous financial crimes that followed in the areas of corruption, money
laundering, banking and financial fraud, tax evasion and the financing of terrorism
added to the negative impact of economic instability. Financial crime did not only
create disorder in various institutions but also became a national and global threat.
Therefore reducing financial crime is a key priority for regulators, authorities and
governments globally, particularly in Indonesia. Organized crime groups, terrorists and
fraudsters are using increasingly sophisticated international networks and financial
systems to move or store funds and assets or commit fraud. Financial institutions are
particularly vulnerable due to the nature of their businesses and the volume of
6
OECD (2011), Reform Priorities in Asia Taking Corporate Governance to a Higher Level,
http://www.oecd.org/daf/ca/49801431.pdf, p. 9 (accessed 4 May 2014).
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transactions and client relationships they manage. Furthermore, the fact that these
crimes were carried out by international perpetrators emphasized the importance of
international co-operation in combating crime. Good Corporate Governance and
Corporate Social Responsibility could be a pathway to preventing, or at least reducing,
financial crime.
The primary aim of corporations has been to make profits, and perhaps for this
reason corporations have not carefully examined their values. This mindset must be
changed through business ethics and Good Corporate Governance to improve the
integrity of corporations and encourage strong commitment, in the best economic
interests of the nation. Furthermore, in banking institutions, it could be used as a
non-penal policy and crime prevention strategy,7 especially taking into consideration
that commercial banks are the largest, the most diverse, and the most important
financial intermediary in the economy.8 Good Corporate Governance and Corporate
Social Responsibility is also very important in the globalization era. Louise Shelley, as
quoted by Dawn L. Rothe and David O. Friedrichs, asserts that globalization has
increased the opportunities for criminals, and criminals have been among the major
beneficiaries of globalization.9 Therefore Good Corporate Governance and Corporate
Social Responsibility have an important role within corporate activities to prevent
financial crime. Moreover, Good Corporate Governance and Corporate Social Respons-
ibility within corporate activities have a great impact in the prevention of financial
crime, such as corruption and state capture. In this form of corruption, the private
sector ‘captures’ the state legislative, executive and judicial apparatus for its own
purposes.10
Benn and Dunphy, and others, as quoted by Donald Nordberg, mention that there is
another range of issues that has increasingly come to be seen as forming a new agenda
in corporate governance: how corporations relate to their broader society. Whether we
call it Corporate Social Responsibility, sustainability, ethics or just corporate respons-
ibility without the ‘social’, this stream of thinking involves a consideration of how
boards and the top management teams they employ relate to their employees, suppliers,
customers, and even their competitors and those who might seek to compete against
them.11 It seeks also to take into account how the corporation relates to the community
in which it operates, the people who live near the factories and office buildings the
corporation operates, local goverments, and even national governments and supra-
national organizations. In addition, it seeks to examine how and even whether
corporations have a responsibility to NGOs, even those that are not particularly part of
a local community in which the global corporation happens to work. It seeks to identify
the role of the corporation and its board in preserving the environment in which we all
7
Arief, Barda Nawawi (2010), Bunga Rampai Kebijakan Hukum Pidana – Perkembangan
Penyusunan Konsep KUHP Baru, Kencana, Jakarta, p. 21.
8
Kidwell, David S. and Richard L. Peterson (1990), Financial Institutions, Markets, and
Money, fourth edition, The Dryden Press, p. 42.
9
Rothe, Dawn L. and David O. Friedrichs (2015), Crimes of Globalization, New Directions
in Critical Criminology, Routledge, London, pp. 28–29.
10
Brooks, Graham et. al. (2013), Preventing Corruption Investigation, Enforcement and
Governance, Palgrave Macmillan, Basingstoke, UK, p. 123.
11
Nordberg, Donald, op. cit., p. 6.
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live, a larger and more prominent part of the agenda as the consensus of scientific
opinion has built around the impact of global warming and the role corporations play in
it.12
Those are the functions of Corporate Social Responsibility. But the strengths of
Corporate Social Responsibility will not work properly because there remain some
weaknesses in its implementation: (1) the lack of organizational culture to support
Corporate Social Responsibility; (2) Corporate Social Responsibility only being seen as
a company’s charity; (3) Corporate Social Responsibility used only to conceal the
illegal behaviour of financial institutions; (4) Corporate Social Responsibility not
purely conducted by corporate conscience or an ethics-based approach but rather as just
a legal obligation; (5) corporations applying Corporate Social Responsibility only for
the short term and not in a long-term and sustainability programme. These weaknesses
could reduce the public and investor trust in business activities, particularly in banking
institutions as an agent of trust. Indonesian and international investors are eager to
invest in Indonesia, and approvals in investments show a significant growth in number.
Government institutions which have an interest in handling investment activities
probably would like to reform and improve public services.
Currently,the point of focus of efforts in the enforcement of good governance is on
the corporate sector. Viewing this holistically, the corporate sector does not stand alone
because it is certainly linked to the public sector, starting with the government as
regulator and as shareholder in state enterprises, as well as other elements such as
legislators, prosecutors and investigators along with court proceedings and so forth. It is
futile attempting to enforce Good Corporate Governance solely in the corporate sector
without applying the same rules to the public sector, including taxes, regional
government, customs and excise, permit regulators and so forth.
The key to implementation of Good Corporate Governance and Corporate Social
Responsibility in banking institutions is based on:
1. the strong commitment and support from all the parties such as the regulator/
supervisory bodies, the corporation and society in encouraging Good Corporate
Governance and Corporate Social Responsibility in all business activities;
2. the strong commitment of the company’s organs such as the Board of Directors,
Board of Commissioners, General Meeting of Shareholders and all the employees
in conducting Good Corporate Governance in a consistent, systematic manner in
sustainability programmes;
3. the compliance of corporations with all the existing government regulations as
well as fostering business ethics among others;
4. the implementation of Good Corporate Governance as a basic philosophy of
corporate culture;
5. a good reward system for corporations implementing Good Corporate Govern-
ance and Corporate Social Responsibility. In contrast, an effective punishment
system should be applied for those who act inappropriately.
12
Ibid.
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The government plays an important supporting role by issuing and enforcing adequate
regulation on, for instance, company registration, disclosure of financial company data
and rules on the responsibilities of commissioners and directors. The company,
however, has the prime responsibility for implementing a system of Good Corporate
Governance. The company should recognize the importance that Good Corporate
Governance is in the interests of its shareholders, its financiers and its employees and,
therefore, the company itself. Companies should anticipate stronger enforcement of
existing laws and regulations, the introduction of new regulations and increasingly
strong public scrutiny over their actions.
The Indonesian government has demonstrated efforts to improve Good Corporate
Governance as well as Corporate Social Responsibility in every aspect of the business
sector, particularly within banking institutions. The NCG is recommending, initiating
and monitoring improvements in corporate governance in Indonesia. It has indicated
ten key areas in which reforms are necessary, and it has drawn up a Model Code of
Corporate Governance that companies can use in implementing this. In addition, an
initiative from private sectors through several business and professional associations
has formed the Forum for Corporate Governance in Indonesia.
By implementing Good Corporate Governance and Corporate Social Responsibility
principles, as stipulated in several Indonesian regulations, the NCG seeks to protect the
integrity and stability of financial and business institutions. The reality, however, is that
the participation of financial institutions in Indonesia is limited and requires fostering,
commensurate with the important role of banking institutions. Banking could have been
chosen as a sector of equal or greater importance, which has played a leading part in
recent developments, and even the inclusion of both would leave out a number of other
interesting and important areas.13 Felix Lessambo states that a bank cannot properly
monitor its operational, counterparty, liquidity and credit risks without an adequate and
efficient corporate governance mechanism.14 Moreover, Lessambo clearly stated that
corporate governance for banking organizations is of great importance to the inter-
national financial system.15
Lack of Good Corporate Governance and Corporate Social Responsibility will drive
corporations into performing illegal acts such as corruption. Geoff Dean explained that
corruption is a strategy that ‘buys’ people like government officials and is more useful
than capital in some circumstances because it provides influence and leverage that
money may not be able to buy.16
The principles of Good Corporate Governance and Corporate Social Responsibility
should be implemented in every aspect of the organization, from the directors and
commissioners to the employees of financial institutions. Initiatives to promote a
culture of Good Corporate Governance, where boards and shareholders expand their
13
Clarke, Michael (1990), Business Crime, Its Nature and Control, St. Martin’s Press, New
York, p. 149.
14
Lessambo, Felix (2013), The International Banking System, Capital Adequacy, Core
Businesses and Risk Management, Palgrave Macmillan, Basingstoke, UK, p. 222
15
Ibid., p. 224
16
Dean, Geoff et. al.(2010), Organized Crime: Policing Illegal Business Entrepreneurialism,
Oxford University Press, New York, p. 9.
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focus beyond business outcomes and ensure that businesses are conducted in a manner
which promotes sustainability, are important elements in preventing financial crime in
banking institutions. Corporate governance involves decision making, accountability
and monitoring.17 Building Good Corporate Governance and Corporate Social
Responsibility is also the key to avoiding any criminal activities which could cause
corporate criminal responsibility and criminalization. Furthermore, it should also be
considered that Good Corporate Governance and Corporate Social Responsibility is a
pathway to preventing financial crime. Encouraging Good Corporate Governance and
Corporate Social Responsibility in every aspect of the business sector, particularly in
banking institutions, is also a way to achieve the strengthening of economic competi-
tiveness.
CONCLUSION
Good Corporate Governance and Corporate Social Responsibility should be developed
to build business ethics inside corporations. Good Corporate Governance is an
important pillar of market economy as it relates to the investors’ confidence both in the
companies and in the overall business environment. Implementation of Good Corporate
Governance encourages fair competition and a good business climate leading to
sustainable economic growth and stability.
According to Indonesian regulations, companies must have a purpose and objective;
business activities should not conflict with the provisions of legislative regulations,
public order and/or morality. In this context, business activities conducted by any legal
entity should consider the regulations, public order and morality. The purpose of doing
business should not be for profit alone, but should also have ethics in mind.
Principles of Good Corporate Governance should be adhered to when the company’s
activities are involved. These include transparency, accountability, responsibility, inde-
pendence and fairness. Concerning the principles of Good Corporate Governance as
mentioned before, Corporate Social Responsibility should be reflected in corporate
activities as should implementing the five principles. So Corporate Social Responsibil-
ity should be conducted in every financial institution.
These principles are necessary to maintain a company’s sustainability and will, in
turn, increase public trust. Every financial institution, both banking and non-banking,
must ensure that the principles of Good Corporate Governance are applied to all
business activities. Considering that Good Corporate Governance and Corporate Social
Responsibility principles seek to protect the integrity and stability of financial and
business institutions, as well as prevent financial crime, the involvement of financial
institutions in Indonesia (which is quite low) should be fostered. Encouraging Good
Corporate Governance and Corporate Social Responsibility in every aspect of
the business sector, particularly in banking institutions, will strengthen economic
competitiveness.
17
Pallissery, Fincy (2012), ‘True and Fair Financial Reporting: A Tool for Better Corporate
Governance’, Journal of Financial Crime, Volume 19 Number 4, p. 336.
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15. Fiduciary duty of loyalty

Cindy A. Schipani*
In the United States (U.S.), directors of public corporations, pursuant to state law,
possess wide latitude when making business decisions.1 The business judgment rule, a
state common law doctrine, protects directors from liability for poor business decisions
provided the directors acted in good faith in an attempt to act in the best interest of the
corporation, without conflicts of interest.2 A claim, however, involving a conflict of
interest or other breach of the duty of loyalty, is afforded no such protection.3 The duty
of loyalty requires that “the best interest of the corporation and its shareholders takes
precedence over any interest possessed by a director … and not shared by the
stockholders generally.”4 Similarly, courts in the United Kingdom (U.K.) describe the
duty of loyalty as a “duty to act in what [the director] in good faith considers to be
the best interests of his company.”5 The U.K. recently codified much of its common
law rules on the duty of loyalty in its 2006 Companies Act.6
This chapter traces the duty of loyalty in the U.S. and in the U.K. from Roman times
to today. As demonstrated below, although the duty has evolved, the obligations derived
from the law of trusts are still important today.
* The author wishes to gratefully acknowledge the research assistance of Jeff Koelzer, J.D.
and Abby Barkwell, J.D., University of Michigan Law School.
1
FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 1036 (2014).
2
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
3
Directors’ broad decision-making power comes from the business judgment rule. The
business judgment rule presumes that directors act on an informed basis and in the best interests
of the company, therefore courts should second-guess directors’ decisions in only the most
extreme circumstances. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). “The directors’ room
rather than the courtroom is the appropriate forum for thrashing out purely business questions
which will have an impact on profits, market prices, competitive situations, or tax advantages.”
Kamin v. American Express Co., 383 N.Y.S.2d 807, 810–811 (N.Y. 1976). Courts will rebut the
presumption of the business judgment rule, and review the actions of directors, if directors
violate one of the triad of fiduciary duties: good faith, loyalty, or due care. See Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
4
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
5
Item Software Ltd. v. Fassihi, 2 B.C.L.C. 91 (2005).
6
See Companies Act, 2006, c. 2, §§ 175–177 (U.K.).
178
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Fiduciary duty of loyalty 179
I. HISTORICAL UNDERPINNINGS OF THE LAW OF TRUSTS
A. Ancient Roman Inheritance Law
Roman inheritance law gives our first example of an institution resembling a trust: the
fideicommissio. In Ancient Rome, certain classes of people were not legally permitted
to inherit land, such as unmarried adults, foreigners, and criminals.7 In order to pass a
legacy on to an incapacitated beneficiary, a testator would give the estate to a legal
beneficiary who then had a moral obligation to pass the estate on to the desired
incapacitated beneficiary.8 Because the legal beneficiary’s obligation to deliver the
estate to the desired beneficiary was not a legal one but a moral one, there was
necessarily a strong trust relation between the testator and his chosen legal beneficiary.
Later, the Roman fideicommissio was adopted by the Church as a means of
accommodating certain Christians, who, for one reason or another at various times,
were prohibited from owning property.9 By using the fideicommissio, which later
became the utilitas ecclesia, and then the use, those whose dedication to God precluded
property ownership were able to use property, nonetheless.10 Moreover, the Roman idea
of trust fit well with the Christian concept of Christ being the owner and beneficiary of
all property.11 Ecclesiastical courts and later courts of equity began to enforce the use
during the Middle Ages.12
In the 16th century, the use became a popular means of avoiding taxes. At the time,
the vast majority of property tax was collected upon inheritance. In order to avoid these
inheritance incidents, landowners would grant legal title to their land to several straw
people, who would simultaneously grant the original owner a use in the land. This way,
when one straw person died, there were no inheritance incidents; the original owner
7
Mary Szto, Limited Liability Company Morality: Fiduciary Duties in Historical Context,
23 Q.L.R. 61, 89 (2004) (Citing BARRY NICHOLAS, AN INTRODUCTION TO ROMAN LAW 267–268
(Oxford, Clarendon Press, 1962); DAVID JOHNSTON, ROMAN LAW IN CONTEXT 48 (Cambridge,
Cambridge University Press, 1999); A. BRIDE, FIDEICOMMISSIO, CATHOLICISME, IV: 1259)
(“Examples of persons who, as a matter of law, lacked capacity to receive legacies or
inheritances were unmarried adults, foreigners, criminals, and others barred by statute”).
8
Id. (“The fideicommissio, or trust, allowed Roman testators to devise their legacies to a
beneficiary who was incapacitated to receive a testament. … This beneficiary then had a moral
obligation to pass the legacy onto the incapacitated beneficiary”).
9
Id. at 90 (“From time to time Christian persons or entities were not allowed to own
property. The church used fidei commissa and the use to accommodate these situations”).
10
Id. at 92–93 (“During the Middle Ages, the Church developed the doctrine of utilitas
ecclesiae, a forebear of the use, which granted clerics stewardship, but not ownership of church
assets. … Thus utilitas ecclesiae, a canonical device, laid the groundwork for the use, the
immediate forebear of the trust, and ancestor of agency, partnership, and corporate law”).
11
Id. at 91 (“Roman legal forms were readily adapted by clerics to address several
theological concepts. These included the ownership of Christ of all property; the beneficiaries of
property as Christ, and his past, present, and future followers; and the relationship of transient
earthly goods to the eternal realm”).
12
Id. at 95 (citing R. M. HELMHOLZ, CANON LAW AND THE LAW OF ENGLAND 342 (1987))
(“There is evidence that ecclesiastical courts enforced uses before the Courts of Chancery did”).
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could simply continue adding straw people to replace those who died, the taxes never
became due, and he could keep extending the use to himself and his heirs.13
Henry VIII wanted to put an end to uses because they were costing him significant
tax revenue, so he convinced Parliament to pass the Statute of Uses in 1536.14 Under
the act, full title to land held in use was automatically given to the person who was
benefiting from the use, the “cestui que use.”15 In response, landowners started using
trusts instead of uses to achieve the same tax-evading ends. This led to further
development of the trust as an institution.16
B. Evolution of Trusts
Trusts originally developed in England during the crusades. A crusader would leave his
land to a trustee while he was away, and when the crusader returned, the trustee would
return the land. Originally, just like the incapacitated beneficiaries of Ancient Rome,
the crusader had no legal right to the return of the land. The trustee had only a moral
obligation to deliver the property, and thus by necessity the crusader had to be able to
trust his trustee. As with the use, courts eventually began to consistently enforce the
crusader’s right to have his land returned.17
After the passage of the Statute of Uses, the trust became more widely used because
it became the best way to avoid inheritance taxes. In order for a property ownership
arrangement to be classified as a trust instead of a use for purposes of skirting the
Statute of Uses, the party entrusted with the land was required to have some active
duties in connection with the management of the property. Thus, those who held
property for the benefit of others were now required by law to fulfill duties in favor of
the settlor.18
In the English case of Keech v. Sandford,19 the court laid down a strict duty of
loyalty owed by the trustee to his settlor. An infant had inherited a lease on some
property, which was then held for the infant in trust. The lessor would not allow the
infant to renew the lease, so the trustee did not renew the lease for the infant and
instead took a lease on the property for himself. The infant’s representatives then
13
See 9 WEST’S ENCYCLOPEDIA OF AMERICAN LAW, 333–335 (Shirelle Phelps & Jeffrey
Lehman, eds, 2nd ed., Detroit, Michigan, Thomas/Gale, 2005) (describing how the use was used
for tax evasion in 16th century England).
14
See W. S. Holdsworth, Political Causes which Shaped the Statute of Uses, 26 HARV. L.
REV. 108, 108 (1912–1913) (discussing the origins of the Statute of Uses).
15
See WEST’S ENCYCLOPEDIA OF AMERICAN LAW, supra note 13, at 334 (describing the
operation of the Statute of Uses).
16
See E. N. Durfee, The Statute of Uses and Active Trusts, 17 MICH. L. REV. 87, 89 (1918)
(tracing the development of the trust as a result of the Statute of Uses).
17
See Karen Platten, Trusts are Creatures of Equity (June 14, 2012), http://findarticles.com/
p/articles/mi_m0OJX/is_5_32/ai_n31063044/ (“with the evolution of the law, courts began to
allow the beneficiaries a right of action against the property of assets of the trusts themselves
even going so far as to allow a beneficiary the right to trace the assets into the hands of third
parties who did not purchase the assets for their true value”).
18
See WEST’S ENCYCLOPEDIA OF AMERICAN LAW, supra note 13, at 333–335 (discussing
how trusts surpassed uses as the favored method of tax evasion).
19
(1726) 25 Eng. Rep. 223.
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claimed that the infant should be entitled to the profits the trustee made through the
lease. The court said that even though the infant himself would not have been able to
renew the lease, the trustee acted improperly by subsequently taking the lease for
himself. Although this rule is very harsh, the court said it was necessary as a
prophylactic means of preventing dishonesty by trustees.20
C. Fiduciary Duties of the Trustee Applied to Other Relationships
Another 18th century English case, The Charitable Corporation v. Sutton,21 likened the
directors22 of a charitable corporation to the agents of a trust, and said that the directors
therefore had obligations to fulfill. The plaintiff alleged that the defendant directors
breached trust, committed fraud, and mismanaged the funds of the charitable corpor-
ation by being grossly negligent and giving loans to patrons who pledged inadequate
collateral. The court held the directors liable. The court said of the directors: “By
accepting of a trust of this sort, a person is obliged to execute it with fidelity and
reasonable diligence; … and therefore they are within the case of common trustees.”23
This case shows the inclination of the English courts to apply the fiduciary duties of
trustees to other relationships.
Other English cases demonstrate the impact of trust law on fiduciary duties in agency
law. In Bishop of Winchester v. Knight,24 the court held that a tenant is a fiduciary of his
landlord. In that case, a tenant was digging up copper on land belonging to his
landlord, and the landlord later sued for an account of all the copper that had been
mined. The tenant died before the trial, so a suit for trespass was precluded, but the
court found that an action for a wrongful taking against the tenant’s estate should
succeed. Moreover, the court emphasized that because the tenant is a fiduciary of the
landlord, the case is even stronger.25 Similarly, in Woodhouse v. Meredith,26 a case
involving an agent who was employed to sell an estate and then secretly bought it
himself in the name of a trustee and tricked his employer into thinking the trustee was
the real purchaser, the court equated agents with trustees and “any other person
possessing a fiduciary character.”27
Furthermore, in Oliver v. Court,28 an auctioneer who was hired as an agent purchased
property for himself after receiving no bids for the property at the auction. Twelve
years later, the court set aside the purchase due to the agent’s violation of his position
of confidence.29 Again, the court ascribed to the agent the duties of a trustee and
discussed the two relationships as more or less equivalent. Specifically, we see the
20
Id. at 223.
21
(1742) 26 Eng. Rep. 642.
22
At the time, corporate directors were referred to as “committee-men.”
23
Id. at 645.
24
(1717) 24 Eng. Rep. 447.
25
Id. at 448.
26
(1820) 37 Eng. Rep. 353.
27
Id. at 356.
28
(1820) 146 Eng. Rep. 1152.
29
See Szto, supra note 7, at 99 (citing Oliver v. Court, (1820) 146 Eng. Rep. 1152, 1665,
1166, 8 Price 127).
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court extending the duty of loyalty from trustees to agents with its proscription against
agents placing themselves in a position incompatible with honestly discharging their
duty.
In the U.S., the New York court in Cumberland Coal and Iron Co. v. Sherman30 held
that an agent who is employed to value property cannot purchase the property himself,
because this violates the moral obligations of trust and loyalty. The defendants,
directors of the plaintiff corporation, were in charge of a committee to value and then
sell a parcel of land belonging to the corporation. The defendants later purchased the
land from the company, without ratification or approval by the corporation, for a price
later determined to be grossly inadequate. The court invalidated the sale emphasizing
that the corporate directors are agents and trustees of the stockholders, and as such they
have fiduciary duties of loyalty that prevent them from entering into unfair, unap-
proved, self-dealing contracts with the corporation.
In Bray v. Ford,31 an English case, the court held that a person in a fiduciary position
is, by default, not allowed to make a profit. Ford was a vice-chairman and fiduciary32
of Yorkshire College. He had been working as legal counsel to the college for free, but
then formed a partnership with another solicitor and decided to bill the college for his
services. The college paid him for his services for a few years. Bray, a governor of the
college, wrote a letter a few years later to more than 300 other governors saying that
Ford was illegally and improperly making money while he was a fiduciary of the
college. The jury originally found this to be libel after the trial judge instructed them
that it was clear from the college’s memorandum of association that Ford was entitled
to receive remuneration for his services. But the reviewing court said the memorandum
does not support this reading and therefore the judge’s instruction was erroneous. The
reviewing court went on to state that “a person in a fiduciary position, such as the
respondent’s, is not, unless otherwise expressly provided, entitled to make a profit; he
is not allowed to put himself in a position where his interest and duty conflict.”33
Again, we see the fiduciary duty of loyalty extended to an agent, and the court
describing his fiduciary duties as analogous to those of a trustee. Additionally, the court
in Bray, like the courts in Cumberland, Oliver, and Keech, emphasized that a strict duty
of loyalty is necessary to mitigate the trustee’s temptation to act dishonestly and breach
the trust between settlor and trustee.
D. Extension of Fiduciary Duties of Trustees to Partnerships
The fiduciary duties of trustees have also extended to partnership relationships.34 The
English commentator Gow discussed the duty of loyalty partners owe to one another,
saying:
30
1859 WL 8052 (N.Y. Sup. 1859).
31
[1896] AC 44.
32
Chairmen of colleges are similar to directors of corporations in that they are “entrusted
with the government and management of the institution.” [1896] AC 44.
33
Id. at 51–52.
34
See Szto, supra note 7, at 102–103 (citing JOHN COLLYER, A PRACTICAL TREATISE ON THE
LAW OF PARTNERSHIP § 182 (J. C. Perkins, ed., 1st American ed., Boston, Little, Brown and
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Indeed, the principles of a court of equity will not permit that parties bound to each other, by
express or implied agreement, to promote an undertaking for their common benefit, should
any of them engage in another concern, which necessarily gives them an interest directly
adverse to their original undertaking.35
Courts have strictly enforced the duty of loyalty in the partnership context. In the
famous New York case of Meinhard v. Salmon,36 Meinhard and Salmon were joint
venturers who were leasing a building. Salmon was the managing partner and Meinhard
contributed financing. When the lease expired, the venture had been very successful
and Salmon had the opportunity to lease an adjacent property, and he did so for himself
without telling Meinhard. Meinhard claimed this was a breach of loyalty; Salmon
argued the joint venture was over at this time, and therefore no loyalty was owed. The
court held that Salmon, as the managing co-adventurer, did have a fiduciary duty to
Meinhard because the new lease was closely related to the same subject matter of the
old lease. The opportunity for the new lease was one of the spoils of the original
venture, and as such it needed to be shared with the other co-adventurer.
In explaining the duty of loyalty that co-adventurers like Meinhard and Salmon owe
to one another, Judge Cardozo said:
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty
of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting
at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something
stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor
the most sensitive, is then the standard of behavior.37
In essence, trustees, joint adventurers, and copartners all owe a strict duty of loyalty to
one another which is above and beyond the duties owed by ordinary people in the
course of business. Once again, we see the court extending the duty of loyalty to a
different fiduciary relationship by analogy to the functions of a trustee. Additionally,
Cardozo emphasized the necessity of a strict duty of loyalty so as to guard against the
“disintegrating erosion” of granting exceptions to the rule, similar to the prophylactic
concerns of the courts in Keech, Bray, Cumberland, and Oliver discussed above.
Company, 1834) (“the functions, rights, and duties, of partners, in a great measure, comprehend
those both of trustees and agents”) and FRANCIS J. TROUBAT, THE LAW OF COMMANDATARY AND
LIMITED PARTNERSHIP IN THE UNITED STATES 280 [§ 265] (Philadelphia, James Kay, Jun. &
Brother, 1853)).
35
NEIL GOW, A PRACTICAL TREATISE ON THE LAW OF PARTNERSHIP § 7 (Edward D.
Ingraham, ed., 3rd ed., Philadelphia, Robert H. Small, Law Bookseller, 1845) (citing Morris v.
Colman, 18 Ves. 438 (1812)) (cited in Mary Szto, supra note 7, at 103–104) (presented in a
discussion of early English and American commentary on fiduciary duty in partnerships).
36
164 N.E. 545 (N.Y. 1928).
37
Id. at 546 (citing Wendt v. Fischer, 154 N.E. 303 (N.Y. 1926)).
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II. MODERN CORPORATE LAW

In the 19th century, the commentator Lindley discussed corporate directors and their
roles as fiduciaries of the shareholders, emphasizing the continuing relevance of the
trust that has been placed in corporate directors by the shareholders:
Directors are not only agents but trustees … the duty of directors to shareholders is so to
conduct the business of the company, as to obtain for the benefit of the shareholders the
greatest advantages that can be obtained consistently with the trust reposed in them by the
shareholders and with honesty to other people.
Every director is a trustee for that company, and bound when his personal interest conflicts
with his public duty, to perform his duty at the sacrifice of his interest, and a court of equity
will not allow a transaction to stand in which a director on behalf of the company, has in fact,
been dealing with himself as an individual.38
Today, there are essentially two important aspects to the fiduciary duty of loyalty as
applied to corporate executives. The first concerns conflicts of interest and the second
involves actions lacking good faith. These aspects of the duty of loyalty are discussed
next.
A. Conflicts of Interest
The Delaware Chancery Court in Guth v. Loft, Inc.39 discussed how the duty of loyalty
applies to corporate executives. Guth was the president of Loft, Inc. Loft had been
buying cola syrup from Coca Cola to make a beverage, but Guth began considering a
change in the supplier due to the failure of Coca Cola to provide a discount. Pepsi, at
the time, was in bankruptcy proceedings. Guth then bought Pepsi stock with money he
borrowed from Loft and used Loft resources to further his investment in Pepsi. Loft
alleged that Guth breached the duty of loyalty by failing to offer Loft the opportunity to
buy the Pepsi shares. The court agreed, saying that Guth wrongfully appropriated the
opportunity to buy Pepsi. The court was “convinced that the opportunity to acquire the
Pepsi-Cola trademark and formula, goodwill and business belonged to the complainant,
and that Guth, as its President, had no right to appropriate the opportunity to himself.”40
In reaching this decision, the court explained the duty of loyalty in the corporate
context. Officers and directors are not trustees, but they are fiduciaries, and they are not
allowed to use their positions as fiduciaries to further their private interests. Further,
officers and directors, just like trustees, have to affirmatively protect the rights of the
corporation.41 The court also discussed the corporate opportunity doctrine, one facet of
the corporate duty of loyalty. An officer or director can take a corporate opportunity
without breaching the duty of loyalty if the opportunity is presented to him in his
38
NATHANIEL LINDLEY, A TREATISE ON THE LAW OF PARTNERSHIP, Vol. I, § 494, § 496
(Philadelphia, T & J. W. Johnson & Co., 1860) (cited in Szto, supra note 7, at 111) (presented
in a discussion of parallels between corporate and partnership and trust law).
39
5 A.2d 503 (Del. Ch. 1939).
40
Id. at 515 (Del. Ch. 1939).
41
Id. at 510.
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individual capacity, the opportunity is not essential to the business, the corporation has
no interest or expectancy in the opportunity, and the director or officer has not used the
company’s resources to obtain the opportunity.42 But if these criteria are not met, or if
taking the opportunity would create a conflict of interest for the officer or director with
respect to the corporation’s interests, then taking the opportunity would constitute a
breach of loyalty. According to the court:
On the other hand, it is equally true that, if there is presented to a corporate officer or director
a business opportunity which the corporation is financially able to undertake, which is, from
its nature, in the line of the corporation’s business and is of practical advantage to it, is one
in which the corporation has an interest or a reasonable expectancy, and, by embracing the
opportunity, the self-interest of the officer or director will be brought into conflict with that of
his corporation, the law will not permit him to seize the opportunity for himself.43
But in somewhat of a deviation from the strict holdings in Keech and Meinhard, the
court in Guth determined that “The occasions for the determination of honesty, good
faith and loyal conduct are many and varied, and no hard and fast rule can be
formulated. The standard of loyalty is measured by no fixed scale.”44
Today, in both the U.S. and the U.K., when a business decision is made by a board
with an interested director, and the interested director is affected by his or her interest,
the transaction breaches the duty of loyalty unless it is saved by a valid approval.45 An
interested director is one who appears on both sides of a board’s decision or
transaction. A director appears on both sides of a transaction when she has a financial,
business, or familial relationship with a party to the transaction; she personally appears
as a party; or one of her associates is a party.46 For example, the director in Bayer v.
Beren suggested that the board contract with his wife to sing for the company’s radio
commercials. This director is an interested director.47 Legislative guidelines in the U.K.
set out additional circumstances when a director may be considered interested, for
instance, if she: is a customer of the company, is a supplier to the company, has a
relationship with the board’s advisors or consultants, or is offered a role with a
potential bidding company.48 In both the U.S. and the U.K., an interested director’s
appearance on both sides of the transaction is insufficient to constitute a duty of loyalty
violation on its own.
42
Id. at 510–511.
43
Id. at 511.
44
Id.
45
A duty of loyalty claim may be brought against one or more directors, officers, or
controlling shareholders.
46
BRENT OLSON, PUBLICLY TRADED CORPORATIONS: GOVERNANCE AND REGULATION § 3.18
(New York, Clark Boardman Callaghan, 2014).
47
9 N.Y.S.2d 2, 6 (1944).
48
GC100, COMPANIES Act 2006 – DIRECTORS’ CONFLICTS OF INTEREST (U.K., Thomas
Reuters, 2008).
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To breach the duty of loyalty, a director must have a “material interest” in the
outcome of the transaction.49 Although a director may stand on both sides of the
transaction, because of her business or other relationships, the director may still be able
to make an unbiased decision. State courts in the U.S. use a subjective standard to
determine whether the director in fact was or would likely be affected by the
self-interest in question.50 Factors to consider in analyzing whether an interest is
material include the strength of a business relationship,51 the length of a business
relationship, the significance of a friendship,52 the magnitude of the financial interest,
and more. In the case Chen v. Howard-Anderson, the Delaware Court of Chancery
found that a director was materially interested in a merger transaction when he
personally received more than $840,500 in benefits from a merger.53 A director is
generally materially interested in the transaction if he stands to benefit more than the
corporation and shareholders generally benefit.54 A director may also have a material
interest if she faces a severe personal detriment depending on the outcome of the
transaction.55 Once a court confirms that a director is materially interested in a
transaction, the court will find a duty of loyalty violation unless there are reasons to
approve the transaction. The potential reasons are discussed below.
1. Approval of an interested transaction

In both the U.S. and the U.K. certain interested transactions may still be permitted. To
avoid a duty of loyalty violation for an interested transaction, the transaction must
either be entirely fair to the corporation (fair in both process and price) or must have
been approved by either the board of directors or shareholders. These issues are
discussed next.
49
See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993); Transkaryotic
Therapies, Inc., 954 A.2d 346, 362 (Del. Ch. 2008); Orman v. Cullman, 794 A.2d 5, 22 (Del. Ch.
2002).
50
See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993).
51
The court believed that the director had a material business relationship because the
director was seeking a “$40 million investment by [the contracting company] in his own
company” at the same time as the board’s transaction was completed. Loral Space & Communs.
Consol. Litig., 2008 W.L. 4293781, at *17 (Del. Ch. 2008).
52
“Allegations of friendliness, for example, that [the interested director] has been to [the
contracting party’s] house” are insufficient for a material interest. MFW S’holders Litig., 67 A.3d
496, 509 (Del. Ch. 2013). However, “if the friendship was one where the parties had served as
each other’s maids of honor, had been each other’s college roommates, shared a beach house
with their families each summer for a decade, and are as thick as blood relations,” it could
constitute a material interest. Id. at 509.
53
87 A.3d 648, 670 (Del. Ch. 2014).
54
See id. at 670.
55
A detriment to a director could create a truly affected director as well – such as a board
considering a lawsuit against two board members. In Rales v. Blasband, a vote to pursue a
lawsuit would have resulted in a significant financial loss for two board members. The court held
that the directors’ interest truly affected their vote in the lawsuit decision. 634 A.2d 927 (Del.
1933).
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a. Fair transaction The English courts traditionally did not permit any self-dealing
transaction, even if considered fair to the corporation, believing that the duty of loyalty
is to be “so strictly … adhered to [so] that no question is allowed to be raised as to the
fairness or unfairness of the contract entered into.”56 Even some recent English cases
refer to the traditional rule that courts cannot inquire into the fairness of a self-dealing
transaction.57
But a recent U.K. case, however, illustrates that the U.K. may be moving toward a
fairness test when executives seek to engage in self-interested transactions. In Mutual
Life v. Rank, the directors of Rank issued new shares in what amounted to a “flash
sale” with too many interested buyers. The directors used their power to choose some
buyers over others. The plaintiffs argued that the directors were self-dealing and biased
in their choice of buyers. The court held that the directors’ preferential sale was still a
fair sale and “in good faith in the interests of the company.”58 The court found that
although the directors’ preference appeared to be self-dealing, it was also “most
advantageous for the purposes of maintaining [Rank’s] investment programme.”59 A
fair board decision that benefits the corporation, the court held, is beneficial for all
shareholders.
In addition, legal experts in the U.K. argue that the U.K. is moving away from the
U.K.’s traditional duty of loyalty rule and courts may permit interested transactions as
long as the terms of the transaction are fair.60 Nevertheless, it is unclear whether the
reasoning of the Mutual Life court will replace the traditional rule finding self-
interested transactions to violate the duty of loyalty.
State courts in the U.S., on the other hand, have a more explicit rule regarding
so-called fair self-dealing transactions. In the U.S., courts may ratify a self-dealing
transaction if it passes the entire fairness test.61 The entire fairness test creates a high
burden of proof for defendants and “not even an honest belief that the transaction was
entirely fair will be sufficient to establish entire fairness. The transaction itself must be
objectively fair.”62 Directors must show both fair price and fair dealing in order to
satisfy the U.S. entire fairness test.63
The fair dealing portion of the entire fairness analysis takes into account the timing,
initiation, structure, disclosures, and approvals surrounding a self-dealing transaction.64
In Americas Mining Corp. v. Theriault, the court found that the structure of negoti-
ations and the research related to a self-dealing merger were insufficient and thus the
56
Aberdeen Ry v. Blaikie, 1 Macq. H.L. 461 (U.K. 1854).
57
O’Donnell v. Shanahan, [2009] E.W.C.A. (Civ) 751 (Eng.).
58
Mutual Life Ins. v. Rank, [1985] B.C.L.C. 11 (Eng.).
59
Id.
60
Luca Enrique, The Law on Company Directors’ Self-Dealing: A Comparative Analysis, 2
J. INT’L & COMP. L. 1, 8 (2000).
61
See Del. Code Ann. tit. 8, § 144.3 (2010).
62
Gesoff v. IIC Indus., 902 A.2d 1130, 1145 (Del. Ch. 2006).
63
FRANKLIN R. BALOTTI & JESSE FINKELSTEIN, DELAWARE LAW OF CORPORATIONS AND
BUSINESS ORGANIZATIONS § 4.16 (New York, Wolters Kluwer Law & Business, 2014).
64
Weinberger v. UOP, 457 A.2d 701, 711 (Del. 1983).
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transaction could not be saved by the entire fairness rule.65 In Reis v. Hazelett
Strip-Casting Corp., corporate directors, attempting to buy out minority shareholders,
pulled a price “out of the air” and threatened shareholders that if they did not accept
this deal they would never offer a higher price and they would never distribute a
dividend.66 The Delaware court found that threats of this nature were evidence of unfair
dealing.67
The fair price analysis takes into account all economic and financial impacts of a
decision including earnings and future prospects.68 In Bayer v. Beran, discussed earlier,
the board had engaged in a self-dealing transaction by contracting with a director’s wife
for radio commercials. But the court held that the board’s decision could stand because
the wife’s contract price was fair.69
In addition, determination of whether the price is fair also depends on the board’s
process for calculating the price. For instance, during a stock sale transaction a share
price based on a “thinly traded, illiquid, market is evidence of a price’s unfairness.”70 If
a court finds that a transaction lacks either fair dealing or a fair price, the court will not
save the transaction from a duty of loyalty violation.
b. Board vote In the U.S., an interested transaction will not violate the duty of
loyalty if it is ratified by uninterested board members.71 Board ratification involves two
elements. First, the board of directors or the committee of the board must know, or the
interested director must disclose, the “material facts as to the director’s interest and as
to the contract or transaction.”72 Second, the uninterested board members or committee
must in good faith authorize “the contract or transaction by the affirmative votes of a
majority of the disinterested directors.”73 Before the vote is taken, the number of
disinterested directors may be less than a quorum.
65
The court reasoned that the fair dealing requirement of the entire fairness test could not be
met because “throughout the negotiation process, the Special Committee’s and Goldman
[Sachs’] focus was on finding a way to get the terms of the Merger structure … to make sense,
rather than aggressively testing the assumption that the Merger was a good idea in the first
place.” 51 A.3d 1213, 1245 (Del. 2012).
66
28 A.3d 442, 452 (Del. Ch. 2011).
67
Id. at 464 (citing Kahn v. Lynch Commc’n Sys., 638 A.2d 1110, 1120–1121 (Del. 1994)).
68
Weinberger v. UOP, 457 A.2d 701, 711 (Del. 1983).
69
The court reasoned that it would not overturn the board’s decision because “the
expenditure [to pay the director’s wife] was not reckless or unconscionable. Indeed, it bore a fair
relationship to the total amount of net sales and to the earnings of the company.” 9 N.Y.S.2d 2
(1944).
70
Gesoff v. IIC Indus., 902 A.2d 1130, 1154 (Del. Ch. 2006).
71
Even a director who is not directly interested in the transaction, meaning she does not
satisfy the above elements of an interested director, may nonetheless be excluded as an interested
director because of her relationship with the interested director. In some cases the interested
director controls some or all members of the board because of board position, intimidation
tactics, or custom. Board members who always vote with the controlling interested party may
therefore not qualify as disinterested. FRANKLIN R. BALOTTI & JESSE FINKELSTEIN, supra note
63.
72
Del. Code Ann. tit. 8, § 144.1 (2010).
73
Del. Code Ann. tit. 8, § 144.1 (2010).
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Although U.S. board members have held the power to approve a self-dealing
transaction via a board vote for some time, it is only with the advent of the 2006
Companies Act that U.K. board members could ratify a self-dealing transaction as
well.74 In the U.K., boards must meet quorum requirements before the vote, without
counting the interested director(s).75 The law in the U.K. then allows corporations to set
their own procedures for board ratification as long as the public corporation’s
“constitution includes a provision enabling the directors to authorize the matter.”76
Private companies do not need express constitutional authorization to ratify as long as
nothing in the company’s constitution invalidates such authorization.77
c. Shareholder vote The laws in both the U.K. and the U.S. have traditionally
recognized shareholders’ power to ratify interested transactions. Like board ratification,
shareholder ratification does not require an inquiry into the fairness of the transaction.
In the U.S., shareholder ratification of a self-dealing transaction operates with the same
requirements as board ratification – shareholders must know the material facts of the
transaction and approve the transaction in good faith.78 Shareholders may approve the
interested transaction during a regular shareholder meeting. In the U.K., shareholders
may ratify a transaction via an ordinary shareholder resolution.79
The various ratification schemes in the U.S. and the U.K. illustrate that courts
recognize conflicts of interest often exist in modern business practices. In both
countries directors may serve on multiple boards, own several business ventures, and
have close relationships with others in the same business community. Neither country
ignores the existence of these relationships. Furthermore, both countries attempt to
strike a balance between a strict interpretation of the duty of loyalty which would
forbid all interested transactions, and a desire to allow transactions that further
corporate interests to proceed despite the conflict of interest.
B. Transactions Lacking Good Faith
Although the corporate duty of loyalty remains relatively unchanged from its origins in
the trust relationships of basic human interactions, it nevertheless continues to evolve in
the courts. One of the more recent developments has been conceptualizing lack of good
faith on the part of directors and officers as a breach of the duty of loyalty. In In re Walt
Disney Co. Derivative Litigation,80 for example, the Delaware Supreme Court dis-
cussed the three most prevalent examples evidencing lack of good faith:
74
Previously U.K. statutory law only provided this power to shareholders. GC100, COM-
PANIES ACT 2006 – DIRECTORS’ CONFLICTS OF INTEREST (U.K. 2008).
75
Companies Act, 2006, c. 2, § 175.6 (U.K.).
76
77
78
Del. Code Ann. tit. 8, § 144.2 (2010).
79
Del. Code Ann. tit. 8, § 239 (2010).
80
906 A.2d 27 (Del. 2006) (shareholders alleged breach of fiduciary duty in connection with
the hiring and subsequent non-fault termination of the company president).
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A failure to act in good faith may be shown, for instance, where the fiduciary intentionally
acts with a purpose other than that of advancing the best interests of the corporation, where
the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary
intentionally fails to act in the face of a known duty to act, demonstrating a conscious
disregard for his duties. There may be other examples of bad faith yet to be proven or alleged,
but these three are the most salient.81
Later, in Stone ex rel. AmSouth Bancorporation v. Ritter,82 the Delaware Supreme

Court further explained how a director’s failure to act in good faith is a breach of the
duty of loyalty.
[T]he fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable
fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in
good faith. As the Court of Chancery aptly put it in Guttman, “[a] director cannot act loyally
towards the corporation unless she acts in the good faith belief that her actions are in the
corporation’s best interest.”83
The inclusion of good faith within the duty of loyalty in one sense represents an
expansion of the duty of loyalty from a simple prohibition of self-interested action. In
another sense, however, it represents a return to the trust relationships among Roman
beneficiaries in fideicommissio, who had a moral obligation to act in good faith and
deliver the legacy to the intended heir. Perhaps if modern corporate executives would
“do as the Romans did” and honor the trust that has been placed in them, there would
be fewer breaches of the duty of loyalty, as well as fewer corporate scandals occupying
the headlines.
81
Id. at 67.
82
911 A.2d 362 (Del. 2006) (shareholders alleged that directors had breached fiduciary
duties by failing to ensure that a reasonable federal Bank Secret Act compliance and reporting
system was in place).
83
Id. at 369–370 (emphasis added) (citing Guttman v. Huang, 823 A.2d 492, 506 n. 34
(Del.Ch.2003)).
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16. Corporate criminal responsibility: a South African

perspective
Johan Henning and Mignon Hauman
The origin of the corporation can be traced back to Roman law,1 and over the years
various theoretical approaches have evolved to give the corporation context within the
law for the purpose of regulation. The full extent of the implications of the separation
of the corporate personality – be it fictitious2 or realistic3 – from that of its individual
members’ personalities was demonstrated in the case of Salomon v A Salomon & Co
Ltd,4 where it was concluded that a company is, for all intents and purposes, altogether
a different person from its shareholders. Essentially, a corporation is an artificial person
in that it is invisible, intangible, existing only in contemplation of law and at common
law possessing only those properties which the charter of its creation confers upon it,
either expressly or incidental to its existence.5 In practice the corporation thus primarily
operates as a legal device that serves to simplify and stabilize the complicated web of
contractual relationships that an association of shareholders has to have with a
1
The universitas personarum is defined as “an aggregation of individuals forming a
persona or entity, having the capacity of acquiring rights and incurring obligations to a great
extent as a human being,” to be “distinguished from a mere association of individuals by the fact
that it is an entity distinct from the individuals forming it, its capacity to acquire rights or incur
obligations is distinct from that of its members, which are acquired or incurred for the body as
whole, and not for the individual members”. See Webb & Co Ltd v Northern Rifles, Hobson &
Sons v Northern Rifles 1908 TS 462 at 464–465.
2
There are those who treat the corporate body as a mere legal fiction devoid of the ability
to function independently and requiring permanent representation by human beings – the
fictitious theory. See E Lederman (1985: 295). Also see J Dejnozka (2007: 6). According to the
fictitious theory, the lawgiver alone can create legal fictions, and corporations are therefore
the creations of the state (concession theory). As a result, such a fictitious person has no will or
mind and cannot conclude any actions by its own accord: it must be represented by human
beings empowered to act on its behalf. See WA Joubert (2013: 72).
3
There are those that treat corporations as real entities, claiming that the law merely
recognizes the existence of corporate bodies rather than creating the corporate entities – the
realist approach. E Lederman (1985: 295). Also see A Machen (1911: 260). The reality theory
subsists in the contention that it is the natural tendency of human beings to organize themselves
into productive groups, leading scholars to perceive the corporation as something more than
either a creation of the state or just an aggregate of the shareholders – rather, it was “an organic
social reality with an existence independent of, and constituting something more than, its
changing shareholders”. MM Blair (2013: 806). As a result, a corporation is not only capable of
acting by itself, but is also capable of committing crimes and delicts for which it can be held
accountable. WA Joubert (2013: 73).
4
Salomon v A Saloman & Co Ltd 1987 AC 22.
5
MM Blair (2013: 799).
191
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multitude of outside parties in order to participate in society.6 Yet, given the artificiality
of its nature, a corporation needs organization in order to make use of its own assets in
society: a corporation is a legal construct incapable of performing any acts except
through the acts of flesh and blood human beings.7
The increasingly active role that corporations assume in all aspects of modern life is
accompanied by their correspondingly increased participation in criminal activities.8
Criminal activity carried out within the corporate framework presents unique chal-
lenges to criminal law because corporate bodies are powerful tools, and their
manipulation for criminal purposes can cause great harm to the public.9 In most
systems, criminal offences have a physical element and a mental (fault) element.10 The
physical element of offences can be imputed to a corporation relatively easily, but the
imputation of the mental element to a corporation contradicts fundamental principles of
criminal law.11 Whilst most of the delinquent activity involving corporations is
generally confined to “white collar” crimes,12 the issue of corporate criminal liability
has proliferated as a topic of debate following the incident where, amongst others,13 an
automobile corporation (Ford) was tried and acquitted of culpable homicide after
negligently failing to repair known lethal defects in the manufacture of its cars which
resulted in the death of three people.14
6
K Iwai (1997: 10).
7
A corporation is only able to establish its existence in society through the actions of
directors who hold the proper authority to exercise all the powers of the corporation, or through
the acts of corporate officers to whom the directors have delegated their powers. See K Iwai
(1997: 40–46).
8
E Lederman (1985: 286).
9
E Lederman (1985: 339).
10
All crimes, with the exception of crimes to which strict liability attaches, require both an
act or omission (actus reus) and a culpable mental state (mens rea). In order for a perpetrator to
be liable for wrongful conduct, one must be able to reconcile “action” with “intention” – having
regard for the applicable forms of intention, i.e. dolus directus, dolus indirectus and dolus
eventualis – because intention must present both cognitive and conative manifestations. See CR
Snyman (2008: 182).
11
Arthur Allens Robinson (2008).
12
The major areas of corporate offence are: restraint of trade; infringement of patents,
trademarks, or copyrights; advertising misrepresentation; unfair labour practices; and financial
manipulations. These typical corporate offences cover the victimization of other firms, of
creative individuals or competitors, of the general public, a company’s own employees and
stockholders. See L Davids (1968: 527).
13
See AI Pop (2006).
14
S v Ford Motor Co., No 80-5324 (Ind. Super. Ct. Mar. 13, 1980). In casu, it was alleged
that Ford (the company) was guilty of culpable homicide as a result of the fact that it had
knowledge of defects of the engine design of its Pinto line, but instead of recalling the model
and rectifying the defect it engaged in “plain, conscious and unjustifiable disregard of harm that
might result (from its actions) and the disregard involves a substantial deviation from acceptable
standards of conduct”. The design of the rear-end of the Pinto could not meet the intention of
Standard 301 of the Federal Motor Vehicle Safety Standards that cars should be able to
withstand a fixed barrier impact of 20mph without losing fuel, but Ford was legally able to
produce the defective Pintos for eight years as a result of creative and intensive lobbying against
Standard 301. It was more cost-beneficial for Ford to wait eight years and resort to paying tens
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Corporate criminal responsibility: a South African perspective 193
The key conceptual problem faced in the contemplation of corporate criminal

liability thus stems from the need to forge a coherent link between the corpus of
criminal law15 and the realities of the corporate form – a complex fabric of human
actions on one hand and corporate hierarchies, structures, policies and attitudes on the
other.16 By the turn of the 19th century the general premise that the employer (master)
must command or procure the wrongful act to be held liable for wrongs committed by
his/her employee (servant) was replaced by the notion that the employer (master)
should be liable if the employee (servant) was acting within the course of the master’s
business and within the scope of his employment.17 The traditional approach to
corporate criminal liability thus focuses on the relationship between the corporation
and its employees and agents, and there developed a legal fiction that the state of mind
of employees and agents can be said to be the state of mind of the corporate entity.18
The principle that developed is that a corporation can be held liable for a crime
where mens rea is an element if it was committed “by the only people who could act or
speak or think for it”.19 It is a legal requirement that a corporation must have a board
consisting of directors who hold the formal powers to act in the name of the
corporation; it is via the need for the division of labour that the board members
delegate part of their powers to corporate officers for the actual management of
corporate assets.20 From an external observation, the constitution of the corporation
(articles of association) identifies the persons whose acts are considered to be the acts
of the corporation, whereas from an internal observation, it identifies those same
persons as the company’s representatives or agents who are empowered to act on behalf
of the company.21 In this regard the law “identifies” the acts and thoughts of prominent
figures in the corporation’s hierarchy (known as organs) when acting within the scope
of their authority as those of the corporate entity itself.22
It has therefore long been accepted that the authorized acts of directors and officers
are the acts of the company itself, and therefore the company in its own capacity can be
guilty of having committed torts and crimes and not merely of authorizing them. The
assignment of mens rea to the persons identified with and as the corporation provides a
mechanism for the personification of the corporation, thus enabling the conviction of
of millions of “pain and injury” claims and out-of court settlements than to recall and repair the
defective models. See WM Hoffman (1982: 222–226). Also see DS Anderson (1981).
15
The corpus of criminal law has been developed to be applicable to natural persons and to
reflect the psychology of human beings. Therefore, criminal law serves to punish and deter the
wrongdoing of the individual moral persons whereas a company is said to be a “fictitious” or
“abstract” entity, incapable of physical action, knowledge or intention. M Wilkinson (2003: 1).
16
17
KF Brickey (1982: 416).
18
19
SJ Naude (1970: 38).
20
K Iwai (1997: 40). The interests of the company are those interests of its members that
are, after incorporation, protected and realized not by its members’ individual rights and powers,
but by the rights and powers of the corporation. WA Joubert (2013: 75).
21
WA Joubert (2013: 77).
22
SJ Naude (1970: 36). See also E Lederman (1985: 292).
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the corporation as directly liable for offences which require criminal liability.23 This
has become necessary since the modern day corporation plays an increasingly
significant part in our lives, and therefore they cannot simply be exempt from being
subject to criminal law.24 Yet, only in certain circumstances are acts and states of
mind25 attributed to the corporation: (1) in the case of acts and states of mind of certain
persons; and (2) where these acts or states of mind by the relevant persons are in
furtherance of the company’s affairs and interests.26 These two prescriptions are very
broad and the mechanisms to determine the liability of a corporation in the case of
wrongful acts committed are not clear-cut: it seems that the approach for attaching
criminal liability to a corporation diverts from the general rule.27 It is, however,
submitted that in the absence of acknowledging that judicial persons (a company) can
be held delictually and/or criminally liable in their own right, the direct association of
the company with its individual counterparts is unavoidable.28
The common law doctrine of vicarious liability imputes to the employer the liability
of the unlawful conduct of his/her employee in the first instance, and in the second
instance imputes liability of the representative of the company to the company if the
execution of his or her duties was done in an unlawful manner that resulted in harm to
a third party.29 In South African law the doctrine of vicarious liability is well
established despite the fact that the doctrine is an exception to the “basic premise of the
law of delict that fault is a prerequisite for liability”.30 In terms of this theory, the
23
E Lederman (1985: 292).
24
M Wilkinson (2003: 23).
25
Acts and states of mind are not the only human attributes that courts have ascribed to
corporations for the purpose of determining liability. Concepts such as “nationality”, “domicile”
and “residence” have been applied to corporations by way of analogy without distortion of the
original and intended meanings for these conceptions. See De Beers Consolidated Mines Ltd v
Howe 1906 AC 445 (PC) at 459, where Lord Loreburn LC states: “In applying the conception of
residence to a company, we ought, … to proceed as nearly as we can to the analogy of an
individual … . We ought, therefore, to see where it really keeps house and does business.” It is,
however, impossible to make use of these conceptions where the relevant legal system fails to
draw a distinction between natural and artificial persons. In the case of Estate Kootcher v
Commissioner of Inland Revenue 1941 AD 256 at 260, Watermeyer JA stated that “… when the
words ‘reside’ or ‘resident’ are used in connection with a corporation to indicate its presence in
a place for some period of its corporate existence, the words are used in the figurative sense and
can only be given meaning analogous to the meaning of the works when used with regard to a
human being”. See WA Joubert (2013: 77).
26
27
SJ Naude (1970: 30). The theory that a corporation can be criminally liable has grown in
stages, and there are many parallels in the consolidation of this doctrine in English and
American law. See E Lederman 1985: 288).
28
SJ Naude (1970: 30). Machen makes a valid point: that it is all but impossible for those
unlearned in the law to think of a corporation as anything else other than an entity. A Machen
(1911: 260). Both lawyers and laypersons tend to speak instinctively of the corporation as an “it”
– that is, as a thing that has an identity and existence of its own. J Dejnozka (2007: 54).
29
SJ Naude (1970: 35).
30
MM Botha and D Millard (2012: 227). Various South African legislations provide for the
imputation of liability to a corporation for wrongful conduct committed by employees, namely
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corporation is liable for the wrongful acts, civil or criminal, of its agent if the agent,
who is himself culpable, acted “within the scope of his employment and with the intent
to benefit the corporation.”31 A corporation is vicariously liable for the acts of its agents
only in situations in which individuals would be held similarly liable to the extent that
those actions are performed within the scope of employment.32
It is this very association that is the mechanism whereby the conduct and the liability
of the functionaries are dispatched to the company.33 Directors are regarded as the
agents of the corporation as a result of the fact that the corporation is an “abstraction”34
which cannot by itself think, resolve or act but for the directors.35 Thereby, a
relationship of principal and agent is endorsed which means that a corporation itself
cannot commit crimes or delicts, but it can be held vicariously liable for the delicts or
crimes committed by its representatives (directors).36 Given that the actual business of
the company is conducted by the agents of the company, that is the directors, the
directors and officers of the company are held to owe duties to the company akin to
duties owed by an agent to his principal.37
The boundaries of vicarious liability in South Africa were, to a large extent, settled
when it was held that
[i]f it is once granted that corporations are for civil purposes to be regarded as persons, i.e. as
principals acting by agents or servants, it is difficult to see why the ordinary doctrines of
agency and of master and servant are not to be applied to corporations as well as to ordinary
individuals.38
In the case of Feldman (Pty) Ltd v Mall 39 it was held that a master who uses servants
creates risk of harm to others if the servant proves to be “negligent, inefficient or
untrustworthy” and “[i]t follows that if the servant’s acts in doing his master’s work
or his activities incidental to or connected with it are carried out in a negligent or
improper manner so as to cause harm to a third party the master is responsible for the
harm”. It follows that once the doctrine of vicarious liability has been extended to
the Labour Relations Act 66 of 1995, the Employment Equity Act 55 of 1998 and Promotion of
Equality and Prevention of Unfair Discrimination Act 4 of 2000.
31
E Lederman (1985: 289).
32
E Lederman (1985: 291).
33
SJ Naude (1970: 31).
34
Reference to a corporation as an “abstraction” originated in the case of Lennard’s
Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 and has since been used by various
legal scholars to reiterated cognizance that a corporation’s place in legal theory remains unclear
and dependent on the circumstances surrounding its consideration.
35
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 at 526–527.
36
WA Joubert (2013: 72). “Agency” is “a fiduciary relation which results from the
manifestation of consent by one person [the principal] to another [the agent] that the other shall
act on his behalf and subject to his control, and consent by the other so to act”. The actual
control need not be complete or continuous, but there must be some sense that the principal is
“in charge”. K Iwai (1997: 47).
37
38
Citizens Life Assurance Co. v Brown 1904 AC 423 (CA) at 426.
39
Feldman (Pty) Ltd v Mall 1945 AD 733.
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cover liability for wrongs, entailing a wrongful or corrupt state of mind, the decision of
policy has been made and therefore such liability ought to be imposed on a company.40
For the application of vicarious liability the position of the employee is of no
consequence, and there is no pretence that the act or omission is actually that of the
company itself.41 Every person involved in the activities of the corporation is
accordingly associated with the corporation for the purpose of determining criminal
liability.42 Quite simply, the corporation is liable for the fault of those who are in its
employment and who commit wrongful acts during the course of their employment. In
the case of a director, his scope of representation refers to any and all conduct that is
intended to promote the business the corporation is authorized to undertake.
The doctrine of vicarious liability is not without certain inherent limitations. The
general rule in South African law is that vicarious liability is limited to those wrongful
actions where “fault” is included explicitly or by implication for the deed, and that the
relationship between the corporation and the accused is that of master and slave.43 The
application of vicarious liability is limited because it can only find application if an
employment or agency relationship is found to exist at the time when the employee
committed the wrongful act, and the employee must have acted within the scope of his
employment.44 In the recent matter of Minister of Defence v Leon Marius von
Benecke45 the Supreme Court of Appeal addressed an appeal against a finding by the
Pretoria High Court that the appellant (the Minister) was vicariously liable for the
damages the plaintiff incurred as a result of an employee, one Motaung, unlawfully and
negligently stealing and selling infantry weapons, ammunition and magazines to one
Mahlangu – the robber who used a R4 assault rifle he purchased from Motaung to
shoot and seriously injure the plaintiff during a robbery. The Supreme Court of Appeal
was asked to determine whether a “sufficient connection between the conduct of
40
41
M Wilkinson (2003: 5).
42
SJ Naude (1970: 41).
43
SJ Naude (1970: 40).
44
Generally there are only two instances in which the doctrine of vicarious liability will not
find application for the contemplation of a company’s delictual and/or criminal liability:
(1) where vicarious liability in the particular instance is expressly excluded by the legislature in
the sense that the conduct and imputable liability is required by the defendant him/herself; and
(2) where the person whose conduct gives rise to liability is not a person whose conduct
vis-à-vis the company qualifies for vicarious liability. See SJ Naude (1970: 32). Determining the
parameters for the scope of “employment” for the purpose of establishing vicarious liability has
proven problematic, and the development of case law led to the conclusion that the application
of vicarious liability will predominantly depend on the facts of each case. In an attempt to
address the uncertainty surrounding the application of vicarious liability, the courts have
developed various sub-rules, including deviation cases, intentional misconduct where the
employee did not act in furtherance of his employer’s business, and the unauthorized transport of
passengers in the vehicles of the employer. See MM Botha and D Millard (2012: 229–230).
45
Minister of Defence v Von Benecke (155/12) [2012] ZASCA 158; (2013) 34 ILJ 275
(SCA); 2013 (2) SA 361 (SCA) (15 November 2012).
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Motaung and the purposes and business of the defendant” was present to render the
Minister liable.46
In its evaluation of the standard for application of vicarious liability the court
recognized that the duties of Motaung in the course of his employment involved
safeguarding the weapons under his care, but he instead stole those weapons and sold
them to criminals who used the weapons to shoot and injure the plaintiff. The court,
however, did not agree with the trial court that vicarious liability was the appropriate
remedial mechanism in this instance. From a subjective perspective, the court was of
the opinion that Motaung willfully turned his back on his employment and the duties
entrusted to him: he chose to pursue his own interests and profit from acting in a
manner contrary to the intended employment relationship.47 From an objective evalu-
ation of Motaung’s conduct the court determined that theft and removal of weapons and
parts thereof did not form part of his duties and there was no link between his own
interests and the business of his employer.48 By all accounts, Motaung’s conduct fell
outside the course and scope of his employment. Moreover, the court pointed out that
there is a clear distinction between negligent performance of a task entrusted to an
employee for which the employer must usually bear responsibility, and conduct which
is in itself a negation of or dissociation from an employer/employee relationship.49
However, the court took cognizance of O’Regan J’s statement50 that where a court
finds that the standard test is not met, it is nonetheless required to ask whether the rule
does not require development and extension to accommodate the particular set of facts
before it.51 Regarding the matter at hand the court established that the defence force is
a special kind of employer with a relationship with both its employees and the general
public, which requires an approach to liability for the wrongful acts of those employees
which is very different from that of an ordinary civilian employer.52 Its proper
functioning requires that it not permit or allow for situations that permit the escape of
weaponry charged in its possession to the public, and it has a duty to ensure that its
employees are educated and disciplined so as to minimize this risk. The court therefore
concluded that there was an intimate connection between Motaung’s conduct and his
employment, firstly because he was charged with a positive duty to care for the items in
question, and secondly because without the scope of his employment he would have
46
(155/12) [2012] ZASCA 158; (2013) 34 ILJ 275 (SCA); 2013 (2) SA 361 (SCA) (15
November 2012) at para 3.
47
48
49
50
K v Minister of Safety and Security 2005 (6) SA 419 (CC) at para 16, 23.
51
52
November 2012) at para 24. The court examined the constitutional foundations of the defence
force and its statutory embodiment and came to the conclusion that it had been charged with the
duty to act, teach and require of its members to act in accordance with the constitution and the
law.
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had neither access nor knowledge of the means to avoid security measures in place to
prevent the delivery of the weapons to the public.53
The court was thus of the opinion that the risk of weapons being stolen and used
during the course of criminal activities in which innocent civilians are injured should
fall to the Minister when the public is exposed to weaknesses in its systems or frailties
in its personnel. However, the court did imply that if it had been satisfied that the
defence force had taken all reasonable steps to prevent the theft of weapons by its
responsible employees in accordance with its constitutional mandate, the court would
have been less inclined to agree with the trial court and impute vicarious liability to the
Minister for the injury caused as a result of the criminal conduct of one of its
employees.54 The doctrine of vicarious liability has therefore been developed to the
extent that it has been held to be applicable to the state whose employees (organs)
cause harm to citizens.55 As far as civil action is concerned the doctrine of vicarious
liability has been extended and adapted to find application in instances where strict
adherence to its limitation will preclude the realization of its purpose – making of
amends to an injured third party who might not otherwise be compensated.
In criminal law, however, no general principle of vicarious liability is recognized
because it is a manifestation of strict liability in that it is not necessary to establish and
prove the defendant’s “intention” for the imputation of liability for the wrongful act by
an employee or agent.56 Thus, certainty on whether “states of mind” can be attributed
to those responsible for directing the mind of the corporation (directors) for the purpose
of imposing criminal liability upon a corporation eludes us, because vicarious liability
is not possible in those instances where “personal fault” is required.57 Yet, the statutory
model for corporate criminal liability in South Africa is based on vicarious liability, and
its application seems to be much wider than originally intended in the law of delicts.58
Section 332(1) of the Criminal Procedure Act 51 of 1977 provides that:
For the purpose of imposing upon a corporate body criminal liability for any offence, whether
under any law or at common law –
(a) any act performed, with or without a particular intent, by or on instructions or with
permission, express or implied, given by a director or servant of that corporate body; and
(b) the omission, with or without a particular intent, of any act which ought to have been but
was not performed by or on instructions given by a director or servant of that corporate
body;
53
54
55
See F v Minister of Safety and Security 2010 (1) SA 606 (WCC).
56
JM Burchall, ed. (1997: 298).
57
G Ferguson (1998: 4). Also see WA Joubert (2013: 76). The doctrine of vicarious liability
attaches strict liability to one person for the wrongful act of another. Yet, recognized instances of
strict liability are rare and stem mainly from modern legislation such as the Consumer Protection
Act 68 of 2008 or common law actions of Roman origin. See MM Botha and D Millard (2012:
227).
58
SJ Naude (1970: 41). See also MM Botha and D Millard (2012: 226).
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in the exercise of his powers or in the performance of his duties as such director or servant or
in furthering or endeavouring to further the interests of that corporate body, shall be deemed
to have been performed (and with the same intent, if any) by the corporate body or, as the
case may be, to have been an omission (and with the same intent, if any) on the part of that
corporate body.
Section 332(1) effectively removes the obstacle holding an artificial person liable for
criminal conduct by attributing “fault” for the crime to the director or servant for the
purpose. Section 332(1) is broad enough to apply to all crimes, both statutory and
common law, irrespective of whether mens rea is an element of the crime or not.59 It
has thus been suggested that Section 332 is unconstitutional: “Legal commentators …
unanimously repudiate the doctrine of vicarious responsibility as representing a
departure from the ‘fault’ requisite for criminal liability, and it will in all likelihood be
declared unconstitutional by the constitutional court for the same reason, if and when
the matter comes up for the decision.”60 Nevertheless, the current legal position in
South African law maintains that it is unnecessary to determine whether the “brain” of
the corporation is guilty of having committed the wrongful acts as Section 332(1)
explicitly states that “with or without particular intent” the commission or omission by
a servant or director will impute liability to the corporation provided that either an
employment or agency relationship is present.61
It is important to note that imputation of liability via the director or servant merely
serves as a mechanism to impute liability to the corporation and does not serve to hold
the director or servant liable for the conduct in their personal capacity for the purpose
of Section 332(1).62 Section 332(2)63 provides for the purpose of prosecuting a
corporation a director or servant of that corporation shall be cited as a representative
offender and will be dealt with as if he or she were the person accused of the crime.
Section 332(2)(c) goes on to ensure that should the representative offender of the
corporation be convicted of the crime, the court may not impose any punishment other
than a fine which will be payable by the corporation and that may recouped by
attachment of sale of property of the corporation.64
The effect of Section 332(2)(c) thus serves only to direct punishment for the
wrongful act by a director or servant at the corporation, whilst the issue of personal
liability for the wrongful conduct remains to be addressed. It can readily be deduced
59
Bowman Gilfillan (2008: 3).
60
61
SJ Naude (1970: 41).
62
In the case of R v Bennet Co (Pty) Ltd 1941 TPD 194 the negligence of an employee was
imputed to the corporation which resulted in the latter being convicted of culpable homicide.
63
Act 51 of 1977. “In any prosecution against a corporate body, a director or servant of that
corporate body shall be cited, as a representative of that corporate body, as the offender, and
thereupon the person so cited may, as such representative, be dealt with as if he were the person
accused of having committed the offence in question …”
64
“if said person, as representing the corporate body, is convicted, the court convicting him
shall not impose upon him in his representative capacity any punishment, whether direct or
alternative, other than a fine, event if the relevant law makes no provision for the imposition of
a fine in respect of the offence in question, and such fine shall be payable by the corporate body
and may be recovered by attachment of sale of property of the corporate body …”
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that should a wrongful act not fall within the scope of employment or within the ambit
of furthering the interests of the corporation, then liability will not be imputed to the
corporation and personal action must be taken against the relevant director or servant. A
director of a corporation will accordingly only be held directly criminally liable in his
personal capacity if he committed the crime whilst acting outside the scope of his
representation of the company. Admittedly, given the extricable nature of the role the
director plays in giving effect to the personhood of the corporation, the wrongful
conduct committed by a director will, by way of vicarious liability, be imputed to the
corporation if the conduct is remotely linked to the director’s duties as a representative
of the corporation.
Section 332(2)(d) attempts to make some provision for holding the said director or
servant personally liable for his or her actions apart from the vicarious liability
attributed to the corporation by stating that “the citation of a director or servant of a
corporate body as aforesaid, to represent that corporate body in any prosecution
instituted against it, shall not exempt that director or servant from prosecution for that
offence in terms of Section 332(5)”. However, in the case of S v Coetzee 65 the
Constitutional Court held that Section 332(5) is unconstitutional. Section 332(5) states
that:
When an offence has been committed, whether by the performance of any act or by the
failure to perform any act, for which any corporate body is or was liable to prosecution, any
person who was, at the time of the commission of the offence, a director or servant of the
corporate body shall be deemed to be guilty of the said offence, unless it is proved that he did
not take part in the commission of the offence and that he could not have prevented it, and
shall be liable to prosecution therefor[e], either jointly with the corporate body or apart
therefrom, and shall on conviction be personally liable to punishment therefor[e].
Section 332(5) effectively serves to hold a director or servant personally liable for the
wrongful act committed on the premise that the corporation is or could be held
vicariously liable therefore. Section 332(5) achieves this by creating a presumption of
guilt of the director or servant on the basis that his or her actions were within the scope
of employment or representation which attributed liability to the corporation, and
places the onus on said director or servant to prove that he or she did not take part in
the commission of the offence and that it could not have been prevented by any efforts
by him or her. The actual or possible vicarious liability of the corporation thus becomes
a mechanism whereby the responsible director or servant can be held jointly or
separately liable from the corporation and any conviction will be carried out against
said director or servant personally. Section 332(5) thus holds the director or servant
strictly liable for his or her conduct that directly contributed to or can contribute to the
imputation of vicarious liability to the corporation.
65
S v Coetzee and Others (CCT50/95) [1997] ZACC 2; 1997 (4) BCLR 437; 1997 (3) SA
527 (6 March 1997).
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The Constitutional Court in the matter of S v Coetzee66 was concerned with the fact
that Section 332(5) violated the presumption of innocence67 and the right to freedom
and security of a person68 enshrined in Section 25(3)(c) of the Interim Constitution69 of
the Republic of South Africa. The Constitutional Court examined a number of cases
that addressed the constitutionality of reverse onus and found that provisions requiring
an accused to disprove an element of the offence violated the right to be presumed
innocent because it exposed the accused to the risk of being convicted of the offence
despite the existence of reasonable doubt.70 The contention made by the state was that
no breach of presumption of innocence occurs where the onus relates to proving a
defence and not to disproving an element of the offence.71 However, the court
concluded that the fact that the accused will be convicted in the absence of discharging
the onus is a factor that directly affects the verdict that will be rendered by a court and
therefore has the “effect” of reverse onus.72
The court did reiterate that it recognizes that directors occupy a special position both
in relation to the corporate body and the interest of the general public, and therefore it
is not unreasonable to enact special measures to assist the prosecution to overcome
difficulties with collecting evidence that are present as a result of the complex
structuring of corporate hierarchies. Employing such measures, however, cannot be
done in a manner inconsistent with the Constitution or in a manner that encroaches
upon the presumption of innocence it endorses. Accordingly, the court held that Section
332(5) was unconstitutional and that its unconstitutionality was not justifiable in terms
of Section 332(1) of the Interim Constitution that provides that the rights in question
can be limited if it is justifiable, reasonable and necessary to do so.
In its order the court proposed that the words “it is proved that” be removed from
Section 332(5) so as to enable the provision to remain effective in achieving the
objective of the statute.73 The proposed removal of the words “it is proved that” places
the burden on the prosecution to prove that the director or servant either participated in
the commission of the crime or at least failed to prevent it. Section 332(6)74 ensures
that where criminal proceedings are brought against the director or servant of a
corporation, any evidence that would be or was admissible for the purpose of imputing
vicarious liability to the corporation will be admissible for the purpose of prosecuting
the accused in his or her personal capacity. This provides some relief for the
66
(CCT50/95) [1997] ZACC 2; 1997 (4) BCLR 437; 1997 (3) SA 527 (6 March 1997) at
para 30.
67
Section 25(3)(c) of the Constitution of the Republic of South Africa Act 200 of 1993.
68
Section 11(1) of the Constitution of the Republic of South Africa Act 200 of 1993.
69
The Constitution of the Republic of South Africa Act 200 of 1993.
70
para 31.
71
para 34.
72
para 38.
73
para 51.
74
Act 51 of 1977.
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prosecution who seeks to establish the criminal liability of a director or servant in his
or her personal capacity, but the presence of vicarious liability is no longer sufficient to
presume the guilt of a director or servant whose conduct attributed to the imputation
thereof.
It is worth noting that at the time of the decision the infringement could not be
justified in terms of the limitation clause because the “necessity” of employing reverse
onus had not yet been established.75 It has accordingly been submitted that had the
court evaluated the constitutionality of Section 332(5) against the current limitation
clause,76 which does not require consideration of the “necessity” of the provision but
only whether it is reasonable and justifiable, the court may have come to a different
conclusion.77 However, by way of precedent established in S v Coetzee,78 in South
Africa law directors will be able to escape personal criminal liability for actions taken
and decisions made during the course of performing his or her duties, representing the
corporation or furthering the corporation’s interests if they prove that they took
reasonable steps to prevent the commission of the crime provided they were aware that
the conduct was taking place.79
The absence of the association between the director or servant and the corporation
will undoubtedly make it much harder to determine the criminal liability of a director
or servant for criminal conduct undertaken during the course of employment or
furtherance of the corporation’s interests. Naude is thus of the opinion that the general
reliance on the doctrine of vicarious liability in South African law does not exclude
resort to an action for direct liability as is predominantly resorted to in English law80
where it is necessary to hold a director personally liable for wrongful conduct
committed during the course of his representation of the company.81 There is, however,
currently no indication that South African courts have made use of the English law
75
H Anderson (2008: 254).
76
Section 36 of the Constitution of the Republic of South Africa Act 108 of 1996 which
states: “The rights in the Bill of Rights may be limited only in terms of law of general
application to the extent that the limitation is reasonable and justifiable in an open and
democratic society based on human dignity, equality and freedom, taking into account all
relevant factors, including – (a) the nature of the right; (b) the importance of the purpose of the
limitation; (c) the nature and extent of the limitation; (d) the relation between the limitation and
its purpose; and (e) less restrictive means to achieve the purpose.”
77
H Anderson (2008).
78
CCT50/95) [1997] ZACC 2; 1997 (4) BCLR 437; 1997 (3) SA 527 (6 March 1997).
79
H Anderson (2008: 259).
80
English law developed what has become known as the “identification” (alter ego) theory
from tort law which originated with the finding by the court in the case of Lennard’s Carrying
Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705. The identification (alter ego/organism)
doctrine is thus premised on the supposition that some officers of the company are more than its
agents: they are the company itself and can therefore be held personally liable for corporate
criminal actions. See Director of Public Prosecutions v Kent and Sussex Contractors, Ltd and
Another [1944] KB 146. See also E Lederman (1985: 292).
81
MM Botha and D Millard (2012: 252). In the case of Barkett v S.A. Mutual Trust &
Assurance Co. Ltd 1951 (2) SA 353 (A) the South African Appeal Court held that a company’s
delictual liability is not necessarily vicarious by nature.
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approach, and it is not entirely clear how the approach will be implemented alongside
the long-standing implementation of the doctrine of vicarious liability in South African
law.
Section 332(1) of the Criminal Procedure Act82 serves to codify the common law
doctrine of vicarious liability to enable the imputation of corporate criminal liability to
a corporation for the criminal conduct of a director or servant within the scope of his or
her employment or during the course of conducting the business of the corporation.
Section 332(5) of the Act83 takes the vicarious liability of the corporation a step further
by attempting to ensure that a director or servant can, apart from any vicarious liability
attributed to the corporation, be held personally liable for the criminal conduct
undertaken by that specific director or servant during the course of his or her
employment with the corporation. Subsequent to the finding in S v Coetzee,84 the
prosecution of a director or servant for a crime for which the corporation can be held
vicariously liable will require of the state to prove that the relevant director was aware
of the crime being conducted, or at the very least that he or she did everything
reasonably possible to prevent the commission of the crime – a feat that may prove
impossible as corporate hierarchies often veil the identity of the individual to whom
“intention” can be assigned for the purpose of attributing “fault” for the wrongful
corporate conduct.
Modern South African legislation does make provision for the imputation of personal
criminal liability to directors apart from any vicarious liability that may arise from the
conduct of the director in connection with his or her employment or representation of
the corporation in specific situations. For example, Section 424 of the Companies Act
61 of 1973, which remains in force despite the implementation to of the Companies Act
70 of 2008, provides for the attribution of liability to a director in his or her personal
capacity for the wrongful contribution to the loss of a creditor that arises as a result of
the reckless or intentional commission of fraud. In the recent case of Fourie v First
Rand Bank Ltd 85 the Supreme Court of Appeal resorted to Section 424 of the Act86 to
hold the director personally liable for the wrongful conduct that contributed to the loss
of the creditor, and found the director’s employer vicariously liable for the conduct of
the director.87
It appears courts have also begun to take action aimed more directly at directors for
corporate criminal conduct. In the recent landmark case of S v Blue Platinum Ventures
(Pty) Ltd and Matome Samuel Maponya,88 the court held that the director (Maponya) of
the company was criminally liable in his personal capacity for the contravention of
82
Act 51 of 1977.
83
Act 51 of 1977.
84
(CCT50/95) [1997] ZACC 2; 1997 (4) BCLR 437; 1997 (3) SA 527 (6 March 1997).
85
Fourie v First Rand Bank Ltd [2012] ZASCA 119 (578/2012).
86
Act 61 of 1973.
87
C Theodosiou (2012). In its application of Section 424 of the Companies Act 61 of 1973
the court held that the application of Section 424 does not require a causal link between the
reckless or fraudulent conduct of the director and the loss suffered by the creditor.
88
S v Blue Platinum Ventures (Pty) Ltd and Matome Samuel Maponya, case no. RN126/13,
in the Magistrate’s Court for the Regional Division of Limpopo held at Lenyenye.
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Section 24F of the National Environmental Management Act by the corporation.89 The
crux of this case pertains to criminal liability of a director with respect to conduct
statutorily provided for in the arena of environmental law, but it is worth noting that the
court, upon conviction of the crime, sentenced Maponya to a term of imprisonment
without an option of payment of a fine.90 The sentence was suspended for five years
provided that the damaged land be rehabilitated by the corporation within the given
time period.91 This is the first case in South Africa where a director of the offending
company is found criminally liable in his personal capacity and sentenced to imprison-
ment without the option of a fine.92 It will be interesting to see how this finding may
influence future findings by courts concerning the criminal liability of a director in his
or her personal capacity for corporate malfeasance.
REFERENCES
Allens Arthur Robinson. 2008. “Corporate Culture” as the Basis for Criminal Liability of Corporations.
<http://198.170.85.29/Allens-Arthur-Robinson-Corporate-Culture-paper-for-Ruggie-Feb-2008.pdf>.
Retrieved 10 June 2014.
Anderson DS. 1981. Corporate Homicide: The Stark Realities of Artificial Beings and Legal Fictions.
Pepperdine Law Review. Vol. 8, No. 8: 367–417.
Anderson H. 2008. Directors’ Personal Liability for Corporate Fault: A Comparative Analysis, Kluwer Law
International BV: The Netherlands <http://books.google.co.za/books?id=S-2TZfRm8K4C&pg=PA253
&lpg=PA253&dq=since+S+v+coetzee&source=bl&ots=qLoCAdce94&sig=kAWX7NiPLudxqKYhFrum
3rcrrfY&hl=af&sa=X&ei=3HTXU86 YLIne7AbwlYCwAQ&ved=0CFAQ6AEwBQ#v=onepage&q=since
%20S%20v%20coetzee&f=false>. Retrieved 29 July 2014.
Blair MM 2013. Corporate Personhood and the Corporate Persona. University of Illinois Law Review. Vol.
2013 No. 3: 785–820.
Botha MM and Millard D. 2012. The Past, Present and Future of Vicarious Liability in South Africa. De
Jure. Vol. 2, No. 45: 225–253.
Bowman Gilfillan. 2008. Criminal Liability of Companies Survey. <https://www.lexmundi.com/images/
lexmundi/PDF/Business_Crimes/Crim_Liability_South%20Africa.pdf>. Retrieved 16 July 2014.
Brickey KF. 1982. Corporate Criminal Accountability: A Brief History and an Observation. Washington
University Law Review. Vol. 60, No. 2: 393–423.
Burchall JM. 1997. South African Criminal Law and Procedure: General principles of criminal
law (Volume 1). Juta. <http://books.google.co.za/books?id=bblC71r7vvAC&dq=vicarious+liability+
implementation+in+south+afri ca&hl=af&source=gbs_navlinks_s>. Retrieved 24 July 2014.
Davids L. 1968. Penology and Corporate Crime. Journal of Criminal Law and Criminology. Vol. 58, No. 4:
524–531.
Dejnozka J. 2007. Corporate Entity. <http://www.members.tripod.com/~Jan_Dejnozka/corporate_entity_
book.pdf>. Retrieved 10 June 2014
Ferguson G. 1998. Corruption and Corporate Criminal Liability. <http://icclr.law.ubc.ca/sites/icclr.law.
ubc.ca/files/publications/pdfs/FergusonG.PDF>. Retrieved 23 July 2014.
Hoffman WM. 1982. Corporate Obligations and Responsibilities: Everything Old is New Again (Case
Study – The Ford Pinto). <http://businessethics.qwriting.qc.c uny.edu/files/2012/01/HoffmanPinto.pdf>.
Retrieved 16 July 2014.
Iwai, K. 1997. Persons, Things and Corporations: The Corporate Personality Controversy and Comparative
Corporate Governance. <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1861919>; also appeared in
American Journal of Comparative Law. 1999. Vol. 47, No. 4: 583–632.
89
Act 107 of1998.
90
Werksmans Attornyes (2014: 2).
91
Ibid.
92
Ibid.
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Joubert WA. 2013. The Law of South Africa. 2nd ed. Vol. 4, Part 1 (Companies). Lexis Nexis: Durban.
Lederman E. 1985. Criminal Law, Perpetrator and Corporation: Rethinking a Complex Triangle. Journal of
Criminal Law and Criminology. Vol. 76, No. 2: 285–340.
Machen A. 1911. Corporate Personality. Harvard Law Review. Vol. 24, No. 4 (part 1) and (part 2): 253–281.
Naude SJ. 1970. Die Regsposisie Van Die Maatskappydirekteur Met Besondere Verwysing Na Die Interne
Maatskappyverband. Buttersworth: Durban.
Pop AI. 2006. Criminal Liability Of Corporations – Comparative Jurisprudence. <http://www.law.msu.edu/
king/2006/2006_Pop.pdf>. Retrieved 15 July 2014.
Snyman CR. 2008. Criminal Law. 5th ed. Lexis Nexis: Durban.
Theodosiou C. 2012. South Africa: No Link Needed: Fraudulent Directors Will Pay, Mondaq. <http://www.
mondaq.com/x/212994/Directors+Officers/No+Link+Needed+Fraudulent+Directors+Will+Pay>. Retrieved
10 July 2014
Werksmans Attornyes. 2014. Environmental Law Compliance – The Noose is Tightening, by Justin Truter.
<http://www.werksmans.com/wp-content/uploads/2014/06/041089-WERKSMANS-environmental-law.
pdf>. Retrieved 7 August 2014.
Wilkinson M. 2003. Corporate Criminal Liability – The Move towards Recognising Genuine Corporate
Fault. <ww.nzlii.org/nz/jour nals/…/2003/5…/5.rtf>. Retrieved 13 June 2014.
Barry Rider - 9781783475780

17. Insolvency-related crime

Laura Atherton and Nadia Saleh
INTRODUCTION
When a company or an individual is subject to a formal insolvency procedure, the
affairs of the company, or the individual, will often be investigated. Depending on the
outcome of those investigations, claims or enforcement action relating to misconduct
may be brought against directors of a company or those in some way involved with the
company or, in the case of personal insolvency, the bankrupt individual. Most actions
arising out of insolvencies are civil in nature and any recoveries made will generally
benefit the creditors of the company or the bankrupt individual. However, there are also
a number of offences which carry criminal liability.
In this chapter, with help from K&L Gates LLP colleagues worldwide, we provide a
high-level overview of insolvency-related criminal offences in a sample of jurisdictions
across the globe, primarily in the corporate sphere.
ENGLAND AND WALES

Both corporate entities and individuals can be subject to English law insolvency-related
offences. The main corporate insolvency-related criminal offences can be found in
Chapter 10 of Part 4 of the Insolvency Act 1986 (“IA86”) entitled “Malpractice before
and during Liquidation; Penalisation of Companies and Company Officers; Investiga-
tions and Prosecutions”. These offences are fraud in anticipation of winding up,1
transactions in fraud of creditors,2 misconduct in the course of winding up,3 falsifica-
tion of company’s books,4 material omissions from a statement relating to a company’s
affairs,5 false representations to creditors,6 fraudulent trading7 and contravention of the
restriction on the re-use of company names.8 We discuss the last two offences in more
detail below.
This short list of main offences is somewhat deceptive. Schedule 10 of the IA86,
which contains punishments for the offences in the IA86, lists more than 100 sections
referring to offences including, for example, section 89(4), which makes it an offence
1
Section 206 of IA86.
2
3
4
5
6
7
8
206
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Insolvency-related crime 207
for a director to make a statutory declaration of the solvency of the company without
reasonable grounds for doing so.
Depending on the offence, defendants to a prosecution under the IA86 may be the
company, its directors, and contributories to the company’s debts or an office holder
appointed in respect of the company. Offences are capable of being committed even by
individuals with a limited connection to the company (promoters and managers);
however, the main category of defendants is formed from past or present company
officers.
The meaning of “officer” was inserted into section 251 of IA86 by the Companies
Act 2006 (“CA06”). Officers are defined as directors, secretaries and managers of the
company, including those occupying the position of director, regardless of their job
title. “Shadow directors”, who are defined as “a person in accordance with whose
directions or instructions the directors of the company are accustomed to act (but so
that a person is not deemed a shadow director by reason only that the directors act on
advice given by him in a professional capacity)”,9 may also incur liability under IA86.
Liquidators, receivers and administrators are not treated as officers of a company unless
expressly included as such in a particular section. The term “manager” has been
defined by case law as meaning someone in the “sphere of management” being a
“person who in the affairs of the company exercises a supervisory control which
reflects the general policy of the company for the time being or which is related to the
general administration of the company”.10
The criminal offences under IA86 can be tried either in the Magistrate’s Court or in
the Crown Court. For offences tried in the Magistrate’s Court, the maximum penalty is
six months’ imprisonment or a fine of £5,000 or both; the penalties in the Crown Court
are higher. There is little guidance and few reported cases on sentencing.
Fraudulent Trading
Perhaps the most well-known insolvency-related criminal offence in England is that of

fraudulent trading.11 This is where the directors of a company allow debt to be incurred
when there is no good reason for thinking that funds will become available to repay the
amount owed when due, or shortly afterwards. Fraudulent trading has both civil and
criminal repercussions for the directors in question.
In order to bring a successful claim for fraudulent trading, the liquidator must show
evidence of actual dishonesty involving real moral blame; it is not enough that those
involved merely continued to run up debts knowing the company was insolvent.12 In
the case of R v Grantham (1984) 1 Q.B. 675 Lord Lane confirmed the words of the
trial judge who had said that an intent to defraud arises when a trader “knows he is
stepping beyond the bounds of what ordinary decent people engaged in business would
regard as honest”. This can be difficult to prove, which is no doubt why there are a
relatively small number of cases in this area.
9
10
In Re a Company (No.00996 of 1979) [1980] Ch. 138 at 144, per Shaw LJ.
11
12
Re Overnight Ltd [2010] EWHC 613.
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Following an application to the court by a liquidator the court can order that any
person who was, in the course of a winding up of a company, knowingly a party to
carrying on the business of the company with intent to defraud creditors of the
company or of any other person, or for any fraudulent purpose, is liable to make such
contributions to the company’s assets as the court sees fit.
Fraudulent trading as a criminal offence carries the risk of imprisonment, a fine or
both. There are criminal sanctions for every person who was knowingly a party to the
carrying on of the business in a fraudulent manner.13 The Fraud Act 2006, which came
into force on 15 January 2007, increased the maximum penalty for contravention of
CA06 from 7 to 10 years.
The Restriction on Re-use of Company Names
Another current issue in English insolvency law is “Phoenix Companies”. The re-use of
a name previously used by a company that has gone into liquidation is restricted.14 The
phrase “Phoenix Companies” refers to a new company started by directors and/or
individuals involved in a previous company which has gone into liquidation. Typically,
the assets of the old business are purchased by a party connected to the previous
company; the newly formed company will then continue to trade in a similar manner to
the old company. English legislation does not prevent the formation of a newly formed
company in such circumstances in principle, provided that the relevant provisions in the
IA86 and Insolvency Rules 1986 (“IR86”) relating to the use of the old company’s
name are complied with.
It is an offence15 for a person who has been a director or a shadow director of a
company in insolvent liquidation, within the period of 12 months ending on the day
before it went into liquidation, to be, for a period of five years, a director or involved in
any way in the management of any other company or business carried on under or
known by a “prohibited name” without leave of the court or unless one of the
exceptions in rules 4.226 to 4.230 of the IR86 applies. A prohibited name is any name
by which the liquidated company was known at any time in the 12 months prior to the
liquidation, or any name so similar to suggest an association with that company.
If found to be in breach of section 216 IA86, a director, former director or shadow
director of the liquidating company is liable to imprisonment (two years) or a fine (of
up to £15,000) or both. Liability is strict, and, therefore, mens rea need not be shown.16
Further,17 a former director or shadow director or persons who act on the instructions of
such ex-directors who are in breach of section 216 IA86 may be personally liable for
the debts of the new company for the period in which that company used the prohibited
name.
13
Section 993 CA06 (formerly section 458 CA 1985).
14
15
16
R v Lees & Birch [1998] B.C.C. 87.
17
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The Effect of Bankruptcy on Individuals
With regard to personal insolvency, according to section 11 of the Company Directors

Disqualification Act 1986, it is an offence for a person who is an undischarged
bankrupt to act as director of a company or directly or indirectly take part in or be
concerned in the promotion, formation or management of a company except with leave
of the court. The maximum penalty is two years’ imprisonment and/or a fine plus
personal liability for the debts of the company.
THE UNITED STATES18

US bankruptcy crime statutes are primarily found in 18 United States Code (“U.S.C.”)
§§ 152–157. The most commonly prosecuted bankruptcy crimes are concealment of
assets, false oaths and claims, improper receipt of estate property, destruction or
falsification of records, withholding information from the trustee and bribery pursuant
to 18 U.S.C. § 152 (the “Common Sins”) and bankruptcy fraud pursuant to 18 U.S.C.
§ 157. All of the Common Sins set forth in 18 U.S.C. § 152 must be committed
knowingly and fraudulently.
Concealment of assets is the easiest to prove and, thus, accounts for almost 70 per
cent of the bankruptcy crimes prosecuted. The elements of concealment are: conceal-
ment from a court officer or from other creditors of property of some bankruptcy
debtor’s estate and that the concealment is done knowingly and willingly.19
Bankruptcy fraud requires that a person devised (or intended to devise) a scheme or
artifice to defraud for the purposes of carrying out that scheme or artifice, or as part of
the attempt to conceal such scheme or artifice and that such person either filed a
petition under title 11, filed a document in a proceeding under title 11, or made a false
or fraudulent representation, claim or promise which concerns or relates to a proceed-
ing under title 11, or which relates to a proceeding falsely asserted to be pending under
title 11 and that such actions were fraudulently undertaken.20 Other bankruptcy crimes
include embezzlement against the bankruptcy estate, adverse interest and conduct of
officers, fixing of professional fees and a knowing disregard of a bankruptcy law or rule
by a bankruptcy petition preparer.21
Many bankruptcy indictments include indictments for aiding and abetting, accessory
after the fact, conspiracy to commit bankruptcy fraud, fraud and false statements, mail
fraud, wire fraud and bank fraud, obstruction of justice, perjury and/or tax evasion.
Bankruptcy crimes and bankruptcy-related crimes can be committed by individuals,
organizations, corporate officers and agents, as well as professionals appointed in
connection with a bankruptcy case such as counsel, accountants or financial advisors.
18
We are grateful to our colleague Eunice Rim Hudson for her contribution to the US
section of this chapter.
19
18 U.S.C. § 152(1).
20
18 U.S.C. §157.
21
18 U.S.C. §§ 153–157.
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Although rare, bankruptcy professionals can also be criminally prosecuted (in

addition to civilly prosecuted) for failure to adequately disclose their connections to the
debtor, creditors or any other party in interest in a bankruptcy case, their respective
attorneys and accountants, the United States trustee or any employee of the United
States trustee as required under Federal Rule of Bankruptcy Procedure 2014 if such
failure to disclose was done knowingly. The disclosure requirements of Bankruptcy
Rule 2014 aid the bankruptcy court in determining whether a professional is dis-
interested under the Bankruptcy Code and does not hold an interest adverse to the
bankruptcy estate under section 327 of the Bankruptcy Code.22
Sentencing for offences committed under 18 U.S.C. §§ 152–157 vary with the
seriousness of the crime. Offences committed under section 152 for Common Sins,
section 153 for embezzlement and section 157 for bankruptcy fraud are Class D
felonies that carry a maximum prison term, if convicted, of up to five years. Individual
defendants can additionally be fined up to US$250,000 and defendants that are
organizations can be fined up to US$500,000. Fraudulent fixing of professional fees
under 18 U.S.C. § 155 and a bankruptcy petition preparer’s knowing disregard of a
bankruptcy law or rule under 18 U.S.C. § 156 are Class A misdemeanors for which
defendants can be imprisoned for one year or less, if convicted. Individual defendants
can additionally be fined up to US$100,000 and defendants that are organizations can
be fined up to US$200,000.
For adverse interest or conduct of officers under 18 U.S.C. § 154, no imprisonment
can be imposed, but a maximum fine of US$5,000 can be imposed and the individual
will be removed from the office he or she held while committing the crime.
GERMANY23
Under German law, insolvency-related crimes are found in the Insolvency Code
(“Insolvenzordnung”) and the Criminal Code (“Strafgesetzbuch”). There are also
connected relevant offences in the Commercial Code (“Handelsgesetzbuch”), the
Limited Liability Companies Act (“GmbH-Gesetz”) and the Stock Corporation Act
(“AktG”).
The most commonly prosecuted offences24 relate to the undue delay of filing for
insolvency, which is punishable by a fine or by imprisonment of up to three years;25
false accounting, which is punishable by a fine or by imprisonment of up to two
years;26 and bankruptcy involving, inter alia, the misappropriation of company assets
22
United States v Gellene, Case No. 97-00221 (E.D. Wis.) was a notorious case involving
criminal prosecution of a debtor’s counsel for bankruptcy fraud and perjury because counsel
knowingly failed to make disclosure of his and his firm’s connections to parties in interest in the
bankruptcy case. The attorney was sentenced to 15 months in prison, fined US$15,300 and given
two years of probation.
23
We are grateful to our colleague Katja Findeisen for her contribution to this chapter.
24
Police Crime Statistics 2012 (http://www.bka.de/nn_194552/EN/Publications/PoliceCrime
Statistics/policeCrimeStatistics__node.html?__nnn=true).
25
Section 15a of the Insolvency Code.
26
Section 283b of the Criminal Code.
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that would, in the event of the opening of insolvency proceedings, have belonged to the
insolvency estate, or where the misappropriation of such assets has led to the
insolvency of the company. This last offence is punishable by a fine or by imprison-
ment for up to five years.27
German law recognizes both corporate and individual insolvency. However,
insolvency-related criminal offences can only be committed by individuals. “Corporate
bodies” can only commit administrative offences under German law. Therefore, where
there are criminal offences in relation to corporate insolvency the defendants will be
individuals such as managing directors of limited liability companies (“GmbH”), the
members of the management board of a stock corporation (“Aktiengesellschaft”) or the
liquidator of a company during winding-up proceedings.
A practice commonly referred to as “company burials” (“Firmenbestattungen”) is a
particular problem for German law enforcement authorities. This phrase describes the
circumstances where the shareholders of an insolvent company sell their shares to an
impecunious buyer through an agency. However, instead of the buyer paying the
purchase price, the seller makes a so-called takeover payment to either the buyer or the
agency. The managing directors are replaced and the business seat of the company is
re-located, often several times, during which the company files are “lost”. The
company’s business activities then cease and its assets are sold. The new managing
directors then file for insolvency with the knowledge that the insolvency court is likely
to reject the opening of insolvency proceedings due to lack of assets, thus depriving the
company’s creditors. The potential offences committed during this practice include
fraudulent failure to file for insolvency or bankruptcy, false accounting, breach of trust
and for participating in a criminal conspiracy under German law.
ITALY28
Italian insolvency-related crimes are found in articles 216 et seq. of the Royal Decree
16 March 1942, no. 267 (the “Bankruptcy Law”).
Under Italian law, most significant insolvency-related offences arise when a company
has been declared bankrupt. One such offence, which also carries the most severe
penalty of all such offences, is that of fraudulent bankruptcy (“bancarotta fraudolenta”)
set out in articles 216 and 223 of the Bankruptcy Law. This offence is punishable by up
to 10 years of imprisonment and covers situations such as when a company’s assets
have been misappropriated or concealed or where there has been false accounting for
the purpose of obtaining an undue profit. Anyone convicted of this offence is banned
from being a company director for 10 years.
Other offences include reckless bankruptcy (“bancarotta semplice”),29 which occurs
when the financial situation of a company has worsened due to a reckless failure by a
director to file for insolvency (punishable by up to two years of imprisonment), and
27
Section 283 of the Criminal Code.
28
We are grateful to our colleague Andrea Campana for his contribution to this chapter.
29
Police Crime Statistics 2012 (http://www.bka.de/nn_194552/EN/Publications/PoliceCrime
Statistics/policeCrimeStatistics_node.html?_nnn=true).
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unfair preference in bankruptcy, (“bancarotta preferenziale”),30 which occurs when, in

violation of the pari passu principle, one or more of a company’s creditors are
intentionally paid with preference over other creditors, (punishable by up to five years
of imprisonment).
It should also be noted that Italian law recognizes both individual and corporate
insolvency. Individuals, including entrepreneurs and their associates (in the case of a
business which is not a corporate entity), as well as directors, statutory auditors,
liquidators, general managers and proxy holders of the company, may be held
criminally liable in relation to a number of offences.
Similar to the law applicable to England and Wales, Italian law recognizes the
concept of shadow directors, and they, too, can be held criminally liable for insolvency-
related offences.
FRANCE 31
The main legal provisions regulating insolvency in France are contained in Sixth Book
of the Commercial Code (the “Code”). The provisions governing insolvency-related
crimes are contained in Title V of Sixth Book of the Code (Liabilities and Sanctions)
and in articles 314-7 et seq. of the French penal code (the “Penal Code”).
These offences mainly concern the fraudulent failure to enter into an insolvency
procedure, breaches of the regulations applicable to the insolvency procedures or, more
generally, the taking of action detrimental to the interest of the creditors of the
insolvent entity or individual. Some of the most common specific offences concern
situations where there has been a concealment or embezzlement of all or part of the
debtor’s assets, a fraudulent increase of the debtor’s liabilities created in order to
defraud creditors, fictitious accounting, concealment of accounting records, or an
absence of any accounting records.
Generally, the sanctions applicable to insolvency-related offences in France can be
imposed on individuals subject to insolvency procedures as well as on legal entities and
all persons that have acted as an entity’s representative, whether or not officially
appointed to do so. Relatives of the involved individuals that have wilfully participated
in an offence may also face criminal liability.
Criminal liability for insolvency-related offences may include fines that can reach
€750,000 and imprisonment of up to seven years. The persons held liable may further
be prohibited from holding any management positions in a legal entity or operating any
business for a period of up to 15 years. In addition, representatives of an insolvent legal
entity who are guilty of an offence may be ordered personally to pay all or part of the
entity’s outstanding debts following liquidation.
30
Section 283 of the Criminal Code.
31
We are grateful to our Paris office for their contribution to this chapter.
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RUSSIA32
The main legal provisions regulating insolvency in Russia are contained in the Federal
law N. FZ-127 on “Insolvency (Bankruptcy)”, dated 26 October 2002 (the “Law”).33
The Law currently regulates insolvency of Russian legal entities and individual
entrepreneurs only. However, in December 2014, the Law was amended significantly to
introduce the concept of individual insolvency into the Russian legal system.34
Provisions relating to insolvency of individuals will come into force on 1 July 2015.
The Code of Administrative Offences and the Criminal Code of the Russian
Federation provide for administrative and criminal liability for the following: unlawful
actions during a bankruptcy procedure, including concealing property, proprietary
rights and liabilities; withholding of information with regard to property; transferring,
alienating or destroying property; concealing, destroying or falsification of accounting
records; unlawful satisfaction of proprietary claims of creditors; and actions impeding
activity of liquidators; fraudulent bankruptcy, that is, making a fraudulent public
announcement about the bankruptcy of a company; and deliberate bankruptcy, that is,
deliberate actions or failures to act that result in the insolvency of a company or its
inability to satisfy claims of creditors.
These types of conduct may result in only administrative liability if the damage
caused is insignificant;35 otherwise, such actions constitute crimes under the Criminal
Code and, therefore, lead to criminal liability. Depending on the facts of the case,
administrative or criminal liability for the conduct may be imposed on an entity’s CEO,
founders and other “persons in control” of companies, including liquidators or interim
administrators.
Administrative liability for insolvency-related offences ranges from fines between
5,000 and 50,000 rubles (approximately US$140 and US$1,400) to disqualification
(i.e., prohibition to hold management positions in a legal entity) for a period from six
months to three years. Individuals who commit insolvency-related crimes may be
subject to a fine of up to 500,000 rubles (approximately US$14,000) or to imprison-
ment for a term of up to six years.
In addition to administrative and criminal liability, CEOs, founders and other
“persons in control” of companies or parent companies may, in accordance with the
Russian Civil Code, be subject to subsidiary liability for a company’s obligations,
where their actions result in its insolvency.
32
We are grateful to our colleague Sergei Korovkin for his contribution to this chapter.
33
Insolvency of credit organizations is regulated by the Federal Law N. FZ-40 “On
Insolvency of Credit Organization”, dated 26 October 2002.
34
The amendments were introduced by the Federal Law N. FZ-476 “On Amendments to the
Federal Law on Insolvency and Certain Legislative Acts Related to Rehabilitation Procedures
Applying to an Individual-Debtor”, dated 29 December 2014.
35
Significant damage is that which exceeds 1,500,000 rubles (approximately US$42,000).
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CHINA36
The law regulating insolvency in China is the PRC Enterprise Insolvency Law
(“Insolvency Law”). The Insolvency Law regulates the insolvency of enterprises and
companies only; there is no individual insolvency in China. The provisions governing
insolvency-related crimes are more specifically contained in section 5 of Chapter 3
under Part II of the PRC Criminal Law (“Criminal Law”).
There are a few possible offences in relation to insolvency, mainly consisting of
fraudulently launching an insolvency procedure, concealing or forging financial
accounting books in insolvency procedures or misconduct detrimental to the interest of
the insolvent enterprise. The most common offences and crimes are the following:
falsification or destruction of financial accounting reports in liquidation;37 false
declarations of a company’s solvency;38 and misconduct of a person who is directly in
charge of a state-owned company or enterprise.39
The sanctions applicable to the above offences (and generally, to the majority of the
other insolvency-related crimes) are mostly imposed on persons that have acted as
representatives thereof and persons that are directly liable for the insolvency.
Criminal liability for insolvency-related crimes may include imprisonment for up to
7 years. Criminal fines between RMB 20,000 and RMB 200,000 can also be imposed.
Where a director, supervisor or senior manager acts in breach of his obligations, and
his failure leads to the insolvency of the enterprise where he works, he can be made
civilly liable for the losses caused if he has contributed to the lack of assets through
acts of concealing or wrongful distribution of the assets of the insolvent enterprises,
and may be ordered to personally pay all or part of the sums due to creditors that
cannot be paid out of the available assets of the insolvent enterprise. He will also be
prohibited from serving as a director, supervisor or senior manager of any enterprise
within three years of the bankruptcy procedure.
TAIWAN40
The main legal provisions in Taiwan are contained in the Insolvency Act (the “Act”).41
Taiwanese law recognizes both individual and corporate insolvency and the Act
regulates insolvency of Taiwanese legal entities and individuals and provides proced-
ures for insolvency and for settlement between creditors and debtors before insolvency
is declared by the court.
In addition to the civil settlement and insolvency procedures there is a body of
insolvency-related criminal offences. Some of the main insolvency-related offences
committed by insolvent individuals or entities include refusal to submit financial
36
We are grateful to our colleague Cecilia Dai for her contribution to this chapter.
37
Article 162 of the Criminal Law.
38
39
40
We are grateful to our colleague Edith Teng for her contribution to this chapter.
41
The Insolvency Act was first passed in 1935 and was last amended in 1993.
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statements and books, refusal to hand over relevant assets to the administrator and
making false statements in the course of the insolvency procedure.42 Where an
individual or entity commits certain actions described as “insolvency deceptions”,
which are intended to damage creditors’ rights, or these deceptions take place in the
year prior to the declaration of insolvency, this will constitute an offence.43 Falling
short of insolvency deceptions, an individual or entity can also commit certain actions
classified as “insolvency neglect” within one year prior to the insolvency declaration.44
Penalties for insolvency-related offences range from one to five years of imprison-
ment and fines of up to around US$300.
On 11 July 2007, the Taiwanese government announced the “Debt Clearance for
Consumers Act” (the “DCCA”), applicable only to individual consumers, which
provides procedures including rehabilitation, liquidation, negotiation and criminal
penalties. The DCCA is a procedure preceding insolvency, which means that a creditor
cannot apply to the court for an insolvency declaration on a debtor if the debtor has
applied for rehabilitation or liquidation under the DCCA.45
SINGAPORE 46
Singapore has distinct regimes for individual bankruptcy (Bankruptcy Act (Cap 20,
2009 Rev. Ed.)) and corporate insolvency (Companies Act (Cap 50, 2006 Rev. Ed.) and
the Companies (Application of Bankruptcy Act Provisions) Regulations).
The most commonly prosecuted offences in relation to corporate insolvency include
false declarations of solvency in the context of a voluntary winding up;47 not
complying with the requirements for the lodgement of a statement of affairs;48
fraudulent trading;49 and failure to keep proper accounts.50 Commonly prosecuted
offences relating to individual bankruptcy include concealment of property, non-
disclosure of property and making false statements.51
The penalties for the offences are specified in the relevant sections of the Companies
Act and the Bankruptcy Act. Of the corporate insolvency-related offences, fraudulent
trading carries the most severe penalties with a fine of up to S$15,000 and imprison-
ment for up to seven years. Conviction for an individual bankruptcy-related offence can
result in a fine of S$10,000 or imprisonment for up to three years. Insolvency-related
offences can be committed by individuals, corporates and those brought in to deal with
insolvency, such as a liquidator or a judicial manager.
42
Please refer to articles 152 and 153 of the Insolvency Act.
43
Please refer to article 154 of the Insolvency Act.
44
Please refer to article 156 of the Insolvency Act.
45
Please refer to article 13 of the Debt Clearance for Consumers Act.
46
We are grateful to our colleague Paras Lalwani for his contribution to this chapter.
47
Section 293(4) of the Companies Act.
48
49
Section 340 of the Companies Act.
50
51
Part X of the Bankruptcy Act.
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CONCLUSION
As is apparent from the above review, the approach to dealing with insolvency-related
criminal offences can vary in a number of respects. There are, however, several
common themes in the jurisdictions detailed above:
1. In the sphere of corporate insolvency, most of the jurisdictions above allow

criminal liability to extend not just to the insolvent corporate entity but also to its
owners and directors as well as those that represent and control it (even if this is
in an unofficial capacity). In a number of jurisdictions this principle has been
extended to impose criminal liability on individuals, other than owners and
directors, such as lawyers, accountants, liquidators, family members and those
who represent the company only in some other limited capacity.
2. Common insolvency-related offences tend to focus on the failure of directors to
carry out their duties towards creditors, particularly those duties which arise at the
point of the insolvency and during the insolvency procedure.
3. The same misconduct is likely to create both civil and criminal liability for the
individuals involved, and those found personally criminally liable for the insol-
vency of a corporate will often become personally civilly liable to the claims of
its creditors. In many jurisdictions, those who commit insolvency-related crime
can expect to be disqualified from acting as a director for a period.
4. Insolvency-related offences are driven by the need to protect creditors. All
jurisdictions above criminalize the misappropriation of assets belonging to the
insolvent company. In some jurisdictions, where the law in this area is arguably
more developed, legislators have also made efforts to criminalize the behaviour of
those who seek to evade their responsibilities to creditors by illegitimate use of
insolvency and company procedures. We expect that other jurisdictions may
follow suit in time.
In practice, the provisions imposing criminal liability for insolvency-related misconduct

are rarely invoked. This is partly because prosecutions are often time-consuming and
costly. Criminal proceedings will not help the creditors to recover their money, and in
many jurisdictions, civil law remedies are pursued instead. However, where they are
prosecuted, the sentences available across the jurisdictions show that the offences are
taken seriously, with convictions leading to high fines and possibly even imprisonment
for those convicted.
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PART IV
THE FINANCIAL SECTOR

AT RISK
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18. Engendering confidence in the financial system –

challenges and observations
Jackie Harvey
INTRODUCTION AND OVERVIEW

Two words – trust and integrity – more than any others underpin the operations of the
London financial markets as an essential precondition to the creation of a climate of
confidence. It is this confidence that helps the financial markets ride out the turbulence
associated with periodic financial crises. One only has to think back to the 1994–95
Mexican peso crisis, estimated to have cost $50 billion; to the 1997 Asian crisis, with
a price tag of $117 billion; and to the 1998 Russian bond crisis, which was put at
$22 billion, as some recent examples. The shock associated with the 2008 western
financial crisis, which, it is suggested, resulted in losses of $1.4 trillion, appears
associated with the widely embraced belief that market volatility had been tamed and
that the long-standing positive correlation between reward and risk had in someway
altered in what was referred to as ‘the great moderation’:
One of the most striking features of the economic landscape over the past twenty years or so
has been a substantial decline in macroeconomic volatility (Ben Bernanke, 20 February
2004)1
It was possibly the apparent unexpectedness of the 2008 crisis, and the resultant market
panic during which trust all but evaporated, that paved the way for the emergence of an
almost perfect storm of scandal and subsequent accusation that has seen changes in
both the structure of regulation and the emergence of a heightened public and media
interest in ‘bank bashing’. Indeed, having been adopted by the press, this pejorative
term has entered the lexicon as a recognised phrase:
Overreaction, but more bank-bashing ahead. (Ian King, The Times 17 April 2010)
Time for some bank bashing. (Emma McKinney, Birmingham Evening Mail 1 April 2013)
There’s a danger that all this bank bashing will just help our competitors. (Business Section,
The Daily Telegraph 18 June 2013)
Greater press attention on financial markets post-crisis has inevitably raised public
awareness and their opprobrium. Witness the various scandals that have emerged from
1
Remarks by Federal Reserve Board Chairman Governor Ben S. Bernanke at the meetings
of the Eastern Economic Association, Washington, DC, 20 February 2004 available at http://
www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/ (accessed 14 September 2013).
219
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the financial sector and found their way into the public arena: most recently, the
failings in respect of LIBOR setting, colloquially referred to as ‘Libor fixing’, that in
2012 saw UBS2 fined £160 million in connection with the event. In addition to UBS,
other banks publically reprimanded and subject to FSA sanction included both
Barclays3 and RBS,4 who were respectively fined £59.5 million and £87.5 million for
the same market misconduct. Most recently the press has reported on what has been
referred to as the ‘foreign exchange rate fixing scandal’,5 with reports drawing attention
to the fact that the regulators have been investigating allegations of long term collusion
between banks in relation to apparent fixing of foreign exchange rates. In light of this,
it hardly comes as a surprise that ‘highly respected individuals and institutions
(bankers, regulators) suddenly became widely detested’.6
Set against this background, this chapter considers the general principles and
objectives of financial market regulation. It goes on to discuss the changes in the
financial markets in light of some high profile losses but notes that the nature of
capitalist markets is inherently unstable. The chapter concludes with the argument that
the answer to maintaining confidence does not lie in a constant tightening of rules but
rather in the maintenance of a constant and open dialogue between the regulators and
the institutions, and it is this that creates trust.
FINANCIAL MARKET REGULATION – THE LONG VIEW

Regulation has long been viewed as being ‘critical to the successful development of
financial systems’,7 and, largely in recognition of the interdependence between global
financial markets and their congruence with the wider economy8 ‘there can be few
issues of greater public importance than the regulation of global financial markets’.9
Justification for market intervention can be found within welfare economics, where it
2
‘UBS Fined £160 Million for Significant Failings in Relation to LIBOR and EURIBOR’,
FSA/PN/116/2012, 19 December 2012 http://www.fsa.gov.uk/library/communication/pr/2012/
116.shtml (accessed 20 July 2014).
3
‘Barclays Fined £59.5 Million for Significant Failings in Relation to LIBOR and
EURIBOR’, FSA/PN/070/2012, 27 June 2012 http://www.fsa.gov.uk/library/communication/pr/
2012/070.shtml (accessed 20 July 2014).
4
‘RBS Fined £87.5 Million for Significant Failings in Relation to LIBOR’, FSA/PN/011/
2013, 6 February 2013 http://www.fsa.gov.uk/library/communication/pr/2013/011.shtml
(accessed 20 July 2014).
5
‘Forex Scandal: What Is That All About?’ BBC Business News, 12 June 2014 available at:
http://www.bbc.co.uk/news/business-26526905 (accessed 20 July 2014).
6
Whittle, A., and Mueller, F., ‘Bankers in the Dock: Moral Storytelling in Action’ (2012)
Human Relations, 65:1, 111 at 112.
7
Mayer, C., ‘Trust in Financial Markets’ (2008) European Financial Management, 14:4,
617 at 620.
8
Htay, S., ‘Corporate Governance and Strategic Information Disclosure in Malaysian Listed
Banks: Panel Data Analysis’, (2012) International Review of Business Research Papers, 8:1,
196.
9
Picciotto, S., and Haines, J., ‘Regulating Global Financial Markets’ (1999) Journal of Law
and Society, 26:3, 351 at 352.
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Engendering confidence in the financial system 221
takes place to correct a perceived failure in what are otherwise regarded as competitive
markets. One of the main market failures that regulation is called upon to counter is
that of informational asymmetry,10 seen to exist between the professional practitioners
within financial markets and the individual users (customers and investors) of the
financial services that they provide.
Thus regulators are very much viewed as ‘technicians acting in the public interest’11
and that ‘the development of codification as institutionalisation’12 is embedded within
the framework such that regulation becomes subject to judgement as to its fairness,
proportionality, targeting and consistency.13 To be effective, regulation also requires
that regulators themselves are open to independent scrutiny, as, if the dominant
paradigm is public interest, it is then imperative that regulators do not fall prey to
actual, or indeed perceived, regulatory capture. Any suggestion of the latter would
undermine the function that regulation plays in reinforcing confidence in financial
markets. Capture occurs where the regulator and those subject to regulation identify
with each other to such an extent that the former cannot envisage rule transgression by
the latter and under which public denouncement and regulatory sanction becomes
unthinkable.
In simple terms prudential regulation establishes the framework that ensures financial
institutions are properly managed, adequately capitalised and have in place appropriate
systems with which to control and monitor risk arising from the portfolio of their
activities. These rules are intended to ensure stability and achieve the underlying
objective of promoting confidence in the financial system. Enforcement of these rules
falls to the national financial market regulator. The 1980s witnessed, through the 1986
Financial Services Act,14 the first comprehensive attempt at wholesale taming of the
financial markets. This Act established multiple self-regulatory bodies which collec-
tively ‘demonstrated … that the City of London was a well regulated market and
therefore an arena of probity and confidence’.15
This was a central tenet of the government at the time and its policy was to open up
access to financial markets to the wider population, whereby the man in the street was
10
Diamond, D., ‘Financial Intermediation and Delegated Monitoring’ (1984) Review of
Economic Studies, 51:3, 393.
11
Ricketts, M., ‘Economic Regulation: Principles, History and Methods’, Chapter 2, 34–62
in Crew, M. and Parker, D. (eds), International handbook on economic regulation (2006)
Cheltenham, UK and Northampton, MA: Edward Elgar at 37.
12
Vass. P., ‘Regulatory Governance and the Lessons from UK Practice’, Chapter 9, 188–205
in Crew, M. and Parker, D., International handbook on economic regulation (2006) Cheltenham,
UK and Northampton, MA: Edward Elgar at 191.
13
Baldwin, R. and Cave, M., ‘Understanding Regulation: Theory, Strategy and Practice’
(1999) Oxford University Press at 77; Kirkpatrick, C. ‘Regulatory Impact Assessment’, Chapter
11, 232–251 in Crew, M. and Parker D., International handbook on economic regulation (2006)
Cheltenham, UK and Northampton, MA: Edward Elgar at 236.
14
Financial Service Act 1986 C60 (Repealed) available at: http://www.legislation.gov.uk/
ukpga/1986/60/pdfs/ukpga_19860060_en.pdf (accessed 31 July 2014).
15
Stanley, C., ‘Mavericks at the Casino: Legal and Ethical Indeterminacy in the Financial
Markets’ (1994) Journal of Asset Protection and Financial Crime, 2:2, 137 at 143.
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encouraged to participate in the growing financial markets.16 To be successful, the

privatisation policy required the introduction of mechanisms that would ensure ‘effect-
ive legal protection of investors’;17 hence regulation delivered the means of engender-
ing trust with the latter of critical importance to the financial sector.18 As rules have to
be policed, internal compliance and strong corporate governance took centre stage.
Regulation can follow one of two broad models – coercive or voluntary – and within
the UK the approach very much aligns with the latter, whereby rules are put in place to
avoid potential ‘conduct failure’.19 Thus there has been a long history of self-policing
within financial markets with emphasis on a more persuasive model of regulatory
compliance20 such that the regulator sits in benign oversight over self-regulatory
structures that constantly monitor against a legal framework,21 reinforced by the belief
that regulatory compliance would be driven through the discipline of the market – the
paternalist model identified by Harvey and Bosworth-Davies.22 Indeed, trust itself
moved from the domain of the individual’s personal ethical stance – ‘my word is my
bond’ – to expectation that it would permeate the standards exhibited by the institutions
themselves as ‘responsibility in the area of finance is not simply a matter of private
ethics. It also involves establishing and maintaining bonds of trust between holders and
users of capital, as well as between the operators themselves.’23
However, these traditional voluntary-persuasive models of financial regulation
assume an inverse relationship between internal cultural values and the prescriptive
content of the regulatory framework, whereby organisations are intrinsically motivated
to ensure that their actions remain legitimate and above board. This model permits
regulation by exception – trusting that organisations self-police leaving the regulator to
concentrate resource and effort in areas of high risk. This approach underpinned the
movement from a rules-based to a risk-based approach promulgated by the Financial
Services Authority (FSA).24 Indeed, as pointed out in 1999 by Baldwin and Cave,25
16
Gamble, A., ‘Privatization, Thatcherism, and the British State. The Crisis of Social
Democracy’ (1988) Journal of Law and Society, 16:1, 1–20.
17
Johnson, S. and Schleifer, A., ‘Privatization and Corporate Governance’, Governance,
Regulation and Privatization in the Asia-Pacific Region, NBER East Asia Seminar on Eco-
nomics, (2004) 12:13, at 16 and Crew, M. and Kleindorfer, P., ‘Regulatory Economics: Twenty
Years of Progress’ (2002) Journal of Regulatory Economics, 21:1, 5.
18
Pettit, P., ‘The Cunning of Trust’ (1995) Philosophy and Public Affairs, 24:3, 202.
19
Op. cit.footnote 12 at 191.
20
Mascini, P., ‘Why Was the Enforcement Pyramid So Influential? And What Price Was
Paid?’ (2013) Regulation and Governance, 7, 48.
21
Robinson, C., and Marshall, E., ‘The Regulation of Energy: Issues and Pitfalls’, Chapter
15, 325–349 in Crew, M. and Parker, D., International handbook on economic regulation (2006)
Cheltenham, UK and Northampton, MA: Edward Elgar.
22
Harvey, J., and Bosworth-Davies, R. ‘Drawing the Line in the Sand: Trust, Integrity and
Regulatory Misdemeanour’ Security Journal (forthcoming).
23
Bonvin, J. and Dembinski, P., ‘Ethical Issues in Financial Activities’ (2002) Journal of
Business Ethics, 37:2, 187 at 190.
24
The single Financial Services Authority was created by the Financial Services and
Markets Act, 2000 (Financial Services and Markets Act 2000, C 8, available at: http://
www.legislation.gov.uk/ukpga/2000/8/pdfs/ukpga_20000008_en.pdf, accessed 14 September
2013) to replace the multiple self-regulatory bodies.
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compliance is synonymous with a risk-based approach to regulation whilst deterrence

models focus more on the impact of the harm. As coercive models make greater use of
regulatory sanction and, indeed, on prosecution, this approach can be expensive to
operate and to enforce. In such circumstances a model based on persuasion is seen as
more cost efficient as the ‘costs’ are shifted out from the regulator and into the
regulated entities.
It is not the purpose of this brief contribution to trace the flux and change in response
to the almost continuous series of financial scandal and crises that has largely been
responsible for changing the UK regulatory framework,26 however, more mature
readers of this chapter will recall the names of Peter Clowes, Johnson Matthey Bank,
Robert Maxwell, Guinness, Blue Arrow and Polly Peck27 as examples selected from the
1980s and 1990s that chart the move from self-regulation to a greater degree of
statutory regulation through the already mentioned creation of the FSA. Move forward
to the 2000s and there has been a further tranche of very public scandals involving
sales of private pensions, endowment mortgages and, most recently, payment protection
insurance (refer to Table 18.1). Indeed, it is these cases that, in the wake of the
financial crisis, have heightened public sensitivity to confidence in activity within this
sector. This is only to be expected. Jewkes28 noted the effect of framing29 on fact
exaggeration whilst Combs and Slovac30 identified a strong correlation between
25
Op. cit. footnote 13 at 99.
26
For a thorough overview of the UK regulatory landscape refer to Nicholas Ryder ‘United
Kingdom – Policy, Legislative, Regulatory and Enforcement Response’, Chapter 5, 179–235 in
The financial crisis and white collar crime (2014) Cheltenham, UK and Northampton, MA:
Edward Elgar.
27
Briefly: Peter Clowes perpetrated a £17 million investment fraud during the mid-1980s
(refer to: http://www.sfo.gov.uk/our-work/our-cases/historic-cases/barlow-clowes.aspx, accessed
14 September 2013); Johnson Matthey Bank, one of the central London bullion market makers,
collapsed in 1984 and was purchased by the Bank of England for £1 in 1991; Robert Maxwell
had misappropriated £450 million from the pension fund of his company, the Mirror Group
newspapers; the Guinness takeover of The Distillers Company plc in 1986 involved illegal share
support (refer to: http://www.sfo.gov.uk/our-work/our-cases/historic-cases/the-guinness-case.
aspx, accessed 14 September 2013); the 1992 takeover by Blue Arrow of the Manpower
employment agency involved price rigging of the Blue Arrow Shares; BCCI was involved in an
£800 million bank fraud in 1991 (refer to: http://www.sfo.gov.uk/our-work/our-cases/historic-
cases/bank-of-credit-and-commerce-international-(bcci).aspx, accessed 14 September 2013);
Polly Peck collapsed in 1990 and was sued for £378 million by its administrators – Asil Nadir,
who has recently returned to the UK, faced charges for theft and false accounting (refer to:
http://www.guardian.co.uk/business/2010/aug/26/polly-peck-business-asil-nadir, accessed 14
September 2013).
28
Jewkes, Y., Media and crime (2004) London: Sage Publications.
29
Framing refers to the cognitive heuristic in which people tend to reach conclusions based
on the ‘framework’ within which a situation is presented, with evidence that decisions will be
systematically different if information is framed in a positive or negative way.
30
Combs, P., and Slovac, B., ‘Newspaper Coverage of Causes of Death’ (1979) Journalism
Quarterly, 56, 837.
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availability31 bias and media coverage. The manner of how such issues are presented to
society has been noted as an important factor in how perceptions are influenced.
Stallings32 notes that written media play a crucial role in this process.
Table 18.1 Timeline of selected ‘incidents’ in the London financial markets
Year in which Incident

incident came
to light
1984 Johnson Matthey Bank

1986 Guinness/Distillers takeover
1988 Barlow Clowes
1990 Polly Peck
1991 Robert Maxwell and Mirror Group
1991 BCCI
1992 Blue Arrow/Manpower takeover
1993 Credit Lyonnaise Rouse (LME)
1995 Nick Leeson – Barings
1996 Pensions mis-selling (various)
1996 Peter Young – Morgan Grenfell
2000 Mortgage endowments mis-selling
2000 Equitable Life
2002 Split capital investment trusts and equity linked income bonds
2007 Self-certified mortgages (leading to the financial crisis)
2011 Kweku Adoboli – UBS
2012 Barclays Bank, RBS and UBS – LIBOR setting
2013 Interest rate protection products
It is as a result of these various scandals and events that twice the government has
resorted to a very public ‘rearrangement of the deck chairs’ and realignment of the
regulatory structures. As noted, the first of these occurred in 1986 through the Financial
Services Act, responsible for the creation of the various self-regulatory bodies for each
discrete area of the financial sector and their subsequent re-combination to mould the
all-powerful single regulatory authority that was the FSA. This emerged as a result of
31
The availability heuristic explains ease of availability of information recall in the brain –
negative events that are easy to remember are accorded a greater perceived frequency and thus
risk. This ease of recall can be influenced by heavy media coverage where such items are
overstated as risk.
32
Stallings, R. ‘Media Discourse and the Social Construction of Risk’ (1990) Social
Problems, 37:1, 80.
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the Financial Services and Markets Act 2000. Sharpened media attention undoubtedly
prompted the FSA to increase the visibility of its regulatory sanction activity via
implementation of a policy of ‘visible deterrence’ over the latter part of the 2000s, and
this did give rise to a gradual increase in the overall size of regulatory fines levied on
rule transgressors. For example, in 2002 the FSA imposed nine fines totalling
£9.4 million, with an average value of £827k and a range of £4k to £4 million. In 2012,
it imposed 53 fines, with a total value of £311.6 million, an average value of £5.9
million and a range from £10k to £160 million.33 Despite these higher sanctions the
UK approach remained in sharp contrast to ‘the American system of enforcement [that]
tends to be more adversarial, litigious and deterrence-based than the more compliance-
oriented British approach’.34
It was, thus, far from unexpected that the latest assault on public confidence
emerging with the 2008 financial crisis, had led to calls for what Moshella and
Tsingou35 referred to as ‘re-regulation’ of these markets and ‘to a more assertive and
interventionist role for the public sector’. In consequence, resulting in the third major
reconfiguration of the regulatory framework that accompanied the Financial Services
and Market Act 2012.36 For the FSA, it was unfortunate that its visible deterrence
efforts proved insufficient to save it from being reorganised and replaced in response to
public criticism that its span of oversight had grown too large for it to be effective. This
Act paved the way for the creation of the Financial Conduct Authority (FCA) and the
Prudential Regulation Authority (PRA) but also broadened and strengthened the law in
relation to market manipulation (arising from the LIBOR setting ‘scandal’) and in
relation to misleading statements and practices and creation of misleading impressions,
which were seen as providing a means of strengthening accountability.
The FSA has lasted barely a decade and was the second failed attempt to balance
self-regulation with formal legislation to guard against City misdemeanours and miscreants.
(‘And so, farewell to the FSA’ Sebastian Walsh, Financial News 9 January 2012)
INHERENT INSTABILITY
Changing the structure of regulation is somewhat predicated on the assumption that it is
possible to intervene and substantially alter past behaviours learned and business
models developed over many years of a free functioning capitalist system.
Unfortunately, what is frequently overlooked is the very real fact that the capitalist
system itself is, by its very nature, unstable, as it centres upon successful profit
generation. This requires companies to pursue and exploit potential market advantage,
33
Op. cit. footnote 22 using data extracted from http://www.fsa.gov.uk/about/press/facts/
fines (accessed 15 July, 2013).
34
Baldwin and Cave, op. cit. footnote 13 at 97.
35
Moshella, M., and Tsingou, E., ‘Regulating Finance after the Crisis: Unveiling the
Different Dynamics of the Regulatory Process’ (2013) Regulation and Governance, 7:4, 407 at
409.
36
Financial Services and Market Act 2012, C21 available at: http://www.legislation.gov.uk/
ukpga/2012/21/pdfs/ukpga_20120021_en.pdf (accessed 31 July 2014).
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seeking to benefit from the very market anomalies that regulation aims to remove.
Ingrained within this approach is the fact that ‘people in markets act in their own
self-interest’.37 Indeed Minsky38 argued that the existence of regular endogenously
generated financial crises were part and parcel of capitalist economies, setting out his
first and second theorems that identified the predisposition of financial markets to lurch
from one crisis to the next:
The first theorem of the financial instability hypothesis is that the economy has financing
regimes under which it is stable, and financing regimes in which it is unstable
And
The second theorem of the financial instability hypothesis is that over periods of prolonged
prosperity, the economy transits from financial relations that make for a stable system to
financial relations that make for an unstable system. In particular, over a protracted period of
good times, capitalist economies tend to move to a financial structure in which there is a large
weight to units engaged in speculative and Ponzi finance.
Thinking back over the past thirty years, there have been various structural changes to
financial markets and in the wider economy that have created the conditions for
opportunistic profit-driven exploitation as illustrated by the transgressions identified in
Table 18.1 and indeed led to the financial crisis. In 1986, ‘Big Bang’39 opened up the
London financial markets to international competition. One of the consequences of this
was a shift from traditional forms of relationship-based financial intermediation to
transaction-based or marketplace finance. Competition resulted in a driving down of
profit margins, and in light of the need to maintain profit flows attention turned to
developing innovative new products. Significantly, one of the changes was the overt
incentivisation (rather than management) of risk-taking by both individuals (bonus
reward culture) and the firms that employed them (gaining market advantage). The
result was that ‘the efficiency of the financial system grew, but so did its vulnerabil-
ity’.40 Significant, however, was that the City culture was one that ‘placed individual
success and self-reliance as the primary indicators of excellence’.41 To this heady mix
was added the continued economic liberalisation of cross border flows and opening up
of sovereign markets to international capital that enabled institutional investors to chase
short term gains (against a back drop of historically low interest rates) by moving
37
Van de Ven, B., ‘Banking after the Crisis: Towards an Understanding of Banking as a
Professional Practice’ (2011) Ethical Perspectives, 18:4, 541 at 542.
38
Minsky, H., ‘The Financial Instability Hypothesis’, in Stilwell F. and Argyrous G. (eds),
Economics as a social science: readings in political economy (2003) North Melbourne: Pluto
Press, 201 at 203.
39
Big Bang describes the event on 27 October 1986 when the London Stock Exchange
became an international exchange and transferred trading in equities and government bonds from
a physical to an electronic display system (SEAQ).
40
Genschel, P., and Plumper, T., ‘Regulatory Competition and International Co-operation’
(2011) Journal of European Public Policy, 4:4, 626 at 628.
41
Stanley, op. cit. footnote 15 at 139.
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speculative capital around the globe. Similarly, O’Brien42 summed up the origins of the
2008 crisis as arising from:
flawed governance mechanisms, including remuneration incentives skewed in favour of

short-term profit-taking; flawed models of financing, including (but not limited to) the
dominant originate-and-distribute model of securitization; and regulatory structures predi-
cated on risk reduction which created incentives for arbitrage and paid insufficient attention
to systemic credit risk.
With the benefit of such hindsight, the financial crisis and indeed the continued
regulatory ‘transgressions’ were and are somewhat predictable. In these circumstances
the challenge facing governments is not to respond to the growing public clamour for
more and tighter regulation but to recognise that we inhabit an unstable system
predisposed to rule-bending and, inevitably, periodic crises. Otherwise we will find that
we enter into a constant upward spiral of regulatory tightening as ‘when beliefs and
presences are produced by a set of probability judgements, made inaccurate by the
availability heuristic, legislation will predictably become anecdote driven’.43
DISCUSSION
The argument being presented here is that there have always been and will always be
financial crises and that changing (synonymous with tightening) regulatory structures
will not prevent their continued occurrence. What is important is rather how the
subsequent reaction of both markets and regulators is managed.
At present, the risk is that the UK shifts from the voluntary and essentially
trust-based model to a US style coercive model without properly understanding that in
so doing they could stifle the very innovation that drives the economy or worse push
such innovative minds to find ways to further circumvent the rules. Indeed, the
introduction of Deferred Prosecution Agreements44 could well be the start of this.
Further, a focus on national systems of supervision based on home country responsibil-
ity for supervision of internationally agreed standards fails to properly recognise the
complexity of operation of financial institutions. It is better to clearly recognise that
‘Arrangements for international regulatory coordination and cooperation still seem to
lag well behind the dynamic of the transformations of finance’45 and this will continue
42
O’Brien, J., ‘The Future of Financial Regulation: Retrieving the Meaning of Accountabil-
ity in Capital Markets’, Institute of International and European Affairs, presentation (2009)
5 November available at: http://www.iiea.com/event/archive_view?urlKey=the-future-of-
financial-regulation-retrieving-the-meaning-of-accountability-in-capital-markets (accessed 7
December 2013).
43
Jolls, C., Sunstein, C., and Thaler, R., ‘Behavioral Approach to Law and Economics’
(1998) Stanford Law Review, July, at 1518. Available at SSRN: http://ssrn.com/abstract=74927
(accessed 27 January 2012).
44
Deferred Prosecution Agreements: new guidance for prosecutors 14 February 2014
available at: http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2013/deferred-
prosecution-agreements-new-guidance-for-prosecutors.aspx (accessed 31 July 2014).
45
Picciotto and Haines, op. cit. footnote 9 at 354.
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to be the case. Trust of itself is not something that can be inculcated via legislation. As
pointed out by Harvey and Bosworth Davies,46 trust within financial markets is
underpinned by collective recognition of accepted and exhibited moral standards that
are presumed to embrace both the individual and their employing institution. As long as
we embrace a capitalist system, crises will happen; it is better that regulators have an
open dialogue with the market so that they are informed of an impending problem
sooner and are thus better able to manage the surprises:
I found a flaw. That is precisely the reason I was shocked because I’d been going for 40 years
or more with very considerable evidence that it was working exceptionally well. (Alan
Greenspan, 23 October 2008)47
46
Op. cit. footnote 22.
47
Testimony by former Federal Reserve Chairman Alan Greenspan in front of the US House
Oversight Committee.
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19. The financial crisis, economic crime and

development
John Jeremie
INTRODUCTION
This chapter speaks to two interrelated and important themes of growing significance
on the very edges of what might properly be described to be the boundaries of
contemporary international economic law and the law of economic crime.
The two themes are “economic crime” and “development.” It is argued that the goal
expressed in the latter must involve an appreciation of the root causes and implications
of the former in the context of the modern world economy.
Speaking in Washington in October, the Governor of the Bank of England, himself a
lawyer, spoke of the bankers who caused the financial crisis and who he said despite
facing “limited social embarrassment” were still “on the best golf courses.” The
Governor said that “the individuals who ran the institutions got away with it. They got
away with their compensation packages and without sanction.” He said that “maybe
they are no longer at the most esteemed table in society, but they are still on the best
golf courses and that has got to change.”1
The Governor’s words require no paraphrasing. He was speaking to the fact that none
of the so-called masters of the Universe, whose financial institutions had brought the
world to the brink of apocalyptic ruin in 2008, had been prosecuted in a criminal court.
In fact many had not simply escaped personal criminal responsibility but had also
exited with generous compensation packages.
It is submitted that without both an effective means of linking compensation to a
deferred system of rewards and the enactment of precise criminal rules to punish
inappropriate risk-taking we are perhaps destined to repeat the harsh lessons of the
crash of 2008.
Economic crime in its modern iteration inevitably affects development. And devel-
opment of course is a function of economic growth. It is argued that neither is possible
without effective measures that are designed to protect our economies. The protection
of our economies and the delivery of justice are but the necessary end states of a
recognition of what is myth from reality as contributing factors to the crash,2 and, as a
1
Mark Carney in Daily Mail, “Bankers Caused Crash and Got Away With It, Says Carney:
Bank of England Chief Says Bosses Should Have Paid a Higher Price,” 13 October 2014,
www.dailymail.co.uk/news/article-2790469/bankers-caused-crash.
2
The crash in this context refers to the near collapse of the financial markets in many
countries of the western hemisphere. These countries included the United States, the United
Kingdom, and most of the territories comprising what is today described as the Eurozone. The
Eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany,
229
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consequence, of the steps urgently required to protect world markets from what are
now properly recognized to be existential threats in the aftermath of the crash.
The collapse of money-center financial institutions that was crystallized for many in
the West on the day that Lehman Brothers3 crashed was not in fact the result of the
actions of a vengeful God. Yet for a number of weeks in the fall of 2008 it seemed as
if the very pillars of the world financial markets were indeed about to crash
spectacularly in apocalyptic fashion.
In point of fact the crisis of 2008 was not caused by any one or any combination of
the well-accepted forms of economic crime, such as money laundering, the financing of
terrorism, the facilitation by banks and financial actors of tax evasion, or the
well-recognized forms of corporate misconduct involving insider trading and self-
dealing. Some of these may have been present in isolated instances, but none was the
cause of the crisis of 2008. Instead, and this is well documented in the literature, other
forms of emergent threats were entirely to blame. As such neither domestic legal
systems nor international economic law had any predictable and well thought out
answer ready to address the causes of the crisis of 2008 either at the domestic level or
the international level.
It is submitted that one must explore fully the true causes of the crash if one is to
answer in adequate fashion the specific question, how does one ensure smooth
economic development to protect our economies in the future? The latter involves a
futuristic, more optimistic perspective on how emergent threats of the type that were
disclosed by the crash can be prevented from recurring. The former involves a
necessary but perhaps less hopeful analysis of opportunities missed and warning signs
ignored with respect to the true causes of, not the mythical reasons advanced for, the
crash.
TRADITIONAL ECONOMIC CRIME

The meaning of traditional economic crime is of course well settled.4 Traditional
economic crime includes well-recognized forms of criminal conduct such as money
laundering, the financing of terrorism, tax evasion and the facilitation by banks and
financial actors of tax evasion and of course other well-recognized forms of corporate
misconduct involving insider trading and self-dealing. At the conclusion of this piece,
an argument is set out for a redefinition of economic crime to include other types of
conduct that satisfy the general test of criminal liability.
Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slova-
kia, Slovenia, and Spain, but the effects of the financial crisis were most acutely felt in Germany,
France, Ireland, Italy, Portugal, Spain, and Greece.
3
The iconic Wall Street firm that was Lehman Brothers collapsed when frenzied attempts
to save it failed in the early morning of Monday September 15 2008; its demise is meticulously
described in the book Too Big to Fail authored by Andrew Ross Sorkin, Viking, 2009.
4
Rider, B. (1980) “The promotion and development of international co-operation to combat
commercial and economic crime.” Paper presented at 1980 Meeting of Commonwealth Law
Ministers, Commonwealth Secretariat, Barbados.
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The financial crisis, economic crime and development 231
Criminal liability is of course generally imposed by way of a general test in most

legal systems: its purpose is to punish wrongs that are so outrageous that they ought not
to be left to private actors to strive for remedy.
If it is in fact clear that traditional economic crime did not cause the fall, then the
question “How do we protect our economies and ensure smooth economic development
in the future?” assumes existential proportions today. Protection of course need not be
driven exclusively by criminal sanctions. Indeed, given the nature of the seamless
trades in derivatives that it will be seen caused the crash of 2008, there must be a
clearly defined role for international cooperation in the regulatory response that must
be developed to deal with any future crises.
But we must remind ourselves even at this juncture that it is a basic function of the
domestic criminal law, certainly in most legal traditions, to protect the public from the
consequences of individual wrongdoing. If the criminal law failed to protect us from
the mighty financial actors in the money centers in 2008, surely a relevant question
must be, what will protect us in the future? And if there were no adequate domestic
sanctions present in 2008, how can either domestic or international law develop rules,
norms, and principles to address the root causes of the crash of 2008.
The logical starting point must be an analysis of the root causes of the crisis of 2008.
If the cause of the crisis was not a failure of our laws, then what was it?
THE TRUE CAUSES OF THE CRASH

An interrogation of the reasons for the crash of 2008 is not difficult. The point that
traditional economic crime played no part in the crash is beyond serious debate today.
Two Nobel Laureates, Professor Stiglitz and Professor Sen, have said as much in
language that is clear and unambiguous.
Professor Sen5 stated that the global financial crisis, “… has come about from an
over reliance on markets and not enough regulation.” And Professor Stiglitz argues that
“The United States has exported its toxic mortgages.” He continues: “We have also
exported our deregulation policy. Decoupling was a myth and the United States is now
exporting its recession.”6
In the works of Professor Stiglitz and Professor Sen, as well as in remarks of the
former Chairman of the United States Federal Reserve, Allan Greenspan,7 all are now
agreed that the root cause of the crisis was a failure to properly regulate the activities of
the “Money Center” financial actors – buttressed by the theory that markets in capitalist
systems are self-correcting. This naivety was to be found at both the domestic and the
international level.
5
Sen, A. (2009), “Capitalism Beyond the Crisis,” New York Review of Books, 56(5), 26
March.
6
Stiglitz, J.E., “The Dismal Economist’s Joyless Triumph.” 1 December 2008, http://
www.project-syndicate.org/commentary/the-dismal-economist-s-joyless-triumph.
7
An unlikely source who was arguably the most influential of the financial regulators in the
period before the crash.
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Yet if there was in fact a failure of regulation this begs the question: what was
required to be regulated? Banks and corporate financial actors are not automatons.
They behave at the command of real individuals. It is submitted that the risky trades
that caused the global crisis were engineered by real persons so that personal
responsibility for those trades ought to be attributed to those who facilitated the trades,
the bankers identified by the Governor of the Bank of England.8
THE DOMESTIC LEVEL

In the United States, Allan Greenspan felt that the banks and other financial actors
could be trusted to do the right thing. This notion of his applied to the risky trades –
particularly the trades in derivatives.
When the housing market crashed in the United States, that crisis – to use the words
of Stiglitz – “was exported to money-center financial actors in the West.”9 Speaking
broadly, bad mortgages were securitized by primary lenders, and derivatives – which
carried differential probabilities of default – were sold to a range of institutional
investors. Because all of the money-center banks wanted a piece of the pie, they all
participated. The crisis and the crash revealed that they were all locked together in
incestuous trades so that the collapse of one led to the collapse of virtually all of them.
To use the language of contemporary finance, risk in 2008 assumed much more than
the mundane character described by Lord Nicholls in Royal Brunei Airlines v Tan:10
“All investment involves risk.” Risk assumed a scale and conception not properly
anticipated by most academics, regulators, and market actors until the crash itself.
The mere running of that risk was hardly even recognized by regulators and
academics, but the risky trades were in fact readily embraced by the “masters of the
Universe,” the executives on the boards of the banks and the financial actors that were
at the center of the maelstrom in 2008. These individuals were, prior to the crash,
rewarded by generous compensation packages tied to the immediate but illusory returns
generated as a result of the high-volume high-value derivatives that were in constant
trade.
That legal academics did not appreciate the risk inherent in the trade in derivatives
can be illustrated by a quick reference to the standard texts. In their text on The Law
and Practice of International Banking published in 1987, for example, Penn, Shea, and
Arora11 defined “risk” to mean “sovereign risk,” “exchange control risk,” “taxation
risk,” and of course the risk of “default.” Although the authors spend some considerable
time in an explanation as to what amounted to “swaps and related instruments,” they
devoted no more than a few pages to a discussion of the risks posed by these
instruments. Even then it is clear from a fair reading of the discussion by the authors
that for the most part the abbreviated discussion on “capital adequacy” failed to
8
Supra, at Note 1.
9
Supra, at Note 6.
10
Royal Brunei Airlines v Tan [1995] A.C. 378.
11
Penn, G.A. , A.M. Shea, and A. Arora, The Law and Practice of International Banking,
London: Sweet and Maxwell, 1987.
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appreciate the nature of the apocalyptic crisis that struck throughout the financial world
less than a quarter century later.
On the definition of “risk,” the modern texts on finance law are obviously
transformed. Hudson12 describes the concept of “financial risk management” before
turning attention to an impressive catalogue of the “species of risk.” The author does
not stop there. The first risk identified is that of “systemic risk,” which the author
defines to be the risk that
if one sufficiently large market participant, or a few market participants, were to go into
insolvency then that would have the effect of putting sufficient pressure on other market
participants to whom the insolvent party owed money so that those other market participants
would similarly go into insolvency, with a further effect on yet more market participants with
whom that second tier of insolvent entities had dealings.
The authors conclude their discussion of “systemic risk” by averring that “systemic risk
is the greatest risk which financial markets face. It is the risk that the entire financial
system might cease to function.”
THE CRASH
When the meltdown occurred in the money-center banks in 2008 and 2009 it was
precisely this event or risk that occurred. The risk that the entire financial system would
cease to function caused real failures and perhaps more significantly the fear of
imagined failures.
The trigger of the systemic crisis was perhaps the near collapse of Bear Stearns. The
bankruptcy of Bear Stearns was averted only by the intervention of the United States
government, which engineered a takeover by JP Morgan Chase of the company at a
fraction of what the market price had been for its shares mere days before. The United
States government facilitated the transaction by taking thirty billion dollars’ worth of
losses from the worst assets held by Bear Stearns. Lehman Brothers, the iconic
behemoth, was then allowed to fail on the morning of 15 September 2008 when the
firm filed for bankruptcy protection at one forty five in the morning in the Southern
District of New York. The second and even third tier counterparties most affected by a
Lehman Brothers collapse were Merrill Lynch and, incredibly, American Insurance
Group, which held of course, through its monopoly on airline lease financing, a
position of complete dominance in the airline industry. As the events unfolded there
were buy-outs of Washington Mutual, Wachovia Bank, and of course Merrill Lynch
itself, all under the watchful and attentive care of the United States government. The
failure of Lehman was restricted only by aggressive government action led in the main
by the then Secretary of the Treasury Hank Paulson, which ensured that Lehman’s
counterparties would set off outstanding transactions owed between themselves and
Lehman, particularly in their exposure to derivatives, and that a certain part of Lehman
would then be auctioned off. In the end it took unprecedented government intervention
12
Hudson, A., The Law of Finance, 1st Ed., London: Sweet and Maxwell, 2009.
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in the United States to prevent systemic risk from translating itself into financial
apocalypse.13
The wonder was that all of this obvious apocalyptic activity took place completely
outside the parameters of traditional economic criminal activity. In this regard it is
noteworthy that, outside of the money-center banks, financial institutions in other parts
of the world with rather more basic and traditional practices in the business of banking
were relatively unscathed – Australia, South Africa, Brazil, and China for example.
The cause of the crash then was in part a system-wide failure to properly regulate
money-center financial actors. Banks in money centers, or rather the executives who
ran these banks, involved themselves in activities not traditionally known to constitute
the business of banking – “trades” that had nothing to do with deposit taking and
mortgage and consumer lending on margins became the “new business of the banks.”
In addition to the system-wide failure at the macro level, one must acknowledge as a
proximate cause of the crash the actual involvement of the bank executives who crafted
and engineered the risky trades that precipitated the bank failures.
With the benefit of hindsight it is now clear that Greenspan’s laissez-faire approach
and the practice of “light touch” regulation in the City of London both contributed to
the absence of a proper regulatory framework. This in turn facilitated the behavior of
the executives, which together caused the crash.
This is not to say that the risk of systemic failure was entirely unrecognized before
the crash either at the domestic level or at the international level. The contrary is true.
As far back as January 1987 a consultative paper entitled “Convergence of Capital
Adequacy Assessment in the United Kingdom and the United States” was published by
an impressive cross-border group of institutions including the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office
of Comptroller of Currency in the United States working together with the Bank of
England.14 The paper failed to deal with systemic risk but demonstrated an awareness
of the inadequacies of the existing capital adequacy structures to deal with certain
forms of off balance sheet items such as revolving underwriting facilities, standby
letters of credit, acceptances, and, interestingly, “interest rate and foreign exchange rate
related transactions,” as the early market in swaps and derivatives was confined to. The
involvement of cross-border regulators was also an early recognition that coordinated
action across borders was required to curtail emergent risks in a world even then
defined by cross-border financial trading.
In another paper, “Large Exposures Undertaken by Institutions Authorised under the
Banking Act 1979,” issued by the Bank of England in the spring of 1987, a distinction
was drawn between banks and non-banks. Yet another consultative paper, published
later in the spring of 1987 by the Bank of England on “Credit Equivalent Amounts for
Interest Rate and Foreign Exchange Rate Related Instruments,” was intended to be a
part of the joint paper published by the United States entities and the Bank of England
in 1987 to which reference has already been made.15 The consultative paper distin-
guished between the instruments which were common at the time: cross-currency
13
These events are detailed in Too Big to Fail, supra, at Note 3.
14
See generally Penn, Shea and Arora, supra, at Note 11.
15
Ibid.
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swaps, forward foreign exchange contracts, foreign currency options, forward rate
agreements and single currency rate swaps. In assessing a risk value of the various
types of transactions, the paper proposed that two factors should be taken into account,
“current exposure” and “potential exposure,” the former denoting the replacement cost
to the bank of the expected payment stream to be derived from the transaction, the
latter the contingent exposure in respect of the duration of the agreement.
THE INTERNATIONAL LEVEL

There was on the international level, at around the same time of the Bank of England
paper and the joint papers of the Federal Reserve and the Bank of England in 1987,
some level of multilateral effort aimed at the measurement of what risks the new trade
in swaps and derivatives posed to the international financial system and to banks and
other financial actors in particular.
The author, writing in the Company Lawyer in 2012, described the position as
follows:16
The systemic risks to global finance were monitored by the BIS which had, in developing the
Basel Accord commonly described as Basel II, promulgated capital adequacy standards in an
attempt to ensure that the banking giants which were increasingly fuelling international trade
and wealth in a borderless world were themselves relatively protected from credit risk. In
these pages the author expressed the view cited before, that what was then the new trade in
derivatives posed a new, quite different type of risk to worldwide financial systems. This risk
was identified at the time by others. The view which the author expressed in these pages was
that the risk to worldwide financial systems and economic stability posed by these new
instruments required a materially different and more coordinated approach to financial
regulation if systemic risk was to be avoided in the future. The author argued in these pages
17 years ago that risk was not static so that capital adequacy standards which were weighted
and required to be applied to financial institutions to address traditional banking transactions
were inappropriate to deal with the innovations posed by the development of the trade in
swaps and derivatives.
Ultimately, of course, the financial actors did in fact fail and were then rescued by
taxpayer funds generally but not exclusively in the United Kingdom and in the United
States. Hudson17 estimates that roughly one sixth of Global Gross Domestic Product
went into the rescue of the money-center banks. The United Kingdom government put
some fifty billion pounds towards the recapitalization of British banks and the United
States government finally managed to have Congress appropriate close to a trillion
dollars to buy up the “toxic assets” which had provided the breeding ground for the
metastatic delivery of derivatives that eventually brought the banks to their collective
knees.
16
Jeremie, J.S. (2012), “Known Risk in a World of Unknown Threats: The Character and
Implications of Risk in the Context of Economically Motivated Crime,” Vol. 33 No. 8. Co. Law.
231.
17
Hudson, supra, at Note 12.
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ECONOMIC CRIME AND DEVELOPMENT

It follows that prejudice, in the specific shape of financial harm, was visited on citizens
of the countries that provided these bailout funds. These citizens were blameless. This
could hardly be described as the delivery of justice and, more significantly perhaps,
being “in the public interest.” In the nations of the developing world the economic
effects of the diversion of vast amounts of resources were also felt. The Millennium
Development Goals were compromised by the 2008 crash. Moreover, the protection of
the public interest is the quintessential rationale that generally demands the intervention
of the criminal law and the sanctions that are imposed in that branch of the law.
And yet, six years after the fall of Lehman, we have not in the West settled on a
well-defined, transparent set of rules that will protect our economies in the future. Part
of the reason must be that punishment requires a subject, be that subject a natural
person or an artificial person in the form of a corporation. Part of the reason must also
be the difficulty which is inherent in coordinating and developing rules which are
intended to be universally applied in domestic markets but which have cross-border
relevance and integrity.
In his text International Law in the 21st Century: Rules for Global Governance,
Christopher Joyner18 stated the principle well before the fall as follows:
International trade of goods and services between states and multinational corporations
expands every year. For this vast nexus of complicated business transactions to occur with
regularity, uniform rules of international economic law must be in place and must be
observed by the participant actors. These rules have evolved in large part since 1970,
although the continued development of new technologies makes necessary the constant
production of new legal rules. The protracted nature of this process is well illustrated in the
need for international economic law for regulating the myriad international financial
transactions that occur through the Internet every day.
There were at least two core reasons for the spectacular failures that took place in the
money-center banks that adversely affected development throughout the world in 2008
and 2009. The first was the existence of toxic mortgages and the unregulated trade in
derivatives that ensured that the risk in these securitized mortgages would be widely
held by the money-center banks. But securitization and the derivatives market would
not themselves have existed without the innovations in technology fed by the computer
and internet age and, critically, the incentives for bankers to leverage these instruments
and the markets in which trades were conducted by super charging executive pay and
remuneration. The second reason for the crash and the reversals in development was
therefore greed and excessive compensation packages paid to the executives in these
financial institutions.
18
Joyner, C. (2005), International Law in the 21st Century: Rules for Global Governance,
Lanham, MD: Rowman & Littlefield Publishers, at p. 283.
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PROTECTING FUTURE DEVELOPMENT
International Law Activity
There is now some international consensus around BASEL III and raising capital
adequacy requirements and liquidity ratios. There is also, on the international level, the
Financial Stability Board of the G20 that is encouraging both the design and auditing
of a new financial architecture that it is hoped will prevent a repeat of the crash. These
measures, if developed in a timely fashion, will help to ensure that banks and financial
actors have enough cash on their books to avoid the type of systemic and cascading
failures that took place in 2008 which so remarkably affected development and growth
worldwide.
Domestic Law Activity
On the national level Dodd-Frank has now been enacted in the United States (and
market actors have accepted mandates of the so-called Volcker Rule). Similarly, in the
United Kingdom the “Ring Fencing” of proprietary bank funds seems now to be
holding sway as a guiding principle. Together with the activity described before on the
international level, these measures can only serve to ensure a more prudential approach
to regulatory activity.
There remain, however, the failures that are still likely in respect of the absence of
hard criminal sanctions catalogued by the Governor of the Bank of England.19 Since
2007 the world has had to learn again the hard lesson that timeless underlying evils
such as “greed” and “excess,” which have invariably characterized criminal activity, are
now generally accepted to have also characterized the behavior of some of the
executives of the large failed financial actors in the development of complicated and
sometimes unworkable financial instruments.
This behavior, perhaps, as the behavior of some of the stewards of financial firms,
might be as much deserving of the label “economically motivated crime” as “corrup-
tion,” “money laundering,” “insider trading,” and “drug trafficking,” the usual and
known subjects of attention in international economic crime, might be.
Two rather large questions remain unresolved. The first is, exactly who will enforce
the new “rules of the road?” Will it be state regulators or one regulator? The present
thinking inclines to the former, but there are obvious benefits to be gained from the
latter in a world which is increasingly defined by borderless financial activity.
The second is, will these new rules in fact deliver justice and protect economic
development in the future? That is a question which none of us can realistically answer
today. A proper appreciation of the causes of the crash must mean that regulators will
now address in a meaningful and comprehensive way the trade in derivatives, capital
adequacy, and curbs on pay structures that encourage irresponsible market activity.
More is obviously required. Sanctions in the form of criminal punishment to deal with
reckless actions by corporate executives are obviously also now required.
19
Supra, at Note 1.
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What is clear is that technological advances in mathematics, engineering, and

computer trading have created for us new means of trading and market instruments
which we must master lest they master us.
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20. Responsibility and accountability in the financial

sector
Graeme Baber
Much of the agenda for financial regulation is driven by the international organisations,
which produce ‘soft law’ instruments that are converted into legislative form in the
various jurisdictions.1 One example of this is the Basel documents that the Basel
Committee on Banking Supervision has published, which do not have direct effect. The
Basel II Framework has been transposed into the laws of many countries,2 and the
Basel III Framework is undergoing the same process.3
The international organisations are constantly active in producing guidelines for
areas of financial regulation that have gone awry. For instance, both the Financial
Stability Board (FSB) and the International Organization of Securities Commissions
(IOSCO) have produced instruments concerning credit rating agencies and, more
recently, financial benchmarks.4 These organisations tend to work together, and in
1
For a synopsis, see Graeme Baber ‘International Financial Regulation: Order or Chaos?’
[2012] 33(1) Comp Law 17.
2
The final rules for the transposition of the Basel II Framework are in force in Argentina,
Australia, Brazil, Canada, China, Hong Kong, India, Indonesia, Japan, Korea, Mexico, Saudi
Arabia, Singapore, South Africa, Switzerland, Turkey, the United States of America and the
European Union – including Belgium, France, Germany, Italy, Luxembourg, the Netherlands,
Spain, Sweden and the United Kingdom (Basel Committee on Banking Supervision, Progress
Report on Implementation of the Basel Regulatory Framework, April 2014, 4–21, <http://
www.bis.org/publ/bcbs281.htm> accessed 14 August 2014).
3
No country has implemented all of the Basel III Framework yet, although the following
countries have made substantial progress: Argentina, Australia, Canada, China, India, Russia
(even though the Basel II Framework is not fully in force in the national legislation), Saudi
Arabia, Singapore, South Africa, Switzerland, Turkey, the United States of America and the
European Union – including France, Germany and Italy (see supra at n. 2).
4
In 2014, the IOSCO published an assessment methodology, in order to assist the
assessment of the extent of implementation of the IOSCO’s Principles for Financial Benchmarks
(IOSCO, Assessment Methodology: IOSCO Principles for Financial Benchmarks, January 2014,
4, <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf> accessed 12 August 2014).
The FSB published the Final Report of the Market Participants Group on Reforming Interest
Rate Benchmarks, a report entitled ‘Reforming Major Interest Rate Benchmarks’, pursuant to the
findings of the Market Participants Group (which is available at <http://www.financial
stabilityboard.org/publications/r_140722.pdf> accessed 12 August 2014), and a consultative
document entitled ‘Foreign Exchange Benchmarks’ – which contains the findings of a FSB
Foreign Exchange Benchmark Group comprising public financial organisations of Australia,
Canada, Germany, France, India, Japan, Mexico, Singapore, Switzerland, the United Kingdom,
the United States of America, together with the European Central Bank, the IOSCO and the
Secretariat of the FSB (<http://www.financialstabilityboard.org/publications/r_140715.pdf>
accessed 12 August 2014).
239
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co-ordination with the governments of the largest countries, in order to lay down a
framework for financial regulation on a global basis.5
The financial crisis of 2007–2009 revealed a number of difficulties in the sector,
which have been addressed – not least in the establishment of the FSB as the
‘enhanced’ successor of the Financial Stability Form.6 The FSB’s objectives are ‘to
coordinate at the international level the work of national financial authorities and
international standard setting bodies (SSBs) in order to develop and promote the
implementation of effective regulatory, supervisory and other financial sector policies’
and ‘to address vulnerabilities affecting financial systems in the interests of global
financial stability’.7
Whilst the origin of this crisis was in the structured finance market in the United
States of America,8 there were other contributory factors – including inadequate
corporate governance and poor financial risk management.9 The FSB has published
recommendations over these areas. These will be considered below, together with some
of the legislation that has been enacted in my jurisdiction – the European Union (EU)
and, in particular, the United Kingdom (UK).
In October 2009, the FSB reported that firms were introducing changes to increase
the engagement of senior managers and board directors with issues of risk manage-
ment, and to strengthen the standing of this discipline.10 However, it was not clear as to
whether those adjustments were contributing to better corporate governance.11 Only a
few organisations demonstrated improvements in the financial expertise of their board
directors.12 Nonetheless, boards of directors and senior managers have provided their
risk management departments with more resources, independence, influence and
authority than previously.13
In respect of systemically important financial institutions (SIFIs), supervisors expect
an effective board of directors that sets a tone which transmits the financial institution’s
risk culture, ensures that an executive team of high-quality is in place, monitors this
5
For example, the G20 asked the FSB to oversee the implementation of principles
concerning the trading of over-the-counter financial derivative contracts, which it has duly done
(Graeme Baber ‘The EMIR of Strasbourg: A Three Year Journey from Pittsburgh’ [2013] 34(4)
Comp Law 117). Furthermore, the G20 requested the FSB to undertake its review on interest
rate benchmarks, and IOSCO has worked together with the FSB’s Official Sector Steering Group
on this project (Reforming Interest Rate Benchmarks, 1, supra at n. 4).
6
FSB, Charter of the Financial Stability Board, June 2012, 1, <http://www.financial
stabilityboard.org/publications/r_120809.pdf> accessed 16 August 2014.
7
FSB, Charter of the Financial Stability Board, June 2012, 2, Art 1.
8
Graeme Baber ‘UK Banking and the Financial Crisis’ [2013] BPP Law School Opinion
Piece – The Banking Crisis – April 2013, 3.
9
RM Lastra and G Wood ‘The Crisis of 2007–09: Nature, Causes and Reactions’ [2010]
13(3) JIEL 531, 541–543; RM Lastra and G Wood ‘Responses to the Financial Crisis’ [2011]
26(7) JIBLR 307, 308.
10
FSB, Senior Supervisors Group: Risk Management Lessons from the Global Banking
Crisis of 2008, 21 October 2009 (Risk Management Lessons), 22, <http://www.financial
stabilityboard.org/publications/r_0910a.pdf> accessed 18 August 2014.
11
Risk Management Lessons, 22.
12
13
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Responsibility and accountability in the financial sector 241
team’s ability to carry out the agreed strategy, comprehends the business model,
challenges management on adherence to the to the agreed framework on the firm’s risk
appetite,14 encourages dialogue and debate – supported by reliable, comprehensive and
understandable information on the issues that are relevant to the organisation and its
business operations, and have a diversified membership – in order to broaden the
discussion on its business strategy and to promote dialogue on the relevant matters.15
Supervisors are increasingly communicating with the board of directors, in order to
ensure that it is focused on issues of strategy and of risk.16
Supervisors must regularly engage with directors and senior managers, in order to
monitor their performance.17 Supervisors should satisfy themselves that financial
institutions have the necessary processes in place to assess applicants for a position on
the board of directors or a senior management role at a SIFI, and to ensure that
applicants are qualified and competent for their prospective role.18
It is important for SIFIs to have strong, competent and independent risk management
and internal audit functions.19 Furthermore, each financial institution should enable its
Chief Risk Officer (CRO) and Chief Audit Executive to be able to challenge its
managers on the business strategy in the light of the organisation’s risk appetite
framework.20 The CRO should be able to thematically present risks to the board of
directors, and to identify similar risks and control requirements across the firm.21
Given the crucial significance of qualified and experienced leaders to the safety and
soundness of a financial institution, it is essential that there are effective, actionable
succession plans in place for senior managers – especially those in the control
functions.22 These organisations, and SIFIs in particular, should operate personnel
management processes that provide for the proactive identification of gaps in staffing
and orderly succession in key roles.23 The firm should develop a pool of talent of
persons who have adequate experience and sufficient exposure to the top management
throughout their career.24 Knowledge of the identified successors gives an opportunity
to supervisors to engage with these people in their current roles, and helps to shape
14
A financial institution’s risk appetite comprises the established risk limits for its business
activities or units, or its legal entities (FSB, Increasing the Intensity and Effectiveness of SIFI
Supervision: Progress Report to the G20 Ministers and Governors, 1 November 2012 (Increas-
ing SIFI supervision), 12, <http://www.financialstabilityboard.org/publications/r_0910a.pdf>
accessed 18 August 2014).
15
Increasing SIFI supervision, 9.
16
17
18
19
20
21
22
Increasing SIFI supervision, 11. The control functions are the compliance, internal audit
and risk management departments.
23
24
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their views about the quality of these individuals – especially in respect of management
of risks at globally systemically important financial institutions (G-SIFIs).25
It is difficult for a financial institution to implement a risk appetite framework that is
measurable and actionable, due to the large number of ways to measure risk (risk
metrics) and the difficulty of introducing sufficiently sophisticated information tech-
nology systems to identify and aggregate the potential for losses (risk exposures).26
Consequently, its senior officers may not be able to instil a strong risk culture across
the organisation – as its risk appetite and risk culture reinforce each other.27
More evidence is required of risk appetite being converted into the firm’s culture
shown in operational practices.28 Even though culture is hard to measure, financial
institutions and supervisors should give more attention to this matter.29 Indicators of a
sound risk culture and control environment are that difficulties are recognised and
escalated as appropriate, the institution’s risk tolerance is clearly communicated, and
there exist controls and incentives for the organisation’s risk profile to remain within
the boundaries set.30 A careful combination of metrics, such as the number of risk
limits breached and the cause of these contraventions, the way in which problems that
internal audit reports have identified are addressed, and awareness of the troubles
before their crystallisation, can help to evaluate a financial institution’s risk culture.31
Supervisors should assess whether boards of directors have devoted enough discussion
and time to ensure that their firm’s specified risk appetite aligns with its risk culture,
and have established a process for communicating and assessing this culture – such as
employee surveys, on-line tutorials, presentations and workshops.32
Supervisors should contemplate whether a financial institution’s risk culture is
suitable for the nature, scale and complexity of the firm’s business, and based on good,
25
Increasing SIFI supervision, 12. The FSB regularly publishes lists of globally systemically
important banks (G-SIBs) and globally systemically important insurers (G-SIIs). The G-SIBs are
currently Hong Kong and Shanghai Banking Corporation (HSBC), JP Morgan Chase, Barclays,
BNP Paribas, Citigroup, Deutsche Bank, Bank of America, Credit Suisse, Goldman Sachs,
Group Crédit Agricole, Mitsubishi UFJ FG, Morgan Stanley, Royal Bank of Scotland, Union
Bank of Switzerland (UBS), Bank of China, Bank of New York Mellon, Banco Bilbao Vizcaya
Argentaria (BBVA), Groupe Bank Populaire and Caisse d’Épargne (Groupe BPCE), Industrial
and Commercial Bank of China Limited, Internationale Nederlanden Groep (ING) Bank,
Mizuho FG, Nordea, Santander, Société Générale, Standard Chartered, State Street, Sumitomo
Mitsui FG, Unicredit Group and Wells Fargo (FSB, 2013 update of global systemically
important banks (G-SIBs), 11 November 2013, 3, Annex I <http://www.financialstability
board.org/publications/r_131111.pdf> accessed 18 August 2014). The G-SIIs are Allianz SE,
American International Group Inc., Assicurazioni Generali SpA, Aviva plc, Axa SA, MetLife
Inc., Ping An Insurance (Group) Company of China, Ltd., Prudential Financial Inc. and
Prudential plc (FSB, Globally Systemically Important Insurers (G-SIIs) and the Policy Measures
that will Apply to Them, 18 July 2013, 4, Annex I <http://www.financialstabilityboard.org/
publications/r_130718.pdf> accessed 18 August 2014).
26
27
28
Increasing SIFI supervision, 12. See supra at n. 14, for a description of ‘risk appetite’.
29
30
31
32
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clear values that the organisation’s leadership manages painstakingly.33 They should set
expectations for the board of directors to oversee the role of managers in promoting
and maintaining a stable risk culture, convey these aims to the board and to senior
management, and ensure that there is continuous follow-up on whether these objectives
are satisfied.34
Supervisors are presented with the challenge, for each firm that they oversee, of
finding the correct balance between taking an intensive, proactive approach and not
inordinately influencing strategic decisions of its management.35 In the corporate
model, the entity’s board of directors are accountable to its shareholders for the
decisions that it takes. Overregulation minimises the rights of shareholders, which they
purchase from the company in accordance with the settled law.
In February 2009, the EU recognised that determinants of the financial crisis
included ‘fundamental failures in the assessment of risk, both by financial firms and
those who regulated and supervised them’.36 It stated that shortcomings in risk
management and risk assessment were compounded by failure in ‘the checks and
balances of corporate governance’.37 The boards of directors and senior managers of
financial institutions neither comprehended the characteristics of the new, complex
financial products in which they were trading, nor were aware of the size of the risk
exposures of their firms.38 Furthermore, neither the shareholders nor the directors of
these companies provided the necessary oversight or control of their managers.39
Moreover, remuneration and incentive schemes within financial firms contributed to
excessive risk-taking by rewarding the short-run expansion of the volume of risky
trades, rather than the long-run profitability of corporate investments.40 In addition,
shareholders put pressure on management to provide higher share prices and dividends,
which encouraged the board of directors to set a quarterly (i.e. short-term) benchmark
for its company’s performance.41
The EU’s de Larosière Report substantially criticised the role of the regulators of
financial institutions.42 In particular, they focused on the micro-prudential supervision
of individual financial firms, and insufficiently ‘on the macro-systemic risks of a
contagion of horizontal shocks’.43 Further, they were reluctant to take unilateral action,
33
FSB, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A
Framework for Assessing Risk Culture, 7 April 2014 (Supervisory interaction on risk culture), 2,
<http://www.financialstabilityboard.org/publications/r_0910a.pdf> accessed 27 August 2014.
34
Supervisory interaction on risk culture, 2.
35
Supervisory interaction on risk culture, 4.
36
European Commission, The High-Level Group on Financial Supervision in the EU
(Chaired by Jacques de Larosière): Report, 25 February 2009 (de Larosière Report), 8, para 13,
<http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf> accessed 27
August 2014.
37
de Larosière Report, 10, para 23.
38
39
40
41
42
de Larosière Report, 10-11, paras 25–31.
43
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due to competition between financial centres.44 In addition, policymakers and regula-

tors agreed neither on the seriousness of the difficulty, nor on the measures to be
taken.45
The legislative response to this is a strengthened banking governance and financial
risk management section in the Fourth Capital Requirements Directive (CRD IV).46
Credit institutions and investment firms are to ‘have robust governance arrangements’,
including ‘a clear organisational structure with well-defined, transparent and consistent
lines of responsibility, effective processes to identify, manage, monitor and report the
risks they are or might be exposed to, adequate internal control mechanisms … and
remuneration policies and practices that are consistent with and promote sound and
effective risk management’.47
EU Member States are to ensure that credit institutions and investment firms that are
significant in respect of their size, internal arrangements and ‘the nature, scope and
complexity of their activities’, found a risk committee that comprises non-executive
directors.48 The risk committee members are to advise the board of directors on the
organisation’s risk appetite and strategy, and help the board to oversee the implementa-
tion of this strategy by the senior managers.49
Member States must ensure that credit institutions and investment firms have a risk
management function that is independent of the operational divisions, and which has
adequate authority, resources, standing and access to the board of directors.50 They
shall make sure that the risk management function ensures that all significant risks are
identified, measured and reported.51
The board of directors of the credit institution or investment firm must have the main
responsibility for the company, approve and oversee the implementation of its internal
governance, risk strategy and strategic objectives, ensure the integrity of its financial
reporting and accounting systems, oversee the process of communications and dis-
closure, be responsible for the provision of effective oversight of senior management,
and have different persons in the roles of chairman and chief executive – unless this is
justified by the organisation and authorised by the financial supervision authority.52
Member States are to ensure that the board of directors monitors and periodically
evaluates the effectiveness of the firm’s governance arrangements and takes suitable
actions to address any shortcomings.53
44
45
46
CRD IV is Directive 2013/36/EU on access to the activity of credit institutions and the
prudential supervision of credit institutions and investment firms [2013] OJ L176/338 (Directive
2013/36/EU).
47
Directive 2013/36/EU, art 74(1).
48
Directive 2013/36/EU, art 76(3). The financial supervisory authority of each Member
State may permit a credit institution or investment firm that is not classed as significant to
combine the risk committee and the audit committee (Directive 2013/36/EU, art 76(3)).
49
50
51
52
53
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The firm’s board of directors shall possess sufficient collective knowledge, skills and
experience to be able to comprehend its activities, including the main risks.54 Each
director shall act with honesty, independence and integrity to effectively examine and
challenge the decisions of the senior management as far as is necessary, and to
effectively supervise and monitor the decision-making of managers.55
This is a high standard for the board of directors of financial institutions to reach.
Furthermore, the idea that a firm’s risk management division can identify, measure and
report all material risks requires a substantial level of competence in its employees. So,
how does the UK’s approach dovetail with the new EU legislation?
The regulation of corporate governance in the UK, outside the framework of the
Companies Acts, which are much older, dates from 1992 with the Cadbury Report.56
The Committee on the Financial Aspects of Corporate Governance, chaired by Sir
Adrian Cadbury, was set up to consider the following matters in relation to financial
reporting and accountability and to make recommendations for good practice:
(a) directors’ responsibilities for reviewing and reporting on performance to share-
holders and others, (b) the case for audit committees of the board of directors,
(c) auditors’ main responsibilities and the extent and worth of the audit, (d) the
connections between shareholders, boards and auditors, and (e) any other issues of
relevance.57
The Cadbury Report’s main recommendations are a familiar part of British corporate
structure today. For instance, recommendation 1.1 states: ‘The board [of directors]
should meet regularly, retain full and executive control over the company and monitor
the executive management.’
After the publication and incorporation of the Greenbury58 and Hampel59 Reports,
the updated recommendations became the Combined Code on Corporate Governance.60
After revisions in 2003, 2006 and 2008, the next revision of this Code in 2010 was
renamed ‘The UK Corporate Governance Code’ (the Code), now in its second edition.61
54
55
Directive 2013/36/EU, art 91(8). The chief executive officer is responsible for running the
company. The chairman is responsible for running its board of directors.
56
Committee on Financial Aspects of Corporate Governance, Report of the Commission on
the Financial Aspects of Corporate Governance, 1 December 1992 (Cadbury Report), <http://
www.icaew.com/en/library/subject-gateways/corporate-governance/codes-and-reports/cadbury-
report> accessed 27 August 2014.
57
Cadbury Report, 61, Appendix 1.
58
Study Group on Directors’ Remuneration, Directors’ Remuneration: Report of a Study
Group chaired by Sir Richard Greenbury, 1 July1995, <http://www.ecgi.org/codes/documents/
greenbury.pdf> accessed 28 August 2014.
59
The Committee on Corporate Governance, Committee on Corporate Governance: Final
Report, January 1998, <http://www.ecgi.org/codes/documents/hampel.pdf> accessed 28 August
2014.
60
The Committee on Corporate Governance, The Combined Code: Principles of Good
Governance and Code of Best Practice, June 1998, <http://www.ecgi.org/codes/documents/
combined_code.pdf> accessed 28 August 2014.
61
Financial Reporting Council, The UK Corporate Governance Code, September 2012
(Corporate Governance Code), <https://www.frc.org.uk/Our-Work/Publications/Corporate-
Governance/UK-Corporate-Governance-Code-September-2012.pdf> accessed 28 August 2014.
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The Code is applied to companies whose shares are listed on the London Stock
Exchange on a ‘comply or explain’ basis,62 other than some provisions that do not
apply to companies below the FTSE 350.63 ‘Comply or explain’ means that a listed
company must either follow each specific provision of the Code, or explain to its
shareholders the reasons for it not doing so.64 This explanation should include an
account of how the company’s practices relate to the main principle in the Code to
which the specific provision relates, contribute to good governance and further the
achievement of its business objectives.65
Thus, in the UK, the ‘comply or explain’ system of corporate governance applies to
listed companies outside the financial sector, whilst listed and non-listed banks and
investment firms are required to respect the banking governance provisions of CRD IV.
Before CRD IV was enacted, Dr. Max Barrett gave the following opinion.
The establishment of mandatory corporate governance requirements in the Proposed Directive

and the fact that various of these requirements appear to be more stringent than the principles
established by the UK Corporate Governance Code (the principles of which do not in any
event need to be complied with so long as an explanation is provided) suggests that
+ the days of ‘comply or explain’ may be numbered;

+ mandatory EU law and regulation may yet become the grundnorm for corporate practice
within the European Union … ; and
+ the status of the UK Corporate Governance Code as a pre-eminent benchmark of
international best practice in the corporate governance arena … may yet be supplanted
by EU standards.66
Whilst it is not yet the case that ‘comply or explain’ is overruled by legislative
requirements for, say, manufacturing companies, there is acceptance within the UK that
the traditional approach of company law, which holds that there is a (unitary) board of
directors accountable to shareholders, is not sufficiently robust to regulate financial
institutions in the current economic climate. Nevertheless, the necessary strengthening
of corporate governance in these firms may not best be achieved by new legislation.
The Walker Review expresses this view succinctly.
The behavioural changes that may be needed are unlikely to be fostered by regulatory fiat,
which in any event risks provoking unintended consequences. Behavioural improvement is
more likely to be achieved through clearer identification of best practice and more effective
62
Corporate Governance Code, 4, para 1.
63
Corporate Governance Code, 4, para 5. ‘FTSE 350’ means ‘Financial Times Stock
Exchange 350 stock index’, which is a weighted index of the shares of the 350 largest
companies that are traded on the London Stock Exchange.
64
Corporate Governance Code, para 3.
65
Corporate Governance Code, para 3.
66
Max Barrett, ‘The End of “Comply or Explain”? Corporate Governance in the United
Kingdom and Ireland and the Impact of CRD IV’ [2012] 27(1) JIBLR 4, 12.
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but, in most areas, non-statutory routes to implementation so that boards and their major
owners feel ‘ownership’ of good corporate governance.67
CRD IV partly acknowledges this view, by providing for the disapplication of some of
its provisions in favour of national law under circumstances specified therein – a rare
approach for EU legislation over areas of joint competence. For example, after
specifying the requirement for, and responsibilities of, a nomination committee for
significant financial institutions, the Directive then disapplies these provisions ‘where,
under national law, the management body [i.e. the board of directors] does not have any
competence in the process of selection and appointment of any of its members’.68
Furthermore, CRD IV specifies requirements that each member of the board of
directors must fulfil, and then states that the Article containing these ‘shall be without
prejudice to provisions on the representation of employees in the management body as
provided by national law’.69
The new financial regulators within the UK, the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA), are gradually finding a way to
supervise the risk management and cultural aspects of firms which fits in with this
environment. The PRA has a general objective: to further the safety and soundness of
the firms that it regulates;70 an insurance objective: to contribute to these securing a
suitable degree of protection for persons who are (or may become) policyholders;71 and
a secondary competition objective: to act in a manner that promotes effective
competition in the markets for services that are provided by the firms that it regulates.72
Within the statutory framework, which includes these objectives, directly applicable EU
regulations, and detailed rules in the PRA rulebook, the PRA’s approach to supervision
is ‘to judge whether [the organisations that it regulates] are safe and sound, and
whether they meet, and are likely to continue to meet, the Threshold Conditions’.73
67
HM Treasury, A Review of Corporate Governance in UK Banks and Other Financial
Industry Entities, 26 November 2009, 9–10, <http://webarchive.nationalarchives.gov.uk/+/http:/
www.hm-treasury.gov.uk/d/walker_review_261109.pdf> accessed 28 August 2014.
68
69
70
Financial Services and Markets Act 2000 (FSMA), s 2B(2).
71
FSMA, s 2C(2).
72
FSMA, s 2H(1).
73
Bank of England (2014), The Prudential Regulation Authority’s Approach to Banking
Supervision, June 2014, 5, <http://www.bankofengland.co.uk/pra/Pages/publications/banking
appr1406.aspx> accessed 28 August 2014. The corresponding statement for insurance companies
is similar to that for banks: ‘The PRA supervises insurers to judge whether they are safe and
sound, whether they protect policyholders appropriately, and thus whether they meet, and are
likely to continue to meet, the Threshold Conditions.’ (Bank of England (2014)), The Prudential
Regulation Authority’s Approach to Insurance Supervision, June 2014, 6, <http://www.bank
ofengland.co.uk/pra/Pages/publications/insuranceappr1406.aspx> accessed 28 August 2014.) The
PRA’s threshold conditions are those that insurers must satisfy under Part 1D of Schedule 6 of
the FSMA, and those that banks (and investment firms that provide PRA-authorised activities)
must satisfy under Part 1E of Schedule 6 of the FSMA, in order to provide, and to continue to
provide, financial services in the UK.
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The FCA has a strategic objective: to ensure that the financial markets and those for
financial services function effectively.74 It also has three operational objectives, which
concern consumer protection,75 integrity76 and competition.77 The consumer protection
objective is to secure ‘an appropriate degree of protection’ for the customers of
financial products and services.78 The integrity objective is to protect and enhance ‘the
integrity of the UK financial system’.79 This integrity includes the system’s resilience,
soundness and stability,80 its freedom from financial crime81 and its resistance to
market abuse,82 as well as the proper functioning of financial markets83 and the
transparency of the pricing process for products in these markets.84 The FCA’s
competition objective is to further effective competition in consumers’ interests, in the
markets for financial services that are regulated by the Financial Services and Markets
Act (FSMA), and for services that a recognised investment exchange provides in
conducting activities that are regulated by this Act.85 This regulator’s approach to
supervision is based on three pillars of activity – proactive group/firm supervision
(Pillar 1), event-driven reactive supervision (Pillar 2), and issues and products super-
vision (Pillar 3).86
In its report of June 2013, the Parliamentary Commission on Banking Standards
outlined a tool, which it called ‘special measures’, in order to ‘identify and tackle
serious failing in standards and culture within the banks they supervise’.87 The
regulators should commission an independent report in order to assess the extent to
74
FSMA, ss 1B(2) and 1F.
75
FSMA, s 1B(3)(a).
76
FSMA, s 1B(3)(b).
77
FSMA, s 1B(3)(c).
78
FSMA, s 1C(1).
79
FSMA, s 1D(1).
80
FSMA, s 1D(2)(a).
81
FSMA, s 1D(2)(b).
82
FSMA, s 1D(2)(c).
83
FSMA, s 1D(2)(d).
84
FSMA, s 1D(2)(e).
85
FSMA, s 1E(1).
86
Financial Conduct Authority (2014), The FCA’s Approach to Supervision for C1 groups,
March 2014, 14, <http://www.fca.org.uk/your-fca/documents/corporate/the-fca-approach-to-
supervision-for-c1-groups> accessed 28 August 2014; Financial Conduct Authority (2014), The
FCA’s Approach to Supervision for C2 firms and groups, March 2014, 14, <http://www.fca.
org.uk/your-fca/documents/corporate/the-fca-approach-to-supervision-for-c2-groups> accessed
28 August 2014; Financial Conduct Authority (2014), The FCA’s Approach to Supervision for
C3 firms, March 2014, 14, <http://www.fca.org.uk/your-fca/documents/corporate/the-fca-
approach-to-supervision-for-c3-groups> accessed 28 August 2014; Financial Conduct Authority
(2014), The FCA’s Approach to Supervision for C4 firms, March 2014, 14, <http://www.fca.
org.uk/your-fca/documents/corporate/the-fca-approach-to-supervision-for-c4-groups> accessed
28 August 2014.
87
House of Lords/House of Commons, Changing Banking for Good: Report of the
Parliamentary Commission on Banking Standards, June 2013 (Changing banking for good), 56
and 437, paras 190–191 and 970–971, <http://www.parliament.uk/business/committees/
committees-a-z/joint-select/professional-standards-in-the-banking-industry/news/changing-banking-
for-good-report/> accessed 28 August 2014.
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which their initial source of anxiety may be a sign of broader shortcomings in conduct
or standards.88 If this report shows that there are problems which require rectification
or there remains reason for regulatory concern, then the regulators should enter into a
formal commitment letter with the relevant bank in order to secure rectification
measures and to form a basis for monitoring progress in addressing the difficulties.89
The regulators must monitor a bank in special measures.90 A person within the bank
should be made responsible for ensuring that the organisation implements the remedial
measures to the satisfaction of the regulators.91
Both the PRA and the FCA have recently reported that they are able to implement
these special measures – which the regulators call ‘enhanced supervision’ – within the
existing powers that the FSMA confers on them.92 These tools include reports by
skilled persons under section 166 of the FSMA,93 powers of requirement under sections
55L and 55M of the FSMA,94 own initiative variation of permission powers under
section 55J of the FSMA,95 and asset requirement powers under section 55P of the
FSMA.96 The FCA primarily fits enhanced supervision within Pillar 1 of its super-
visory model.97
Thus, the PRA and the FCA are developing the capacity to manage serious
difficulties in the risk management and the governance of the firms that they regulate.
Nonetheless, as the financial crisis took place just six years ago, and in the presence of
substantial new international guidelines and considerable recent legislation at EU and
national level, it is too early to say how successful the regulatory response to these
events is likely to be.
88
Changing banking for good, 56 and 437, paras 191 and 971.
89
90
Changing banking for good, 56 and 437–438, paras 192 and 973.
91
92
Bank of England (2014), Statement of Policy: The Use of PRA Powers to Address Serious
Failings in the Culture of Firms, June 2014 (Use of PRA powers), 4, para 14, <http://
www.bankofengland.co.uk/pra/Pages/publications/powersculture.aspx> accessed 28 August
2014; Financial Conduct Authority (2014), Tackling Serious Failings in Firms: A Response to
the Special Measures Proposal of the Parliamentary Commission on Banking Standards, June
2014 (Tackling serious failings), 3, <http://www.fca.org.uk/your-fca/documents/tackling-serious-
failings-in-firms> accessed 28 August 2014.
93
Use of PRA powers, 4–5, para 17; Tackling serious failings, 12, Annex 1.
94
Use of PRA powers, 5, paras 22–23; Tackling serious failings, 12, Annex 1.
95
Use of PRA powers, 6, para 27; Tackling serious failings, 12, Annex 1.
96
Use of PRA powers, 5, para 25; Tackling serious failings, 12, Annex 1.
97
Tackling serious failings, 12, Annex 1.
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21. A new era of sentencing insider crimes

Rita Cheung
A. INTRODUCTION
Insider trading1 has been a criminal offence in the US2 and England.3 The offence in
both countries is based on unlawful trading in securities by an insider on the basis of
confidential inside information. Insider trading occurs when an insider trades on the
basis of confidential price sensitive information for a financial gain. The gain could
take the form of ‘profit made’ or ‘loss avoided’. While the policy justifications for
regulating insider trading have been much disputed,4 insider trading is regarded
essentially as a sophisticated fraud. It is a form of market abuse that erodes public
confidence in the integrity, fairness and efficiency of the financial markets and damages
the interests of market participants.
In recent years, both countries have taken steps to reform their sentencing guidelines
for insider trading. In the US this has taken the form of amending the insider trading
guideline as contained in section 2B1.4 of the Federal Sentencing Guidelines in
response to the recommendations made by the Dodd-Frank Wall Street Reform and
Consumer Protection Act 2010;5 while in England this has taken the form of the
introduction of the Court of Appeal guideline judgments and new sentencing guidelines
under the Coroners and Justice Act 2009. A significant feature of the reforms in the two
countries is that both called for the development of an effective sentencing framework
that would promote greater consistency and proportionality in sentencing.6 The
countries, however, adopt different approaches to sentencing insider crimes.
US law uses ‘gain’ as a core measure of culpability and harm. The meaning of ‘gain
resulting from the offence’7 is, however, vaguely defined. The ambiguity of the
guideline language has long given rise to conflicting judicial interpretation. On the one
1
In this chapter, the two expressions ‘insider trading’ and ‘insider dealing’ are used
interchangeably.
2
Securities Exchange Act 1934 s 10 and SEC Rule 10b-5.
3
Criminal Justice Act 1993, Pt V, s 52.
4
The desirability of regulating insider trading has been subject to considerable debate.
Opponents of regulation argue that insider trading is desirable because it is economically
efficient to compensate entrepreneurs and to motivate managers to competently allocate
information. See generally H Manne, Insider Trading and the Stock Market (New York, Free
Press 1966).
5
Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (‘Dodd-Frank Act’)
(Pub L 111–203, HR 4173).
6
US Sentencing Guidelines Manual (‘USSG’) (US), Ch 1, Pt A(1)(3); Criminal Justice Act
2003 (UK), s 170(5)(a).
7
USSG, § 2B1.4 (b) (2014).
250
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A new era of sentencing insider crimes 251
hand, some courts espoused a broad measurement of gain as an insider trading

defendant’s total profit realized from the share sales. However, in 2009, the Tenth
Circuit in US v Nacchio8 propounded a new principle based on the civil disgorgement
remedy, which establishes a cut-off point to measure gain more narrowly by reference
to the share price at the time the inside information is disclosed and absorbed by the
market. While this development resonates with an increasing judicial willingness to
employ an economically realistic approach to measuring insider trading gain, the
complexity of the gain calculation compounds confusion and creates uncertainty,
resulting in unwarranted sentencing disparities.
The English judiciary, by contrast, has adopted a more pragmatic approach to
measuring crime seriousness by considering a myriad of sentencing factors.9 Signifi-
cantly, the Coroners and Justice Act 2009 ushered in a new era through the creation of
a new single guidelines authority, the Sentencing Council for England and Wales,10
which in turn promulgated new definitive sentencing guidelines with the aim of
creating a consistent approach to sentencing, while preserving judicial discretion. The
Act heralds a new dawn not only in the development of definitive sentencing guidelines
in a new format,11 but also in the replacement of the old guidelines issued by the
former Sentencing Guidelines Council and a disjointed collection of the Court of
Appeal’s guideline judgments.
At present, England has no definitive guideline for insider trading, and the Court of
Appeal’s authority has been limited. There is a clear need for improved guidance in this
area. It is notable that the Sentencing Commission has already embarked upon an
examination of the fraud guideline that culminated with the publication in May 2014 of
a guideline on fraud, bribery and money laundering (hereinafter the ‘Fraud Guide-
line’).12 The Fraud Guideline is designed to replace the definitive fraud guideline issued
by the former guidelines body, and to promote greater consistency in the sentencing of
fraud, bribery and money laundering offences. Regrettably, insider dealing was omitted.
8
US v Nacchio, 573 F3d 1062 (10th Circuit, 2009).
9
See the Court of Appeal guideline judgments on insider dealing R v McQuoid [2009]
EWCA Crim 1301, where the Court of Appeal enunciated eight factors that might be relevant in
assessing sentences including the role of the offender, the level of planning and sophistication of
the offence, the amount of gain (or loss avoided) and the impact of the offence on any individual
victim, on overall public confidence in the integrity of the market. See also R v Rollins [2011]
EWCA Crim 1825, where the Court of Appeal assigned a clear role to personal mitigation.
10
Replacing the Sentencing Advisory Panel and the Sentencing Guideline Council.
11
For a detailed discussion of the new guidelines format, see J Roberts and A Rafferty,
‘Sentencing Guidelines in England and Wales: Exploring the New Format’ [2011] Criminal Law
Review 681.
12
Sentencing Council, Fraud, Bribery and Money Laundering Offences. Definitive Guideline
(May 2014), effective from 1 October 2014. The inclusion of this Guideline followed a request
from the Lord Chancellor under section 124 of the Coroners and Justice Act 2009, in support the
Government’s introduction of deferred prosecution agreements for corporate offenders by the
Crime and Courts Act 2013. The Guideline, which will replace the definitive fraud guideline
published in 2009 by the former statutory guidelines authority, is divided into seven guidelines
for the offences of (i) fraud (‘the fraud model’) – which is the focus of this chapter, (ii)
possessing, making or supplying articles for use in frauds, (iii) revenue fraud, (iv) benefit fraud,
(v) money laundering, (vi) bribery and (vii) corporate offenders.
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Notwithstanding, the development of a new sentencing guideline for financial crimes

represents a historic landmark in England – for it is the first time guidelines have been
produced for bribery and money laundering, along with a revised fraud guideline. More
importantly, the bribery and money laundering guidelines follow broadly the format
used in the fraud model but with a variability of culpability, harm, mitigating and
aggravating factors tailor-made for specific offences. In that regard, the publication of
the Fraud Guideline has important implications for the future shape of an English
insider dealing guideline.
This chapter critically assesses the impact of the Dodd-Frank reform on insider
trading sentencing. It is argued that the US law, with its undue emphasis on gain as a
core measure of harm, is overly restrictive and unnecessarily complex. This is to be
contrasted with the position in England, with the aim of highlighting the general
difference in approach which may be instructive.
B. THE REFORMED INSIDER TRADING GUIDELINE

The US insider trading law has developed through judicial interpretations of the general
anti-fraud provisions under section 10(b) of the Securities Exchange Act 1934 and Rule
10b-5, which broadly prohibit the use of any manipulative and deceptive device in
connection with the purchase or sale of any security. Liability under Rule 10b-5 has
been constructed on the classical13 and misappropriation14 theories.
For most of the 20th century prior to the guidelines reform, the American sentencing
system implemented a discretionary rehabilitative model, conferring virtually unfet-
tered discretion on judges to impose the initial sentences, and broad powers on parole
boards to set release dates. The most significant reform introduced by the Sentencing
Reform Act 1984 was the creation of the US Sentencing Commission, tasked with the
development of the Federal Sentencing Guidelines. The primary objective of the
Federal Sentencing Guidelines was to eliminate sentencing disparities, and the guide-
lines reform was intended to achieve honesty, uniformity and proportionality in federal
sentencing15 that will meet the purposes of just punishment, deterrence, incapacitation
and rehabilitation.16 A mandatory-guidelines system held sway for two decades until
13
The fiduciary theory is based on the notion that a corporate ‘insider’ owes a fiduciary
duty, or a duty of trust and confidence, to the company shareholders, and thus does not extend to
those who owe no duty to shareholders, Chiarella v US, 445 US 222 (1980), rejecting the parity
of information rule in SEC v Texas Gulf Sulphur Co, 401 F2d 833 (2nd Circuit, 1968) that
anyone who has inside information must either disclose or abstain from trading.
14
The misappropriation rationale extends liability for insider trading not merely to fiduciar-
ies, but to any person who misappropriates inside information for a securities trading purpose, in
breach of a duty owed to the source of the information: US v O’Hagan, 521 US 642 (1997).
15
USSG, Ch 1, Pt A(3).
16
18 USC § 3553(a).
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the restoration of judicial discretion by the Supreme Court’s landmark decision in US v

Booker,17 which rendered the guidelines effectively advisory.
Insider trading sentencing is governed by section 2B1.4 of the Federal Sentencing
Guidelines. An insider trading conviction under the US guideline carries a theoretical
maximum sentence of life imprisonment.18 The most recent reform activity follows
upon the recommendations made by the Dodd-Frank Act 2010 to review the guideline
for fraud offences. The Sentencing Commission was given a wide remit: to amend the
guideline so as to ‘appropriately account for the actual and potential harm’ to the public
and the financial markets, to reflect the seriousness of the offences, and to meet the
statutory purposes of sentencing.19 These objectives broadly mirror the core principles
underpinning the Reform Act 1984.
The centrepiece of the section 2B1.4 insider trading guideline is a two-dimensional
grid for the measurement of crime seriousness (the ‘offence level’)20 and criminal
history, which ultimately sets out a presumptive sentencing range. An eccentric feature
of section 2B1.4 is that a conviction carries a relatively low base offence level of
eight,21 but the sentence length is driven by the amount of ‘gain’.22 Crucially, the
Economic Crime Reform23 retains ‘loss’ as the linchpin in economic crime sentencing
and ‘gain’ as an alternative measure of loss when loss is unascertainable.24 Ironically,
the provision fails to provide any helpful guide on how to measure gain, which is often
misstated. The inconsistent judicial approach to calculating gain has been a source of
confusion and uncertainty, generating markedly disproportionate outcomes and incon-
sistencies in sentencing. Another criticism is the failure of the guideline to appropri-
ately assess crime seriousness due to its over reliance on using gain alone as the
17
US v Booker, 543 US 200 (2005), where the Supreme Court found the Federal Sentencing
Guidelines unconstitutional under the Sixth Amendment right to a jury trial, but upheld them as
a system of ‘effective advisory’ sentencing rules.
18
Cf in England, the maximum sentence for insider dealing is seven years’ imprisonment:
Criminal Justice Act 1993, s 61.
19
Dodd-Frank Act 2010, s 1079A(a)(1)(A),(B).
20
The offence level consists of three components: a base offence level; a set of specific
offence characteristics; and additional adjustments under Chapter 3 of the Federal Sentencing
Guidelines.
21
USSG, § 2B1.4 (a).
22
USSG, § 2B1.4 (b). See e.g., a gain of US$5,000 would produce no increase in the base
offence level of 8 and carries a sentencing range of 0 to 6 months’ imprisonment; while a gain
of US$400,000,000 would produce a 30-level enhancement and results in a sentencing range of
97 to 121 months’ imprisonment.
23
In 2001, the US Sentencing Commission approved amendments to guidelines governing
the sentence of economic crime, known as the ‘economic crime package’. The reform
consolidated the guidelines governing theft and fraud into a single guideline; redefined loss;
modified the loss table; and approved changes to the money laundering guidelines. For a
historical account of the reform, see Frank O Bowman III, ‘The 2001 Federal Economic Crime
Sentencing Reforms: An Analysis and Legislative History’ (2001) 35 Indiana Law Review 5.
24
USSG, § 2B1.4, cmt(n2); § 2B1.1, cmt(n3B). Both gain and loss use the same loss table in
§ 2B1.1.
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measure of harm.25 The lack of proper guidance on the criteria for mitigation and
aggravation which are generally used to justify the imposition of non-guidance
sentence results in substantial sentencing disparities.26
The need for reform is widely acknowledged. An attempt was made by the
Sentencing Commission to amend the uniquely defective insider trading guideline in
response to the recommendations made by the Dodd-Frank Act in two respects.27 First,
it creates a new minimum offence level of 14 and, likely, longer prison terms, for any
‘organized scheme to engage in insider trading’.28 It also sets out a list of non-
exhaustive factors which the court should consider in determining whether the insider
trading scheme is ‘organized’, involving ‘considered, calculated, systematic, repeated
effort to obtain or trade on inside information’.29 The change introduced is that a
defendant who engages in an organized insider trading scheme, as opposed to
fortuitous or opportunistic instances of insider trading, will now warrant at minimum a
definite period of incarceration. An obvious flaw of this provision is that it would
impose disproportionate punishment on low-gain offenders given that the imposition of
the minimum sentence is now based on the operation of a scheme, rather than the
relative culpability of the participants. The problem is compounded by the omission to
elucidate the applicability of the ‘relevant conduct’30 rules. It is beyond the scope of
this chapter to have a detailed exploration of the relevant conduct rules, under which
judges are allowed to consider real offence conduct as broad as a defendant’s
uncharged, dismissed and acquitted conduct as well as conduct of co-conspirators in
crime, beyond the crime of conviction. Relevant conduct, as defined, includes all
‘reasonably foreseeable’ conduct of a defendant’s co-conspirators in furtherance of a
‘jointly undertaken criminal activity’,31 and conduct that is ‘part of the same course of
conduct or common scheme’.32 But the logical corollary of applying this concept to
white collar crimes involving an astronomical amount of monetary gain would expose
all participants to draconian criminal sentences.33 The reform leaves unanswered the
more fundamental questions: should a defendant’s sentence be measured by his own
25
For a frontal assault on the § 2B1.4 insider trading guideline, see DD Chattin, ‘The More
You Gain, The More You Lose: Sentencing Insider Trading under the US Sentencing Guidelines’
(2010) 79 Fordham Law Review 165, 185–214. The Sentencing Commission has identified the
deficiencies of § 2B1.4, considering the inclusion of one or more specific offence characteristics
that use aggravating factors other than gain to account for crime seriousness: Sentencing
Commission, Proposed Amendments to the Sentencing Guidelines (19 January 2012).
26
See US Sentencing Commission, Report on the Continuing Impact of United States v
Booker on Federal Sentencing (2012) 113.
27
See Amendments to USSG, Supp to App C, effective on 1 November 2012.
28
USSG, § 2B1.4 (b)(2).
29
USSG, § 2B1.4 (b)(2)(A)–(H).
30
The relevant conduct rules are fairly complex, and there has been general support for
reform. For a summary of the issues and extensive criticism of the rules, see US Sentencing
Commission, Simplification Draft Paper: Relevant Conduct and Real Offense Sentencing (2010).
31
USSG, § 1B1.3 (a)(1).
32
USSG, § 1B1.3 (a)(2).
33
See e.g., US v Bauer, 11 Cr 858 (DNJ 2012); US v Gupta, 11 Cr 907 (SDNY 2012)
applying the relevant conduct rules.
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gain? Or should he be liable for the total gain of his co-conspirators in a scheme – an
approach that appears to be more in line with the relevant conduct concept?
Second, the reformed guideline broadens the applicability of the ‘abuse of position of
trust’ adjustment under section 3B1.3, which warrants a two-level enhancement in
insider trading cases. This broader standard is intended to apply to hedge fund
professionals with regular participation in securities transactions, as well as lawyers
who regularly provide professional assistance in securities transactions. But the old rule
remains the same, for the commentary merely provides examples of positions that will
trigger an enhancement. One of the main criticisms of the guideline, namely, that it
places disproportionate weight on gain, has not been properly addressed. This repre-
sents a major lacuna which runs counter to the goals of sentencing reform and the
declared objectives of the Dodd-Frank Act.
C. JUDICIAL APPROACHES TO SENTENCING INSIDER CRIMES

In the US, an insider trading defendant’s culpability and harm are measured by ‘the
gain resulting from the offence’,34 defined as the ‘total increase in value realized
through trading in securities’35 under section 2B1.4 of the Federal Sentencing Guide-
lines. The unclear wording of section 2B1.4 long gives rise to conflicting judicial
interpretation, resulting in divergence in calculation methodologies.
The practice of the American courts was to measure gain by adopting the net gain
formula derived from the Eighth Circuit’s widely followed approach in US v Mooney.36
The defendant, Michael Mooney, a former United Healthcare Corporation vice presi-
dent, was convicted of trading in United shares on the basis of inside information
regarding United’s acquisition of Metra. In May and June 1995, while he was attending
Metra for confidential due diligence meetings, Mooney purchased call options in
United shares. The share price soared following the acquisition announcement on 26
June 1995, and subsequently in July and October 1995 Mooney sold his shares for a
total profit of US$274,199. At sentencing, the district court employed the net gain
approach and calculated Mooney’s gain as his net profit. On appeal, Mooney argued for
the adoption of the market absorption approach, much discussed below, under which
there should be a cut-off point for measuring gain – a point that would reflect the time
the market had absorbed the inside information (i.e. two days after the acquisition
announcement on 28 June 1995) and, therefore, meant his gain was only US$50,467,
resulting in a lower sentencing range. Mooney’s arguments were bluntly rejected by the
Eighth Circuit. Relying heavily on the guideline commentary, the Court construed the
word ‘realized’ as a defendant’s actual total profit made from his trades. The rationale
of this approach, as enunciated by the majority of the Eight Circuit in Mooney, is that
the use of actual sales to calculate gain would provide a clear bright-line rule and
would therefore promote certainty in criminal sentencing.37 Powerful dissent was
34
USSG, § 2B1.1 (b).
35
USSG, § 2B1.1 (b) and cmt.
36
US v Mooney, 425 F3d 1093 (8th Circuit, 2005).
37
Mooney 425 F3d 1093, 1101 (8th Circuit, 2005).
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voiced by Bright J, who criticized the court for failing to recognize that market factors
unrelated to the fraud should be excluded from the sentencing calculus.38 Net gain
would punish a defendant for exogenous market events, divorce the sentencing
assessment of gain from the defendant’s culpability of the offence and lead to unequal
sentences for equal crimes.
The alternative market absorption approach, with its origin in the civil disgorgement
remedy,39 calculates gain that would reflect the point when the inside information is
disclosed and absorbed by the market, excluding the unfair influence of external market
factors40 unrelated to the fraud. This approach was forcefully advocated in US v
Nacchio.41 The case involved Joseph Nacchio, a former Qwest CEO, who was
convicted of trading in Qwest shares on the basis of negative inside information
regarding Qwest’s financial accounting. Drawing on Bright J’s dissent in Mooney, the
Tenth Circuit broke new ground in applying civil disgorgement principles in criminal
sentencing. The Court gave an intellectually respectful explanation as follows: the
essence of the offence of insider trading is not the mere act of trading – standing alone,
a lawful act – but trading on the basis of inside information.42 The plain language of
the guideline specifically limits the gain to that ‘resulting from the offence’ (i.e. trading
on the basis of inside information), and not the gain resulting from the trade (i.e. share
sales). Accordingly, Nacchio’s gain was narrowly calculated as the portion of his
proceeds from the sale of Qwest shares during the insider trading period at ‘a
reasonable time after public dissemination of the inside information’.43 This approach,
while involving extensive fact-finding in determining the market absorption point, bears
the virtues of achieving uniformity and proportionality which go to the heart of
American sentencing reform. The considerations of consistency and fairness which led
the Nacchio court to adopt the market absorption approach are intuitively persuasive.
While Nacchio may be read as an implicit repudiation of the net gain approach, the
subsequent decision in US v Rajaratnam44 clouds the issues and suggests that Nacchio
is probably erroneous.
The difficulties in measuring insider trading gain are amply illustrated by Rajarat-
nam. The decision is likely to be the subject of lively debate for a long time as the
largest hedge fund insider trading scandal in American history. Over the course of
seven years, Rajaratnam orchestrated an insider trading scheme that involved extensive
and repeated trading at Galleon, a multi-billion dollar New York hedge fund complex
founded by Rajaratnam, based on inside information he received from certain indi-
viduals. The sources of inside information were provided by his expert network, a
38
Mooney 425 F3d 1093, 1106 (8th Circuit, 2005).
39
SEC v MacDonald, 699 F2d 47 (1st Circuit, 1983); SEC v Happ, 392 F3d 12 (1st Circuit,
2004); SEC v Maxxon, 465 F3d 1174, 1179 (10th Circuit, 2006).
40
There is a tangle of factors affecting share prices, eg the overall growth or decline in the
share price or changes caused by external market forces such as changed economic circum-
stances, changed investor expectations, and new industry-specific or firm-specific events.
41
Nacchio 573 F3d 1062 (10th Circuit, 2009).
42
Nacchio 573 F.3d 1062, 1072 (10th Circuit, 2009).
43
Nacchio 573 F3d 1062, 1082 (10th Circuit, 2009).
44
US v Rajaratnam, 09 Cr 1184 (SDNY 2011). The gain calculation methodology was not
challenged on appeal: 719 F3d 139 (2nd Circuit, 2013).
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widespread web of well-placed tippers, comprising corporate insiders, hedge fund

executives, proprietary traders and financial professionals. The inside information
concerned market moving events such as quarterly earnings announcements, takeovers
and material contracts of various publicly traded companies. On multiple occasions,
Rajaratnam’s business associate, Gupta, disclosed inside information that he obtained in
the course of his employment as a Goldman Sachs director to Rajaratnam, who in turn
caused Galleon funds to trade based on Gupta’s illegal tips, generating substantial illicit
profits and loss avoidance of more than US$23 million. Specifically, at the height of the
global financial crisis, on 23 September 2008, after attending a special Goldman board
telephonic meeting, Gupta called and disclosed inside information to Rajaratnam about
Berkshire Hathaway’s soon-to-be-announced US$5 billion investment in Goldman.
Within a minute after that call, Rajaratnam caused Galleon funds to purchase large
quantities of Goldman shares before the market closed and, in turn, tipped a conspirator
at Galleon who traded profitably based on that information. Gupta also passed inside
information about Goldman’s negative earnings announcement to Rajaratnam, who then
caused Galleon funds to sell their valuable holdings of Goldman shares to avoid loss.
Further, Rajaratnam conspired with Khan, a former Galleon employee, to trade on
inside information regarding Google’s negative earnings announcement which Khan
received from an employee of a firm providing investor relations services to Google. It
was also found that his university classmate, Goel, a former Intel Corporation
managing director, disclosed inside information regarding Intel’s positive earnings
details and strategic deliberations to Rajaratnam, who then traded profitably on behalf
of Galleon funds based on Goel’s illegal tips. In exchange, Rajaratnam provided Goel
with financial assistance and executed trades in Goel’s brokerage account based on
inside information Rajaratnam received from other sources.
Rajaratnam was convicted of 14 counts of conspiracies to commit insider trading.
The advisory guidelines recommended a maximum sentence of 24 years’ imprison-
ment, which included a 24-level enhancement for Rajaratnam’s gain of over US$50
million, a four-level enhancement for his leadership role and a two-level enhancement
for obstruction of justice. The central issue before the District Court was the proper
measurement of gain resulting from Rajaratnam’s unlawful trading in the shares of
three companies – Goldman, Google and Intel. The government argued for the
employment of the net gain approach that calculated Rajaratnam’s gain as his net profit
or US$72 million. Rajaratnam, on the other hand, argued for the adoption of the market
absorption approach, which excluded unrelated market factors and, accordingly, meant
his gain was only US$42 million. Rejecting the defence argument, Holwell J adhered to
the net gain approach and, in doing so, relentlessly dismantled the elaborate analysis of
the market absorption approach in Nacchio. In a remarkably skeletal argument, the
judge construed the commentary language ‘increase in value’ as the difference between
the purchase and sale price, and thus the net gain approach, he insisted, accorded with
the plain language of the guideline.
This analysis is difficult to follow. It clashes with the view, so forcefully put forward
by the Supreme Court in Dura Pharmaceutical v Broudo,45 that civil securities fraud
plaintiffs must prove that their loss was caused by the defendant’s misrepresentation (or
45
Dura Pharmaceutical v Broudo, 544 US 336 (2005).
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other fraudulent conduct) as opposed to other independent market factors.46 Nor does it
take account of earlier civil insider trading cases such as SEC v MacDonald,47 where
the court refused to strip the defendant of his total profits realized from insider trading,
holding that his gain should be limited to ‘those accretions occurring up to a reasonable
time’48 after the disclosure of the inside information. McDonald has rightly recognized
that measuring gain without considering when the inside information became public
would appraise an insider’s gain by totally fortuitous circumstances. The Rajaratnam
court had also discarded a considerable number of established authorities on criminal
securities fraud cases49 which accept the notions that exogenous market factors should
be excluded from the sentencing calculus, and that it would be appropriate to adopt
civil disgorgement for criminal sentencing purposes because it is attuned to the stock
market complexities. These decisions are important for their reaffirmation of the basic
but important principle that a defendant should not be punished for unrelated market
factors.
But at the end of the day, the option between net gain and market absorption
approaches was all rather technical. The Court adopted a generous downward departure
from the advisory guidelines and sentenced Rajaratnam to 11 years’ imprisonment in
the light of his extensive history of charitable work. Rajaratnam illustrates the dangers
posed by unstructured judicial discretion in the application of sentencing factors in the
post-Booker advisory guidelines system which, if unchecked, has the potential to create
sentencing disparities. The lack of clarity in the criteria for mitigation and aggravation,
and, in particular, the increased judicial discretion after Booker to consider personal
mitigation, has led to increasing sentencing disparities. The courts had from time to
time interpreted gain out of the guideline or whittled its meaning. The recent
Dodd-Frank amendment to the insider trading guideline expanded the recommended
sentences for organized insider trading scheme, doubtless prompted in part by
Rajaratnam. Yet the reform is wholly inadequate. So long as section 2B1.4 survives in
its present form, it will continue to generate lengthy and costly litigation.
1. Gain Paradox
The conflicting judicial interpretation on gain demonstrates the need for reform. In
contrast to the conservative approach to reforming the section 2B1.4 insider trading
guideline, an important innovation introduced by the Dodd-Frank amendment to the
fraud guideline was the creation of a loss calculation formula based on a ‘modified
rescissory’ approach that calculates loss by reference to an average post-fraud price
over a relatively lengthy 90-day period. The new formula is designed to reduce the
impact on the loss calculation of factors unrelated to the fraud. Given the moderation
which the civil disgorgement method has incorporated in the loss calculation, and the
advantages afforded by such approach that have been evident in the case law, it is
46
Dura 544 US 336, 346 (2005).
47
SEC v MacDonald, 699 F2d 47 (1st Circuit, 1983).
48
MacDonald 699 F2d 47, 53 (1st Circuit, 1983).
49
US v Olis, 429 F3d 540 (5th Circuit, 2005); US v Rutkoske, 506 F3d 170 (2nd Circuit,
2007). Cf US v Berger, 587 F3d 1038 (9th Circuit, 2009).
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submitted that the market absorption approach should be adopted as a guidepost to

calculating insider trading gain.
2. Sentencing Factors
The most cursory of examinations of the US guideline raises the fundamental

questions: what factors might usefully be considered as relevant in assessing insider
trading sentencing? It has been argued that the continued adherence to gain as a core
measure of harm remains a significant lacuna in the US guideline. The comprehensive
sentencing guideline system currently being developed by the English Sentencing
Council should be studied as a model for reform. While it is beyond the scope of this
chapter to explore the new English guideline, it would be instructive to look at the
fraud model,50 which provides an excellent illustration of current English approach to
sentencing financial crimes. It contains a series of eight steps, of which the first two are
of critical importance for the purpose of determining crime seriousness.
Step one involves the identification of the main sentencing factors (offence category)
relating to ‘culpability’ and ‘harm’. Culpability, which is divided into three levels,51
relates to the role of the offender and the level of planning and sophistication of the
offence. Harm is assessed in terms of the financial value involved in the offence and the
victim impact. One great virtue of the fraud model lies in its endorsement of a
two-stage approach to harm assessment. While financial loss remains at the heart of the
sentencing process as the primary harm factor, it appropriately accounts for ‘victim
impact’ as the secondary harm factor because the financial loss alone does not fully
reflect the harm. This represents a clear departure from the previous fraud guideline
which assesses harm solely on the basis of financial amounts. The two-stage approach
to harm assessment would have the dual benefits of providing consistency in terms of
how financial amounts are considered, and of allowing greater judicial flexibility to
increase the overall harm category proportionally to reflect the level of victim impact.
Step two involves the shaping of a starting point sentence by reference to a
non-exhaustive list of aggravating and mitigating factors. The fraud model includes a
detailed list of 11 aggravating factors, including but not limited to the statutory factors
of previous convictions and committing the offence while on bail, but also extends to
other important aggravating factors such as destruction of evidence and witness
intimidation. The aggravation element is balanced by a comprehensive list of 12
mitigating factors including absence of previous convictions, remorse, age, mental
disorder or disability. The merit of this approach is that it strikes a proper balance
between the need for consistency, by offering a coherent framework for judges to apply
50
Fraud Guideline, 5–12. This section considers fraudulent acts that have been charged
under Fraud Act s 1, Theft Act s 17, conspiracy to defraud or statutory conspiracy to commit
such an offence. The revised fraud guideline is grouped in broadly the same way as the previous
definitive fraud guideline with the exception of the merger of confidence fraud and banking
fraud into a single guideline.
51
There are three levels of culpability: high, medium and lesser. Examples of high
culpability factors include a leading role of the offender, an abuse of position of trust, a large
number of victims and deliberate targeting of vulnerable victims. Low culpability factors include
a minor role of the offender and an opportunistic one-off offence with little planning.
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a combination of sentencing factors, and the need for flexibility, by allowing judges to
depart from the starting point sentencing range after taking into account the aggravation
or mitigation elements in step two. Having selected the appropriate sentence, judges are
required to proceed through other steps, including the application of guilty plea
discount52 and the totality principle – that the total sentence must be just and
proportionate reflecting the overall criminality of the offences.53
This comprehensive, well-reasoned and balanced approach to sentencing is com-
mendable. While the US model places disproportionate weight on the financial amount
as a virtual determinant of crime seriousness and offers limited guidance regarding the
application of sentencing factors, the English guideline provides an appropriate account
for culpability and harm, assigns a clear role to mitigation/aggravation and gives full
credit for totality. As compared with the American grid system, the more detailed but
less prescriptive approach in England would achieve greater consistency and propor-
tionality in sentencing, while allowing judges to impose a sentence that is commen-
surate with the assessment of crime seriousness and appropriately accounts for the
characteristics of an individual case.
It is suggested that a modern insider trading guideline should provide a two-step
framework for the determination of crime seriousness for which the Anglo-American
experience has provided cogent lessons. The first step is to identify the main sentencing
factors which reflect gradation in culpability and harm. Culpability should be assessed
in terms of the role of the offender and the level of planning and sophistication
involved in the offence, with the emphasis that abuse of position of trust and organized
insider trading schemes should warrant higher culpability. Harm should be identified in
broad terms to take account of both the monetary gain (or loss avoided) and the impact
of the offence (whether on any individual victim or in a wider context, on public
confidence in the integrity of the markets). The second step is to direct the court to
consider relevant aggravating and mitigating factors for which the English fraud model
has provided a useful framework of reference. It must be recognized that a well-
designed guideline should give an explicit recognition to the totality principle, and
should include a consistent and workable method based on the market absorption
approach to calculating gain that resulted from the offence, excluding the impact on the
gain calculation of factors unrelated to the fraud. This would eliminate the complexity,
uncertainty and expense incurred in attempting to determine the gain calculation
methodology on a case-by-case basis.
At bottom, it bears reiterating that an ideal insider trading guideline should strike a
delicate balance between the desirability of consistency and fairness in sentencing and
the need to retain sufficient judicial flexibility. The English Sentencing Council is
vigorously embarking upon that task. It is to be hoped that the current sentencing
52
Sentencing Guidelines Council, Definitive Guilty Plea Guideline (2007) para 4.3. As a
general principle (rather than as a matter of law), the English courts may adopt a one-third
discount for a guilty plea: see Criminal Justice Act 2003, s 144. In the US, defendants who plead
guilty may qualify for and can bargain for a 2-level reduction for ‘acceptance of responsibility’:
USSG § 3E1.1(a)(b).
53
Sentencing Council, Definitive Totality Guideline (2012) 5–6.
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guidance on insider dealing will be fully reviewed by the guidelines authority as part of
its reform agenda, and that if a definitive insider dealing guideline were implemented in
England it would adopt the same bold and fresh approach.
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22. Regulation of insider dealing in China from the

perspective of protecting the integrity of the
capital markets
Zhen Ye
INTRODUCTION
The development of China’s economy has been well acknowledged. Playing a crucial
role in this continuing process, the securities markets in China not only act as allocators
of capital resources, but also guide China in a direction to a new economy that
recognises and respects market forces. According to the regulator of China’s securities
markets, the China Securities Regulatory Commission (the CSRC), there were 2,494
companies listed on China’s two stock exchanges in 2012, and the total market
capitalisation was RMB 23.04 trillion (GBP 2.304 trillion), equivalent to 44.36 per cent
of China’s GDP. It made China the second largest stock market in the world after the
US by the end of 2012.1 The unfortunate corollary of the above achievements, however,
has been a steep rise in abuses of the markets.
As have many of its fellow countries, China has given increasing attention to the role
of the law in shaping the character of the markets and their participants. This is because
it is generally agreed that it is pivotal to foster the integrity of the market given its
significance in maintaining a degree of investor confidence for sound, stable and
efficient markets. The issues in controlling such abuses are many and varied. Insider
dealing regulation has been selected on the basis that it has long been identified as one
of the most serious problems of China’s securities markets.
This chapter intends to contribute to the research of international insider dealing
regulation by providing a close examination of both the substantive rules and
enforcement of insider dealing regulations in China. The first part of this chapter
provides a historical overview of insider dealing regulation in China. In the next part an
analysis of the present statutory insider dealing regime in China is provided. This is
followed by an examination of enforcement issues with a few key case studies.
1. HISTORY OVERVIEW
1.1 Insider Dealing Regulations of the Republic of China before 1949
The history of China’s securities regulation starts as early as 1914 with the enactment
of the Stock Exchange Law 1914 by the Beiyang Government of the Republic of
1
CSRC, China Securities Regulatory Commission Annual Report 2012 (2012) 20.
262
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Regulation of insider dealing in China 263
China. Before it, the subject was embedded in a very limited number of commercial
and corporate regulations. It must be pointed out that there existed at the time no
modern stock exchange in China in the sense that it was run by the Chinese when the
law was promulgated.2 Thus the purpose of the law was not to regulate stock exchanges
but to regulate the issuance of bonds, thereby serving as a tool of the government to
extort money from the public. Nevertheless, article 33 of the Stock Exchange Law 1914
deserves special mention here. The provision prohibited any person from using undue
means to disturb the market prices of stocks and bonds. Considering that insider
dealing can affect the market price of the subject securities, it could fall into the scope
of ‘undue means’ under the provision. Therefore, this article may be regarded as the
earliest attempt to regulate insider conduct.
Tackling insider dealing and market manipulation became a clear legislative intent
when the Ministry of Industry and Commerce of the successive Nanking National
Government enacted the Revised Stock Exchange Law 1935 (RSEL 1935) on 27 April
1934. On the one hand, an increase of the prevalence of such practices on the bond
markets had jeopardised the fiscal revenue of the state, which mainly relied on the
issuance of government bonds. Therefore, it was in the government’s interest to
regulate insider dealing and market manipulation in order to ensure the smooth
issuance of government bonds and maintain tight control of their transactions. On the
other hand, the public was charged with anger by the large number of government
officials involved in such practices. The government, hence, had to take relevant
measures in order to ease the tension.
Under article 41 of the RSEL 1935, any public functionary was prohibited from
speculating on the stock market through an intermediary. Any violation was subject to
a fine of no less than twice but not more than ten times the purchase or selling price, or
criminal punishment according to article 49 of the law.3 Evidence of suspected
contravention of the law, meriting possible investigation by the Ministry of Industry
and Commerce, could be provided by the stock exchanges’ inspectors upon the
appointment of the ministry through on-site or off-site inspection of stock exchanges
and their member firms. The following investigation, if any, would be carried out by the
stock exchanges.
In addition to the RSEL 1935, article 10 of the Revised Directive for Rules of
Service of Government Officials 1933 prohibited all government officials from
speculating, directly or indirectly, on the bonds markets. All central administrative
2
Technically, there was a stock exchange, the Shanghai Shares Public Service, at that time,
but historians normally recognise the Beijing Stock Exchange, founded in 1918, rather than the
Shanghai Shares Public Service, as the first stock exchange given that the latter was founded by
the Chinese. Firstly, the former was founded under the Hong Kong Joint-Stock Company Rule in
1891 and reregistered in Hong Kong when it changed its name to the Shanghai Stock Exchange
in 1905. In other words, it was not under China’s jurisdiction. Secondly, its founders were
mainly British merchants, with no Chinese citizens involved. Thirdly, only foreign stocks and
other securities were traded in it. Nevertheless, the Shanghai Shares Public Service was
considered the starting point of China’s stock markets: Shiyun Song, ‘China’s Securities Markets
at the End of Qin Dynasty’ (1997) Journal of Shandong Teachers University (Social Science
Edition) 37.
3
Revised Law of Stock Exchange 1935 (1935), art 49.
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organs of the Republic of China and major offices in provinces and cities were obliged
to investigate and charge anyone who was suspected of jeopardising the Republic of
China by underselling government bonds. A person could also be convicted alongside
his subordinate if he failed to detect and report the latter’s irregular practices. It was
also decreed that ‘any civilian who undersold government bonds should be charged
with disturbing the smooth functioning of the financial system’.4
Meanwhile, the Nanking National Government also enacted two Criminal Acts in
1928 and 1935 respectively, which contained a number of provisions concerning insider
dealing.5 Article 335 of the Criminal Law 1928 could be read as imposing insider
dealing liability on tippees (any unauthorised person who disclosed ‘the industrial and
commercial secret’ obtained by virtue of his employment), punishable by up to one
year imprisonment, criminal detention or a fine up to RMB 1,000. Article 317 of the
Criminal Law 1935 further prohibited any person who was obliged to keep industrial
and commercial secrets he knew or obtained in accordance with the law or contract
from leaking such information without legitimate reason; any contravention was
punishable by up to one year imprisonment, criminal detention or a fine of not more
than RMB 1,000. Article 318 doubled the maximum prison term and amount of fine if
the offender was a public servant or ex-public servant in possession of information
gained by virtue of his current or previous office.
The insider dealing regime of the Republic of China was doomed to failure for one
simple reason: government officials, especially ministers who had privileged access to
inside information, were hand in glove with traditional insiders, such as company
directors, engaging in market speculation. In other words, there was nobody to guard
the guardians. For example, Kong Xiaoxi, the Minister of the Finance, was known as
one of the notorious insiders in the early 20th century in China. Abusing his position as
a high-ranking government official, he disclosed confidential and material information
to Seven Start Company – jointly set up by his wife, brother-in-law, vice minister of the
Ministry of Finance and vice president of the Central Bank – to enable it to speculate
in securities markets.6 Kong, at the same time, acted as the head of the regulator of the
securities industry.7
1.2 Insider Dealing in Municipal Regulations
After almost half a century, the securities markets in China were gradually reduced and
eventually disappeared as a result of the establishment of a highly centralised economic
4
The Historical Data and Files of the Finance and Taxation of the Nanking National
Government (1927–1937) (China Financial & Economic Publishing House 1997) 726–727.
5
A Complete Collection of Laws, Rules and Regulations (Commercial Press 1937)
137–173.
6
R. Zhao, ‘Commentary on K’ung Hsiang-his’ (1992) Associated Universities in Shaanxi
Province Press 52.
7
Xinquan Zhu, Bibliography of Famous People in the Republic of China (China Youth
Publishing Group 1997) http://news.ifeng.com/history/special/jiangyusong/200911/1130_8825_
1457031_5.shtml accessed 25 November 2013.
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structure that had heavily relied on administrative management since 1949.8 It was not
until the early 1980s that they re-emerged thanks to a great many structural reforms,
economic as well as political, that had been taking place since 1978.9 While the term
‘insider dealing’ had not yet achieved popular currency, the existence of the practice
within the securities markets was still widely suspected by both academics and
legislators. The Central Government began to recognise it as a problem in the country
that had affected public confidence in the integrity of the securities markets since the
end of the 1980s. It made its first major attempt to tackle the problem by enacting the
Interim Measures for Regulating Securities Companies 1990, to prohibit securities
companies from indulging in insider dealing, market manipulation, fraud or any other
irregularity under article 17. While using the term ‘insider dealing’, the regulation
appeared to lack sufficient depth to implement; commentators considered it a mere
political announcement with very little legal value.
Nevertheless, prior to the introduction of the present system, which came into effect
in 1997, insider dealing was initially mainly regulated at a Provincial/Municipal level.
In fact, the principal sources of insider dealing regulation were municipal securities
regulations of Shanghai and Shenzhen, given that the two governments were the hosts
of Shanghai and Shenzhen Stock Exchanges (the SSE and SZSE) respectively.
For example, article 39(2) of the Regulatory Methods of Shanghai Securities Trade
1990 prohibited any department or individual from using inside information to deal
with securities. Any violation would be subject to a fine of not less than RMB 50,000
(around GBP 5,000) and not more than RMB 100,000 (around GBP 10,000) under
article 75. If the circumstances were considered particularly serious, the fine could be
increased to not less than RMB 100,000 but not more than RMB 200,000. Similar
prohibitions were found in article 43(4) of the Interim Measures for Regulating Stock
Issuance and Trading and article 93 of the Interim Measures for Supervising Listed
Companies of Shenzhen 1992 (IMSLCSZ 1992) enacted by the Shenzhen Municipal
Government.10
8
The securities markets in China went through a restrained–reformed–disappeared–
reintroduced process. For a general overview, see The CSRC, China Capital Markets Develop-
ment Report, ch 1.
9
For a brief account, see Zhenghua Li, The Third Plenum of the 11th Central Committee of
the Communist Party of China and the Great Process of the Reformation and Opening Up
(2008) The Research of China’s Contemporary History.
10
Some argue that article 29 of the Interim Measures for Regulating Stock Issuance and
Trading 1991 prohibited ‘functionaries of Party and government offices, personnel on active
service, professional securities practitioners, the functionary of relevant securities regulatory
organs’ from purchasing or selling any securities regardless of whether or not they do so on the
basis of inside information. As a result, it could conclude that the scope of insider in the
IMSLCSZ 1992 was limited to directors, supervisors, managers and other senior employees of
listed companies, persons possessing inside information relating to securities trading and persons
obtaining such information illegally.
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1.3 Insider Dealing in Administrative Regulation at Central Level
Proceeding from efforts made by local governments, the State Council and the
Securities Committee of the State Council (SCSC), at Central Government level,
brought in the Interim Provisions for the Management of the Issuing and Trading of
Stocks 1993 (IPMITS 1993) and the Interim Measures on Prohibition of Securities
Fraudulent Conducts 1993 (IMPSFC 1993), which both contained anti-insider trading
provisions. Although neither of these provided an explicit legal definition of insider
trading, article 3 of the IMPSFC 1993 did go some way to reveal the essence of the
irregularity by prohibiting any department or individual, for the purpose of increasing
profits or reducing losses, from using inside information to issue or trade in securities.
Adopting a ‘person connection’ test, the IPMITS 1993 defined ‘insiders’ according to
their direct or indirect connection or relationship to the source of inside information,
while the IMPSFC 1993 specified five types of person who could be deemed insiders in
article 6. Also, the two regulations differed in their definitions of ‘inside information’.
Firstly, while both regulations recognised the information to have significant impact on
the affected securities, article 81(15) of the IPMITS required that it must only be
known to a limited number of persons who were primary and secondary insiders,
whereas article 5 of the IMPSFC 1993 only required it to be undisclosed but known to
insiders. Secondly, article 5 of the IMPSFC 1993 particularised 25 forms of inside
information, chiefly corporate inside information, quite apart from published infor-
mation and materials, rationale for forecasting and analysis of securities markets, of
which it made no mention.
As to the activities to which insider dealing prohibitions applied, both regulations
prohibited any person who either legally or illegally possessed inside information from
trading in the subject securities, disclosing such information without authorisation and
encouraging others to trade in such securities. The IMPSFC 1993, however, required an
additional subjective element: the purpose of the insider’s activities must be to gain
profit or avoid loss.
Both regulations established only administrative liability, with confiscation of
illegally obtained profits (especially shares), a fine of up to RMB 0.5 million, a
warning or both.11 Criminal and civil liabilities were touched upon lightly in articles
77–78 of the IPMITS 1993 and article 13 of the IMPSFC 1993, though not in sufficient
detail to allow implementation. Nevertheless, the idea of there being three types of
liability played a role in the development of insider dealing regulation.12
The IPMITS 1993 and the IMPSFC 1993 are often seen as landmarks in the history
of China’s securities legislation, as together they form the basic framework for insider
dealing regulation. Problems, however, remain. On the one hand, as purely administra-
tive regulations, they lacked the force of law. Nor did they fully address the problem of
insider dealing by themselves. At the same time, certain crucial provisions, such as
those regarding liability, were little more than formalities. Their enforcement often
11
Ibid, art 72.
12
It should be noted that any proceeding brought by the CSRC against alleged insiders is
categorised as administrative liability because of its administrative characteristic; civil liability
carries only private remedies.
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proved difficult. Nevertheless, academics generally agree that the promulgation of the
two regulations did have certain, albeit limited, positive effects on curbing abusive
practices in the securities markets.13
2. CURRENT INSIDER DEALING REGULATION

The current prohibition against insider dealing in China is contained in Chapter 4 of the
revised Securities Law of the People’s Republic of China 2005 (the SL 2005), which
came into effect on 1 January 2006. Its predecessor, the first Securities Law of the
People’s Republic of China, was passed by the Standing Committee of the National
Congress, after many long years on the drawing board, on 1 July 1998. The operative
provisions of the SL 2005 are articles 73 to 76.
Failure to comply with this section gives rise to administrative liability, of which
there are three elements: (1) the person’s status as an insider; (2) possession by the
person of inside information; and (3) the type of trading activity conducted by him
amounting to prohibited insider dealing.14 Under the authorisation of the SL 2005, the
regulator of China’s securities markets, the CSRC, proposed the Directive on Identify-
ing Insider Dealing in the Securities Markets 2007 (referred to as the ‘Insider Dealing
Directive 2007’) and the Directive on Identifying Market Abuse in the Securities
Markets 2007 (the ‘Market Abuse Directive 2007’) that provide guidance for deter-
mining whether behaviour amounts to insider dealing.15 While recognised as internal
documents, they set out in more detail the standards that should be applied to identify
the elements of insider dealing and market abuse, which will also be mentioned in the
following sections.
Insider dealing is also criminalised under article 180 of the Criminal Law of the
People’s Republic of China 1997 (the CL 1997). The Supreme People’s Court (SPC)
and the Supreme People’s Procuratorate (SPP) promulgated the Interpretation of
Certain Issues Related to Specific Application of Laws in Handling Criminal Cases
Involving Insider Dealing and Divulgation of Insider Information 2012 (IID 2012),
which provides further guidance on specific issues of insider dealing offences. While
acknowledging the similarity between the elements of two liabilities – criminal and
administrative liabilities – their differences should not be overlooked, which will be
discussed later.
13
Sunyan Zheng, A Legal Analysis of Misconduct in the Securities Markets (China
University of Political Science and Law Press 2000) 76. Given limited data, it is, however,
difficult to attribute the small number of cases from 1993 to 1995 to the promulgations of the
two pieces of regulations, and the following increase in the number of cases might not indicate
an increase in abusive activities, because it might be a result of poor enforcement of the
regulations.
14
The Law of the People’s Republic of China on Securities 2005 (2005), arts 73 and 76.
15
Article 7 of the SL 1998 gave powers and objectives to the securities regulatory authority
under the State Council, and the explicit provision remains unchanged for the SL 2005: CSRC,
‘The China Securities Regulatory Commission Dedicated to Protecting Investors’ Rights and
Interests’ <http://www.csrc.gov.cn/pub.scrc_en/about/> accessed 10 December 2013.
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2.1 Insiders
Under article 73 of the SL 2005, insider dealing prohibition is violated when a person,
legally or illegally, in possession of inside information trades in the subject securities
on the basis of inside information or engages in other practices in relation to the
information. It can be said that the SL 2005 applies an ‘information-connection’ test
which identifies an insider merely according to his connection with inside information.
This is different from the ‘person-connection’ approach adopted by the IMPSFC 1993,
which required certain types of connection between the party and the company whose
securities were traded. It should be noted that the term ‘insider’ is neither used nor
defined in the SL 2005. Instead, articles 73 and 76 of the SL 2005 and article 180 of
the CL 1997 make a distinction between persons in possession of inside information
(legally) and those who obtain the information through illegal means. They are both
regarded as insiders.
A person in possession of inside information is himself an inside source of
non-public and price-sensitive information. Article 74(1)–(3) identifies six types of
corporate insiders who have access to inside information by virtue of their ordinary
course of duties to the company whose securities are traded as follows:
1. directors, supervisors and senior managers of the company;

2. 5 per cent shareholders;
3. actual controllers of the company16 and their directors, supervisors and senior
managers; and
4. companies which are controlled by the issuer of the securities and their directors,
supervisors and senior managers.
The term ‘person in possession of inside information’ has also been extended to include
low-level employees of the company and those who have access to inside information
by virtue of their contractual (such as lawyers, accountants and investment advisers) or
professional relationship (such as journalists, editors and typists) within the company
according to article 74(4). In addition, the liability of insider dealing can also be
applied to trading, tipping and encouraging others to so do committed by a public
servant who holds his office in any securities or futures regulatory authority or
performs a statutory administrative duty in respect of the issuance and trading of the
securities under article 74(5). However, the provision fails to cover those officials
whose jurisdictions are outside the securities and futures industries but have access to
crucial information that can affect the market prices of the securities. For example,
relevant economic regulatory departments, including industrial and commercial admin-
istrations and tax authorities, could also be in a position to obtain inside information.
16
While the SL 2005 is silent, the term ‘actual controller’ is generally defined in article
217(3) of the Companies Law of the People’s Republic of China 2005 (the CPL 2005) to include
anyone who is not a shareholder of the company but able to control the actions of the company
by means of investor relations, agreements or any other arrangements. Actual controllers can be
natural or legal persons: regulatory departments of state-owned assets or other institutions, or
natural persons accorded control as the result of some agreement among shareholders, including
those with actual control status resulting from a relationship of trust.
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It is further regarded as insider dealing when a person, while not in a fiduciary,

employment, contractual or business relationship to the company whose securities are
traded, acquires inside information with the knowledge that the information is of a
non-public and price-sensitive nature, but then trades in, discloses it to another or
encourages another to so do. In sharp contrast to the legitimate possessors of inside
information above, misappropriators not only have inside information directly or
indirectly from an inside source that is a primary insider within the scope discussed,
but also acquired the information by illegal means. It is not necessary that such persons
are connected to the company whose securities are traded; they are simply classed as
outsiders. While the phrase ‘obtaining such information unlawfully’ appears in the SL
2005, the legislation fails to provide any functional provisions to specify what means
are deemed unlawful, which in practical terms leads to the situation where a broad
range of irregularities may not be covered. Article 2 of the IID 2012 specifies that a
person is deemed as a misappropriator if his possession of inside information is as a
result of tipping, criminal activity or having a close kinship with a legitimate possessor
of inside information. It must be pointed out, however, that article 2 of the IID 2012
explicitly limits the application of the above categories of misappropriator to cover only
those who illegally obtained inside information on securities and futures trading
specified in paragraph 1 of article 180 of the CL 1997, but not articles 73 and 76 of the
SL 2005. This creates a potential loophole for the application of the SL 2005.
2.2 Inside Information
Having understood that the status of ‘insider’ in China’s insider dealing regulation is
established on the basis of the possession of inside information, it is pivotal to identify
the information that falls into the category of inside information. Article 75 of the SL
2005 defines inside information as ‘… the information that concerns the business or
finance of a company or may have a major effect on the market price of the securities
thereof and that hasn’t been publicized in securities trading’. This definition introduces
three new notions into the matrix: non-disclosure, relevancy and materiality. Before
moving on to the three elements of inside information, careful reading of the provision
suggests that the definition of inside information is confusing, with the usage of the
word ‘or’ between the relevancy and materiality. It seems to indicate that to constitute
inside information, unpublished information in question must have either of the
additional characteristics. In other words, the SL 2005 only requires two elements of
inside information, the second being an alternative choice.
The requirement that inside information must be unpublished has been a straight-
forward element. Instead of identifying the status of being ‘published’ or ‘deemed to
have been published’, the SL 2005 develops a ‘publishable information’ test.17 The test
is built on a mandatory disclosure system in which the general requirements are
summarised and illustrated in Figure 22.1.
Meanwhile, the law also specifies the methods of disclosure, including publishing on
any of the CSRC’s approved media, and placing in both the company’s head office and
17
Companies and Securities Advisory Committee, Insider Trading Discussion Paper (2001)
35. Here we only borrow the terms.
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Informaon
Disclosure
IPO Disclosure Connuing Disclosure
Prospectus Periodic Report Temporary Report
Board of Directors Related Transacon

Lisng Announcement Annual Report Mid-Term Report
Announcement Announcement
Half-Year Report Quarterly Report M&A Announcement *Major Events
Figure 22.1 Mandatory disclosure system in China

the stock exchanges. Accordingly, information is deemed to be published if it has been
made known only through all of the said methods. The CSRC has specified eight
newspapers, one journal and three websites: China Securities News, Securities Times,
Shanghai Securities News, Finance Times, China Reform News, Securities Daily,
Economy Daily, China Daily, Securities Market Weekly, the Shanghai and Shenzhen
Exchanges websites and Juchao’s website.18 The second method would seem to say no
more than that a listed company must ensure that the disclosed information is available
and publicly accessible.
Information that is deemed effectively disclosed according to law immediately upon
release, however, does lead to concerns about the length, if any, of a putative
post-announcement waiting period. Some argue that article 70 of the SL 2005 implies
that investors, especially ordinary investors, are able to react instantaneously to newly
released information. In practice, however, a reasonable period should be required for
investors to absorb such information, since ‘mere public announcement of the infor-
mation does not necessarily amount to public availability’.19 Such a post-announcement
waiting period is not actually required by insider dealing regulations in China; however,
even though it has been recognised in common practice at the SSE and the SZSE and
approved by the CSRC, the latter has said that if a listed company has material
information it is about to disclose in the form of periodic or temporary reports, a
routine suspension in the trading of its securities should be imposed for the first or
opening hour of the trading day. One big reservation commentators have, however, is
whether a single hour is sufficient for investors, especially ordinary investors, to absorb
the information and make reasonable investment decisions, because individuals vary
greatly in terms of their professional knowledge and their ability to understand.
18
CSRC, ‘Frequently Asked Questions Regarding Letters and Visiting’ <http://www.csrc.
gov.cn/pub/ningbo/hdjl/tsyjb/201204/t20120427_209341.htm> accessed 10 December 2013.
19
Ibid.
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Even if the information in question is non-published, article 75 also requires that, to

constitute inside information, it must have an immediate and significant effect on the
price of the securities in concern. While enumerating 17 types of information that fall
into the category of inside information in articles 67 and 74, the SL 2005 does not,
however, provide any guideline as to when the information can be expected to have
such material effect on the market price of the relevant securities. It has been of great
concern that such a defined scope of inside information may not include all information
that may have market impact on the price of the relevant securities. For example, it is
without doubt that government policies, especially financial and securities policies,
have overriding influence on the securities markets. They are, however, not considered
inside information according to the law.
In practice, the CSRC has adopted an ‘effect on the price’ approach with the
additional ‘effect on investors’ decisions’ concepts for materiality. According to Zhang,
although article 75 of the SL 2005 defines materiality of inside information as
significantly affecting the trading price of securities concerned, the CSRC has
‘consciously taken the element of investors’ decisions (both ordinary investors and
those involved in a specific case) into account’.20 He also summarises a few points
which need to be considered in determining the materiality of the information in
question:
1. whether it has impact on the company’s operation and performance in the context
of the company’s overall business;
2. whether it has a close connection with the decisive factor of the subject securities’
trading price according to the company’s business features and trading records of
the subject securities;
3. historically, whether it has any similarity with the information which affected the
subject securities’ market prices;
4. whether the company has protected the information specifically; and
5. whether the information was evaluated as being price-sensitive in any pre-existing
report or analysis conducted by the company.21
Nevertheless, none of the above considerations can detract from the core fact that
neither the SL 2005 nor the CL 1997 provides any guidelines to apply this concept of
materiality, which is a big loophole.
In addition to non-disclosure and material effect, the SL 2005 also requires that, to
qualify as inside information, the information in question must only relate to the
business or financial activities of a specific issuer of securities. The types of business or
financial activities covered by the SL 2005 are listed in the second part of article 75. It
is clear that inside information is restricted to that arising from a source within a
company, including:
20
Zixue Zhang, Analysis of the Forming Time of Inside Information (2011) 4 Zheng Quan
Fa Yuan 22.
21
Ibid 22.
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1. any of its plans for profit distribution or capital increase;

2. major changes in its share capital structure and the surety for debts, pledges,
dispositions or retirements of a principal business asset of a company; or
3. the value of a single transaction which exceeds 30 per cent of the total value of
such asset with potential liability for major losses to be assumed in accordance
with the law as a result of the activities of a director, supervisor or senior
manager of a company and the plans relating to the acquisition of a listed
company.
The SL 2005 also states that any major events specified in the second paragraph of
article 67 that requires compulsory disclosure, may also be considered inside infor-
mation. All of these 11 types of information can be generated only from a source
within a company whose securities are traded. In other words, under the terms of article
75 of the SL 2005, information may be inside information only if it arises from a
source inside a specific company and specifically concerns the company or its
securities. This leaves a considerable loophole insofar as information arising from
sources outside a company is completely ignored, even though such information,
especially where it has relevance to the industry in which a company operates, may
have considerable impact on the value of that company’s shares. Such information may
concern policy changes, for instance, or administrative decisions by securities regula-
tory departments on prohibiting the controlling shareholder of an issuer from transfer-
ring the shares in his possession, and it is undeniable that such information would have
significant impact on the securities markets as a whole.
2.3 Prohibited Conducts
The third issue of insider dealing liability is which types of conduct come within the
insider dealing regulations. The SL 2005 and CL 1997 place an absolute embargo on
dealing in the subject securities on the basis of inside information. Similarly, divulging
that information or suggesting others to trade in those securities is prohibited.
This seems straightforward enough, but there is one problem. Any person in
possession of inside information is prohibited, both under the SL 2005 and CL 1997,
from dealing, tipping and making trading suggestions to others before the information
is made publically available for the purpose of levelling the playing field of investors;
certain types of persons are prohibited from doing so within six months from the
information being disclosed. Such a period of time is prescribed under the IID 2012 as
the ‘sensitive period of inside information’, referring to the period between the
formation and publication of the inside information. The occurrence time of ‘major
events’ is prescribed in paragraph 2 of article 67 of the SL 2005, and the formation
time of ‘plans’ and ‘schemes’ is mentioned in article 75 of the SL 2005 and the
formation time of ‘policies’ and ‘decisions’ is mentioned in article 82(11) of the
Administration of Futures Trading 2007 (the AFTR 2007). While also adopting
the term ‘sensitive period of inside information’, article 10 of the Insider Dealing
Directive 2007 defines it as the period between the moment when inside information
was generated and time when it was disclosed to the public/the moment when the
information had no significant impact on the market price of the subject securities. The
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SL 2005, on the other hand, does not stipulate such a period but simply makes it
unlawful for a person in possession of inside information as an insider to engage in any
prohibited activities specified in article 76 of the SL 2005 before the information in
question becomes publicly available.
Both the SL 2005 and the CL 1997 provide that a person who possesses inside
information as an insider commits insider dealing if he deals in the very securities to
which the information in question is related.22 The circumstances referred to in both
provisions are the purchase or disposal in question. While the terms ‘dealing’ or ‘buy’
and ‘sell’ are defined in the SL 2005 and the CL 1997, it is generally believed that the
terms should be interpreted more broadly than just direct purchase or disposal, to avoid
loopholes which allow perpetrators to exploit their informational advantages.23 Article
13 of the Insider Dealing Directive 2007 serves as a useful reference as it provides two
specified circumstances in which dealing is prohibited: (1) in the name of an insider,
buying or selling the subject securities directly or relying on others; and (2) in the name
of a person other than the insider, buying or selling the subject securities. The Directive
goes further to provide that a person deals in the subject securities in another’s name if
(1) he provides, directly or indirectly, securities or funds for another person’s purchase
of the subject securities and collects all or part of the profit gained accordingly; or
(2) he has rights to manage, use and dispose of the subject securities in another
person’s possession.
The second prohibition relates to disclosing inside information. Article 76 of the SL
2005 and article 180 of the CL 1997 provide that a person in possession of inside
information as an insider is liable for insider dealing if he discloses the information.
Although it is not specified by the law, it is generally understood that, in the context of
insider dealing, disclosure itself is unlawful unless it was conducted in order to fulfil
one’s legitimate duty by virtue of one’s employment, profession or office. In other
words, an insider may still be liable for insider dealing if the disclosure of inside
information was not intentional but merely in error.
Unauthorised disclosure of inside information may lead to two likely consequences:
the informed third party (the tippee) may use the information to trade in the relevant
company’s securities, or pass on the inside information to others. It would appear that
the purpose of the provision governing the above practices is to set an objective
standard, meaning that there is no need to prove actual use by the third party of the
inside information in question.24 One point of argument is whether this provision also
prohibits the third party from further divulging the information to others. Some take the
view that, as far as disclosure of information is concerned, there should be no
difference between disclosure by insiders themselves and disclosure by third parties.
The third prohibition provided by the SL 2005 and the CL 1997 is that of suggesting
to another person to deal in the subject securities. Under the SL 2005, a person in
possession of inside information as an insider is liable for insider dealing if he suggests
to another person to purchase the subject securities. There has been no further
22
The SL 2005, art 76 and the CL 1997, art 180, para 1.
23
Brenda Hannigan, Insider Dealing (2nd edn, Longman Law, Tax and Finance 1994) 92.
24
Ying Liu, ‘A Discussion of Identify Insider Trading in the Securities Markets’ (2005) 18
Economy Forum 106.
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elucidatory statutory interpretation of ‘suggesting’. The offence of suggesting under the

CL 1997 is worded differently from that in article 76 of the SL 2005, with article 180
stating that a person is guilty of insider dealing if he expressly indicates or implies to
any person that he deals in the subject securities or discloses inside information. It is
clear that this offence applies not only to directly giving advice or instruction to
another person to deal in the subject securities, but also making any suggestions to such
a person.
What is unclear is, whether to establish that the insider has encouraged another
person to deal in the securities or disclose the inside information, it must be shown that
this resulted in the informed party ultimately trading in the subject securities. The
absence of any further elucidatory statutory interpretation or provision has once again
led to a number of practical difficulties.25
3. SANCTIONS
Insider dealing under China’s insider dealing regulation may be punished as either an
administrative or criminal offence. Administrative sanctions are imposed by the CSRC
under article 179(7) and are set under article 202 of the SL 2005. For an insider, either
an individual or company, whose illegal gain is over RMB 30,000, the CSRC may
order it to dispose of the securities held illegally, confiscate any illegal gain and impose
a fine of up to five times the illegal gain. If the amount of illegal gain is under RMB
30,000, the insider will be subject to a fine of up to RMB 600,000. An additional fine
of up RMB 30,000 and a warning will be imposed on a company’s chief representative
if the company is the insider. In addition to the above pecuniary penalties, the CSRC
may disqualify or ban individuals, for a limited period or even permanently, from
participating in the securities and futures markets.26 The imposition of a ‘ban of market
entry’ does not preclude other forms of punishment.
Criminal sanctions for both individuals and companies are imposed under article 231
of the SL 2005 and set under article 180 of the CL 1997 and the IID 2012 issued
thereunder. For an individual, the penalty is up to ten years’ imprisonment and/or a fine
of up to five times the profit he gained or loss avoided. For a company, the penalty is
a fine of up to five times the profit it gained or loss avoided; its chief representative or
those who are directly in charge of the business are liable to imprisonment of up to five
years. In a case where insider dealing is committed by multiple defendants, each
defendant shall be convicted and punished according to the accumulative value of the
securities traded, security deposit occupied, and profit gained or the loss avoided, while
the fine imposed should not exceed five times the illegal profits. In cases where insiders
have not actually made any profits from unauthorised disclosure of inside information
to a third party or encouraging that party to trade in the affected securities, article 10,
paragraph 2 of the IID 2012 states that the amount of the fine imposed shall be
determined according to the value of profit gained or loss avoided by the beneficial
25
It is a common view that the above forms of conduct constitute transactions covered by
insider trading rules or that fall into the category of insider trading.
26
The Law of the People’s Republic of China on Securities 2005, art 233.
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party of the inside information who engaged in insider dealing activities based on the
information.27
The current approach to the punishment of insider dealing violations relies on public
enforcement, administrative sanctions and criminal prosecutions. Although a general
private right of action against insiders has been created by article 76, paragraph 3 of the
SL 2005, and the Supreme Court has repeatedly confirmed its position on encouraging
private litigation against insiders, the record of private enforcement shows it is not just
that there have been only three unsuccessful cases, but that the provision is too vague to
apply to insider dealing. Nor is there any judicial interpretation of the issue. Therefore,
it is difficult to see a realistic prospect of China, in the foreseeable future, finding any
viable cause of action for counterparty in other than face-to-face transactions despite a
private cause of action provided by the SL 2005.
4. HOW WELL HAS THE LAW BEEN ENFORCED

It is fair to say that insider dealing has become a high priority for the enforcement
programme of the CSRC; this has been stressed again by Mr Xiao Gang, the new
chairman of the CSRC, as extremely important for the protection of investors and
maintaining the integrity of China’s financial markets, which contributes to the smooth
and healthy development of China’s economy.28 From 2008 to 2011 the number of
insider dealing cases handled increased from 34 to 129. Between 2008 and 2012 the
CSRC aggressively pursued 590 insider dealing cases that accounted for 40 per cent of
the total number of cases. During the first ten months of 2013, the CSRC launched 158
investigations into suspected insider dealing.29 The CSRC is required to publish its
enforcement decisions. In practice, there are two ways of doing so. The first is to post
the full text of its decisions on its website. This accounts for only a small percentage of
the cases decided by the CSRC. In 2011, for example, there were 28 concluded insider
dealing cases, yet only ten were available on its website with full texts. In addition to
online disclosure, the CSRC also holds press conferences to disclose general infor-
mation about important enforcement decisions. The total number of investigations and
cases are also included in its annual reports. Between 2010 and 2012, the CSRC held
27
The standards for determining whether suspected insider dealing activity is ‘serious’ are
set out in the IID 2012 and are similar to those used in Provisions of Supreme People’s
Procuratorate and Ministry of Public Security regarding Criteria for Accepting Cases for
Prosecution in Respect of Criminal Cases under the Jurisdiction of Public Security Organ (Part
2), while the IID 2012 specifies the term ‘repeatedly’ to include committing the said acts more
than three times. Article 7 clarifies the issue of what constitutes ‘extremely serious circum-
stances’.
28
Nianyue Jiang, ‘Xiao Gang: Heavily Punishing Manipulation, Insider Dealing and Other
Forms of Illegal Conducts’ Finance China (6 September 2013) <http://finance.china.com.cn/
money/futures/special/gzqhcxss/20130906/1792977.shtml> accessed 10 December 2013.
29
Qingqing Du, ‘The First Fire of Xiao Gang’s New Administration: the Number of Cases
Investigated in the First Ten Months Was Equal to That of Last Year’ Chinese Business News (25
December 2013) <http://stock.hexun.com/2013-11-25/159980321.html> accessed 10 December
2013.
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27 press conferences to disclose the details of 38 insider dealing investigations. The

number of disclosed cases was, however, obviously much smaller than the actual
number of cases that occurred or were handled by the CSRC – 122 cases were
investigated and punished. By the end of March 2013, the CSRC had posted 403
Administrative Sanction Decisions on its website since 2001, 46 of them in insider
dealing cases. Nevertheless, to those who know China’s securities and futures markets,
these figures can hardly reflect the real situation, while there have been few estimates
of the extent of insider dealing in China’s securities and futures markets. The most
quoted is certainly that the proportion of insider dealing cases accounts for 80 per cent
of all unfair practice cases in the securities markets.30
Like any other country, prosecution of insider dealing in China has never been an
easy task. The Prosecution Service, also known as the People’s Procuratorates (the
PPs), have acquired exclusive power under the Constitution of the People’s Republic of
China 1982, the CL 1997 and Criminal Procedures Law to prosecute the cases
transferred by the Public Security Organs (PSOs) after criminal investigation. The
CSRC, however, is obliged to refer suspected criminal violations of the securities laws
to a relevant PSO for further criminal investigation. Prosecution of insider dealing has
not had a long history in China since insider dealing was not criminalised until 1997,
and it was not until 2003 that the first case, Shenshen Fang, was brought successfully
under article 180 of the CL 1997. Although it is true that the PPs have secured
convictions in a number of cases, including a number of high-profile cases such as
Huang Guangyu, Ji Minbo, Li Xugang, Qin Xuan and Gaochun Taoci, there is little
information on the exact number of successful prosecutions. The most authoritative
statement is in the answer given by the SPC’s Justices at a press conference regarding
the IID 2012 on 2 May 2012: Justice Pei stated that by the end of 2011, there had been
22 criminal convictions in China for insider dealing – one each in 2007 and 2008, four
in 2009, five in 2010 and eleven in 2011.31
While recognising the efforts of the CSRC, the PPs and the courts in attempting to
curb insider dealing, the overwhelming view, particularly of investors, commentators
and legal professionals, however, is that insider dealing regulations have not been
adequately enforced. This said, some express that ‘the regulations of insider dealing
have been drafted according to the requirement of the international standards and have
been amended to adjust to and tackle the new challenges’.32 One aspect of the insider
dealing debate in China has been the constant reference to the scarcity of cases
combined with lenient sentences. The difficulties of detection and identification are
great, and the CSRC and the courts have not really addressed this issue. The work
undertaken by Guo interviewing people from financial, regulatory, judicial and legal
sectors concludes that, although the precise extent could not be quantified, insider
30
Zheng 20.
31
Weihan Yang and Qingxin Cui, ‘The Responsible Justice of the Supreme People’s Court
on the First Judicial Interpretation of Securities and Futures Crimes Answering Media’s
Questions’ News China (22 May 2012) <http://news.xinhuanet.com/legal/2012-05/22/c_
112013889.htm> accessed 10 December 2013.
32
Interview with Zixue Zhang, Commissioner of the Administrative Sanction Committee of
the CSRC (Beijing, 10 March 2012).
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dealing activities do occur with great frequency throughout the financial industry and
business world. It is hard to find someone who is willing to give credit to the
enforcement from individual investors, both public and private, of insider dealing
regulations.33 Many hold a much more negative approach, considering the insider
dealing regulations are only a ‘face job’ without any substantial deterrence or
enforceability.34
The general disappointment over the enforcement of insider dealing law reflects
poorly on regulation and may be interpreted as a worrying public distrust of the
government. It is clear that the regulators of the securities markets and the judiciary
face real problems in the enforcement of insider dealing regulations, especially in terms
of finding and retaining experienced staffing and adequate funding. It is also clear that
sufficient political will, in ensuring the independence and transparency of the CSRC
and the courts, has been missing.
A recent incident greatly embarrassed the CSRC. On 16 August 2013, the Shanghai
Composite Index rose by 6 per cent within minutes as a result of abnormal trading
volumes of the shares of Everbright Securities by the company itself. The company
claimed that its erroneous buying orders were due to a system glitch and it only took
short positions later in index futures and exchange-traded funds to fix the error. The
CSRC tried to act timely in order to stabilise the markets after the massive coverage of
the incident in the media: it not only confiscated the company’s illegal gains, but also
imposed a record fine of RMB 523 million against the company for insider dealing and
banned the company indefinitely from trading on its own account; it also fined four of
the company’s executives RMB 0.6 million in total and banned them permanently from
securities markets. Despite the record sanctions, the CSRC has had to deal with a wide
range of criticism. One is that it has failed to actually protect the interest of investors,
especially those who suffered in the incident, by compelling Everbright Securities to
produce an enforceable proposal of civil compensation, even though the CSRC insisted
that it had not only urged the company to set up a foundation for civil compensation
but also offered help. The CSRC has also been criticised for not referring the case to a
PSO for criminal investigation, despite the fact that it has clearly satisfied the criteria
set out in Provisions of Supreme People’s Procuratorate and Ministry of Public Security
Regarding Criteria for Accepting Cases for Prosecution in Respect of Criminal Cases
under the Jurisdiction of the Public Security Organ as we discussed above.35
33
Feng Guo, Financial Regulation and Securities Laws in the Era of Globalisation
(Intellectual Property Publishing House 2010) 442.
34
Interview with Yixin Song, Senior Partner of Shanghai Xinwang Wenda Law Firm
(Telephone interview, 15 March 2012).
35
Zheng Xing, ‘Legal Embarrassment behind Everbright Securities’s Case’ Beijing News
(1 September 2013) <http://news.xinhuanet.com/comments/2013-09/01/c_117175417.htm>
accessed 10 December 2013.
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5. CONCLUDING REMARKS
The revival of the securities markets in the early 1980s was greeted with mixed
reaction. While there were those who welcomed and celebrated the revival, there were
others who viewed them with suspicion. The last 30 years has seen the Chinese
financial markets taking off from a modest beginning to a remarkable industry that
plays an increasingly important role in the national economy. While this is a success to
be appreciated, half of the battle is yet to be won. Since the very beginning, a serious
problem in China’s securities markets has been the dominant position of insiders in
accessing non-public material information and using it for their own ends. From the
perspective of maintaining and promoting the integrity of financial markets as well as
investors’ confidence in such markets, insider dealing regulations are pivotal in view of
their function of reducing information asymmetry. In addition, the growth of a global
market compels China to formulate its own regulations on insider dealing in order to
provide support for continued economic development, reduce the risks for investors and
attract more capital.36
The main changes of law, regulation and policy concerning insider dealing in China’s
securities markets have been discussed. It is fair to say that insider dealing regulation in
China has undergone a positive and constructive development. It is on the right course
in criminalising insider dealing and introducing a private right of action against insiders
on the basis of administrative sanctions imposed by the CSRC. There are, however,
several problems surrounding particular provisions of insider dealing regulations. Issues
such as that the term ‘insider’ is not defined and it is unclear whether inside
information is required to be securities-related and material at the same time have
certainly caused problems in practice. In the meantime, the enforcement record of the
regulations remains far from satisfactory. It is safe to conclude here that the rapid and
continuous development of China’s financial industry will inevitably lead to limitations
on the considerations set out in the law to be directed against insider abuse. Therefore,
continuous evaluation of the regulatory system of the markets is of great importance.
36
Hui Huang, International Securities Markets: Insider Trading Law in China (Kluwer Law
International 2006) 55.
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23. Compliance issues in the financial sector

Dayanath Jayasuriya
BACKGROUND
With recent financial crises the compliance function has gained more currency as an
issue of concern. What was taken for granted for many decades as a routine activity has
now acquired a new dimension; there has indeed been a paradigm shift in terms of
expectations, influence and interventions. With almost every postmortem in the
aftermath of a crisis, there has been a finding that if the compliance officers were more
proactive and alert some of the underlying factors leading to the crisis could possibly
have been mitigated with the intervention of the regulator and the board and senior
management of financial services firms. Compliance officers are expected to be the first
to see the ‘red flag indicators’ and to be proactive in dealing with them.
This chapter outlines some of the issues relevant to compliance officers or prospect-
ive compliance officers. The aim is to give a broad perspective of how expectations are
changing the world over and to underline what compliance officers should address their
minds to in order to be able to better cope with the changing realities and expanding
responsibilities and expectations. Given the wide scope of the topic, the chapter
naturally has its focus on certain selected aspects of immediate relevance to a global
audience of compliance officers.
The traditional role of compliance and that of compliance officers was based
essentially on a 2005 paper produced by the Basel Committee on Banking Supervision.
It pointed out, inter alia, that
Compliance starts at the top. It will be most effective in a corporate culture that emphasises
standards of honesty and integrity and in which the board of directors and senior management
lead by example. It concerns everyone within the bank and should be viewed as an integral
part of the bank’s business activities. A bank should hold itself to high standards when
carrying on business, and at all times strive to observe the spirit as well as the letter of the
law. Failure to consider the impact of its actions on its shareholders, customers, employees
and the markets may result in significant adverse publicity and reputational damage, even if
no law has been broken. (Bank for International Settlement 2005)
The above pronouncement remains true even today, but with regard to the specific
functions and issues that compliance officers need to be aware of, much water has
flowed under the bridge since then. The Securities Industry Financial Markets
Association’s White Paper on ‘The Evolving Role of Compliance’ issued in March
2013, in particular, has stimulated fresh thinking on the expected role of compliance
officers (Securities Industry Financial Markets Association 2013). One of the key
points considered is whether compliance officers run the risk of being classified as
performing ‘supervisory activities’, thus making themselves open to liability. The
279
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recommendation is that appropriate standards should be formulated with regard to the

‘failure-to-supervise liability’ so that there can be a clear distinction between the
compliance function and supervisory activities. Moreover, several recent reports on
corporate governance in the UK and elsewhere, which are far too numerous in number
to be discussed here, have also pointed out situations where the timely intervention of
compliance officers could make a difference without necessarily exposing them to
liability in the absence of clear evidence of wrongful conduct or negligence.
THE GLOBAL ECONOMIC CLIMATE

Some of the challenges which compliance officers now face stem from changes in the
global economic landscape. Globalisation itself has posed many challenges; businesses
transcend geographical barriers and transactions tend to involve multiple jurisdictions
with varying legal and regulatory requirements. Many proposals for reforming the
global economic architecture are currently being debated. As underlined by Joseph
Stiglitz: ‘There are, of course, no magic solutions. But there are a multitude of changes
to be made – in policies, in economic institutions, in the rules of the game, and in the
mindsets – that hold out the promise of helping make globalization work better,
especially for the developing countries’ (Stiglitz 2007, p. xi). A case for global financial
supervision has been advocated by many including the former British Prime Minister
Gordon Brown (Brown 2010, p. 77), and developments within the European Com-
munity are being closely monitored to see to what extent the emerging regulatory
system can be replicated on a broader scale. The bank set up by the BRIC (Brazil,
Russia, India and China) group of countries in Shanghai is the latest development; it is
too premature to prognosticate how this mechanism will affect the structure and
operations of the International Monetary Fund (IMF), in particular, and Basel reforms
for financial stability. Nevertheless, what is clear is that the rationale and objectives
underlying the Bretton Woods institutions set up half a century ago are being
challenged and that the new emerging economic forces need to be reckoned with
(Sharma 2012, p. 255).
Compliance officers need to closely monitor developments in the international and
regional arena and alert their Chief Executive Officers and boards of directors to
significant developments that might impact on the operations of their firms. A risk
dashboard of emerging threats and developments should ideally find a place at the
monthly board meetings of banks and large financial institutions which are vulnerable
to regional and international developments and influences. This requires compliance
officers to work closely with risk managers (PwC 2014).
REGULATORY LANDSCAPE
A well-known text on compliance has described ‘regulation’ as ‘undoubtedly the
founding spark and ultimate justification of all Compliance activity in the financial
services industry’ (Mills 2008, p. 3). Financial services regulation does not operate in
total isolation but in a broad context. In particular, after the collapse of ENRON, there
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Compliance issues in the financial sector 281
has been a spate of new laws and regulations that have come into place not just in the
US, where the problem first surfaced, but also elsewhere. The Dodd-Frank Wall Street
Reform and Consumer Protection Act contains a large number of sections, and even for
US compliance lawyers it is not the easiest of legislation for one to navigate and to be
able to distil the essence. In 2012 it was estimated by the US House of Representatives
Financial Services Commission that ‘it will take 24 million man hours every year in
order for the private sector to comply with the Dodd-Frank rules’ (Gallagher 2013). The
US Securities and Exchange Commission (SEC) has produced a document running into
more than 600 pages on new rules governing just one area of reform, namely
securitisation. The Sarbanes-Oxley Act of 2002 – which preceded the Dodd-Frank Act
and is a relatively simpler piece of legislation in terms of sections but nevertheless has
more than 1000 provisions – has had a stronger influential effect on other jurisdictions,
in particular with regard to the requirement for dual certification of accounts. As is the
case with most compliance-related laws, one needs to view the statutory provisions
within a broad legislative context. According to Barry Rider, ‘It is often the case that
compliance systems focus almost exclusively on the criminal and regulatory laws and
ignore the legal environment within which the relevant transactions or conduct occurs.
The problems are all the greater when several different jurisdictions are involved’
(Rider 2014, p. 36). The US Foreign Account Tax Compliance Act (FATCA) is a classic
example where financial institutions outside the US had to develop systems and train
staff to comply with the requirements. Similarly, the new UK Bribery Act has
extra-territorial effect (Parlour 2013).
Regulatory structures which were at one time thought to be the ideal model are
undergoing radical reforms. These are taking place just not only in Europe but even in
faraway places. With the replacement of the UK Financial Services Authority (FSA)
and the Securities Commission of New Zealand, for instance, compliance officers and
indeed associations of compliance officers now need to closely follow the law- and
rule-making processes in different jurisdictions and accordingly modify internal com-
pliance manuals and compliance monitoring plans. Staff training assumes a high degree
of importance in this context.
Not all compliance officers have a legal background, and it is essential that those
who do have a legal background, or firms that have a legal department, work in tandem
with compliance officers without a legal background to help demystify the laws and
regulations and provide clarity with regard to compliance requirements. Updating of
compliance manuals and compliance monitoring plans must receive constant attention.
RISK MANAGEMENT
Despite the presence of risk managers, compliance officers cannot remain oblivious to
the risk factors that certain products, services, activities, market conduct, and advertis-
ing and promotion might give rise to. In consultation with business heads and risk
managers, compliance officers are duty bound to exercise greater vigilance to reduce
regulatory and reputational risks that might arise due to the failure to properly
appreciate and estimate risk factors.
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In the development of risk mitigation factors, compliance officers have a special role
to play. Case studies from various jurisdictions serve as good examples of what may
possibly go wrong even with the best of plans. From Nick Leeson of Barings Bank to
Kweku Adoboli of UBS, the world is full of stories of how inadequate internal control
and risk management systems have facilitated financial frauds. Nick Leeson, in his
book titled Rogue Trader, thought it fit to reproduce (Leeson 1996) some of the
conclusions of the Bank of England report on the inquiry into the collapse of Barings
Bank, namely:
1. the losses were incurred by reason of unauthorised and concealed trading

activities within Barings Futures Singapore;
2. the true position was not noticed earlier by reason of a serious failure of controls
and managerial confusion within Barings;
3. the true position had not been detected prior to the collapse by the external
auditors, supervisors or regulators of Barings.
Each scandal has lessons to offer, but these are often highlighted, only to be ignored
within a short span of time. The financial services sector remains far too vulnerable
unless diligent and robust measures are in place; compliance officers must take the
initiative to scale up risk mitigation systems.
COMPLEXITY OF PRODUCTS AND SERVICES

The sub-prime mortgage crisis and the securitisation process serve as grim reminders
that attempts at making excessive profits without adequate consideration to customer
needs and repayment capacity can have a major systemic impact worldwide. Vince
Cable, in his introduction to The Future of Money, a collection of essays from leading
economists, regulators and policymakers, points out that the essays provide different
perspectives ‘of how the financial crisis occurred when the constructs of our supposed
wealth were exposed as little more than sleights of hand by overleveraged banks and
we realised our financial system had shallow roots that were exposed by a strong gale’
(Chittenden 2012, p. xiii). The East Asia crisis had a major negative effect on the
economies of many developing nations which are yet struggling to cope with low levels
of poverty, compounded by unemployment and a rising cost of living.
Compliance officers need to be involved throughout the product development cycle
not only to be satisfied that what is being developed for marketing is within the
boundaries of the law but also that it serves the best interests of the customers. The Fair
Dealing outcomes, first promulgated by the FSA and which have found their way into
other jurisdictions such as Singapore, are at the very core of concerns that should drive
companies that wish to develop new products and services. The operations of Sovereign
Funds, Hedge Funds and so-called Hybrid Products pose formidable challenges in
terms of what might be needed to monitor and regulate certain practices. Trust funds,
especially in off-shore jurisdictions, conceal the true beneficial owner. Islamic banking
and Takaful insurance are gaining currency not just within predominantly Islamic
jurisdictions but even elsewhere. These activities give rise to many jurisprudential and
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operational issues, and compliance officers need to understand the dynamics underlying
these new types of products and services. The Shariah compliance risk, in particular,
needs to be understood by compliance officers (Chia der Jiun and Wang Yining 2008,
p. 1). Indeed, credit rating agencies, stock exchanges and stock market regulators need
to develop a better understanding of the implications of some of these instruments.
Business units do not work in isolation. The operations are becoming more and more
complex and involve other jurisdictions with which cross-border trading is taking place.
Coordination with business units has become more important today than ever before.
Some of the compliance risks have arisen due to poor understanding of the nature of
the products, particularly those of a hybrid nature. If the nature of products cannot be
easily understood, the applicable legal, regulatory and compliance rules cannot be
properly appreciated and applied.
ANTI MONEY LAUNDERING AND TERRORIST FINANCING

MEASURES
Where organisations employ anti money laundering (AML) officers and compliance
officers as members of separate teams the distinction is rapidly becoming blurred. Even
though a specific Money Laundering Reporting Officer may have to be notified to the
regulatory agency, the type of issues that now arise require the combined expertise of
both those with a knowledge of compliance and those with a knowledge of anti money
laundering and terrorist funding regimes. Risk mitigation measures require their
combined contribution. A good example is the latest Financial Action Task Force
(FATF) report on diamond smuggling, which was compiled by FATF with the
assistance of the Egmont Group of Financial Intelligence Units (FIUs). The demand for
diamonds has witnessed an exponential growth as conflict areas have proliferated, and
there is a ready demand for unpolished diamonds. The Kimberly process of certifi-
cation has been found to have many limitations, and it is not difficult to circumvent its
requirements. Origin, transit and recipient countries have been called upon to review
and augment risk mitigation measures. One of the significant findings of the study is
that law enforcement and AML/Combatting of Financing of Terrorism (CFT) author-
ities, including FIUs, have limited awareness of potential money laundering/terrorism
financing schemes through the trade in diamonds (Financial Action Task Force 2013,
pp. 6–7).
The hefty fines (e.g. BNP Paribas paid almost US$9 billion to settle charges that it
violated US sanctions against Sudan, Cuba and Iran) imposed in recent times on many
international banks reinforces the need for intensified training and closer monitoring by
compliance and anti money laundering staff. Good governance within firms will also
help to augment anti money laundering control systems (Jayasuriya 2009).
MARKET MISCONDUCT AND CRIME PREVENTION

Despite vigorous law enforcement efforts, criminals still attempt to make illegal gains
through insider dealing, market manipulation, pyramid schemes and a variety of other
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means. Heavy penalties imposed by the US courts on individuals such as Raj

Rajaratnam (11 years imprisonment and a fine of approximately US$150 million) send
a strong message to those who are tempted to operate outside the lawful boundaries.
The volatility of capital markets and operations of Hedge Funds pose considerable
challenges to regulators (Kersanti 2014).
Anti-corruption measures are being implemented to varying extents by signatory
states as required by the United Nations Convention against Corruption. Transparency
International and the International Association of Anti-Corruption Authorities play a
pivotal role in sensitising countries to the need to implement anti-corruption measures
in the public and private sectors.
Compliance officers and legal counsel need to ensure that financial service insti-
tutions have a strong anti-bribery and anti-corruption policy and adopt a ‘zero
tolerance’ attitude.
INFORMATION TECHNOLOGY, CYBER SECURITY AND CYBER

CRIME
Advances in the development of software packages have been a great boon to the
compliance function. Manually operated systems have given way to computerised
systems which are far more efficient, recording and retrieving information within a
matter of few seconds. In a sense, it was to be anticipated that these developments
would spawn a culture of cyber crime that started on an experimental basis of checking
how robust certain systems were. The vulnerabilities were soon discovered and
exploited at every conceivable opportunity. According to a recent special report
published in The Economist, the total annual cost of digital crime and intellectual
property crime is estimated at US$445 billion (The Economist 2014a). The same report
states that last year organisations around the globe spent US$67 billion on information
security.
Cyber crimes often involve multiple jurisdictions with different legal principles
relating to data privacy, unauthorised access, and so on. Not all jurisdictions are yet
members of an international convention that provides for speedy and coordinated
international exchange of information. Compliance officers need to work with IT
specialists and information security specialists to develop more robust Chinese Walls
and other systems to ensure greater security.
SPECIALISED TRAINING
The International Compliance Association was established in 2001. It is the leading
global provider of professional certificated qualifications and training in anti money
laundering, compliance and fraud/financial crime prevention. Its Diploma level and
other certificates are provided in association with the Manchester Business School of
the University of Manchester.
The annual international symposia on economic crime organised at Jesus College,
Cambridge, have been largely instrumental in exposing compliance officers to a range
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of topical issues which are not otherwise discussed at length in commercially

sponsored seminars. Quite appropriately, the thirty-second symposium in September
2014 had as its focus ‘Information and Risk Control’.
Despite the increasing importance of compliance as an important discipline, with the
possible exception of BPP’s new LLM in Regulation and Compliance, there is still no
university master’s degree level programme available for compliance officers working
in the financial sector. In July 2014 Barclays Bank and Cambridge University
announced an arrangement to provide compliance training programmes. There are signs
that things will begin to change, and this is a priority area that needs to be addressed by
the academic community in tandem with the financial services industry players.
HOW MAY COMPLIANCE OFFICERS COPE WITH THE NEW

CHALLENGES AND ISSUES?
Compliance is no longer an issue that can be addressed purely from a domestic
perspective. Regional developments, particularly within the European Community, and
international developments stimulated partly by the discussions and recommendations
within the G20 Group, Basel Committee, International Organization of Securities
Commissions (IOSCO), International Association of Insurance Supervisors (IAIS),
FATF, and so on. and the United Nations (particularly in relation to sanctions against
certain countries) all impact upon the work of compliance officers. Monitoring
international developments and trends and anticipating possible impact at the domestic
level should become a routine daily activity. The LIBOR scandal and the imposition of
fines on banks that have violated the sanction rules exemplify the extra-territorial reach
of the powers of regulators. The IOSCO Multilateral Memorandum of Understanding
has now facilitated access to sensitive information required for investigations which
were hitherto unavailable in the absence of a bilateral treaty.
It was not so long ago that compliance officers were expected to work virtually in
isolation following a passive tick-box approach and responding to any queries that were
forwarded to them. Today, there are signs of a major paradigm shift taking place, at
least in some countries. Compliance officers, risk managers and legal counsel are
required to work as a team adopting a proactive role. The compliance function is
increasingly seen as a strategic function. The view that effective compliance adds value
is gaining currency. A risk-based and outcomes-based approach is rapidly replacing the
tacit monitoring and mechanical approach of the past.
Regulators are beginning to recognise that financial institutions that accord import-
ance to the compliance function tend to follow a path studded with fewer pitfalls.
Issues of particular concern to regulators that would be relevant to the work of
compliance covers a wide range of requirements – legal, regulatory and prudential
requirements; corporate governance structures; outsourcing arrangements; conduct of
business rules; monitoring of market abuse; handling of conflict of interest issues; and
finally the prevention of bribery and corruption. The inventory is becoming longer as
more and more financial scandals unravel the complexity of the subtle and insidious
operations. Early red flag indicators play a crucial role. Way back in 2001, Erin
Arvedlund, an investigative journalist, wrote a critical investigation into the affairs of
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Bernard Madoff under the title ‘Don’t Ask, Don’t Tell’. No proper follow-up action was
then taken by the US financial regulators to what later turned out to be a major 65
billion dollar scandal. In her book Madoff: The Man Who Stole $65 Billion she rightly
asks the question, how did he fool so many investors for so long (Arvedlund 2009)?
Compliance officers who work in firms within a strong compliance and corporate
governance culture will get more comfort that the norms of ethical conduct will
permeate all levels of activities and personnel. The setting up of Integrated Risk
Management Committees with the participation of compliance officers affords an
opportunity for them to set right many things. However, there are many issues yet to be
sorted out. The European Union rule on a cap on bonuses, for instance, has resulted in
an increase in salaries and thus in bonus payments. Bill Dudley, the head of the New
York Branch of the Federal Reserve, has mooted the idea of ‘performance bonds’ which
will be kept in vaults for ten years – this idea is gaining support as a means ‘to nudge
financiers away from dodgy dealings’ (The Economist 2014b) and to ensure that fines
are not passed onto shareholders. In Sri Lanka, in the wake of the collapse of several
finance companies, a new Finance Business Act was enacted. In terms of it, any fine
imposed on a director will have to be paid out of the personal funds of the director, and
if company funds are used the director will be liable to serve a period of imprisonment.
Another provision – perhaps of an unusual nature – states that upon three consecutive
defaults of the same requirement, the Chief Executive Officer will automatically cease
to hold office, even though he was not personally responsible for the lapses.
CONCLUSIONS
The changing regulatory landscape and the results of fact-finding missions have meant
that the compliance function has to undergo a major transformation. Compliance
officers now have to cope with new responsibilities and challenges which were
inconceivable ten or fifteen years ago. This will be possible only if they can work
within an enabling environment that is supportive of their changing role. Boards, senior
management, internal auditors and indeed all employees and stakeholders have to
recognise that compliance has ‘come of age’. The corporate culture must be supportive
of the compliance function, which must permeate all levels within the organisation. The
compliance function must receive the recognition it deserves. Those financial insti-
tutions that continue to lag behind in elevating the compliance function to its rightful
place and thus encounter problems might find that they have missed a valuable
opportunity to reduce their vulnerability and effectively manage compliance risks.
REFERENCES
Arvedlund, E. (2009) Madoff: The Man who Stole $65 billion, Penguin Books, UK.
Bank for International Settlement (2005) Basel Committee on Banking Supervision – Compliance and the
Compliance Function in Banks, Basel, para. 2.
Brown, G. (2010) Beyond the Crash, Simon & Schuster, London.
Chia der Jun and Wang Yining (2008) Risks and Regulation of Islamic Banks: A Perspective from a
Non-Islamic Jurisdiction, Monetary Authority of Singapore Staff Paper, No. 49.
Barry Rider - 9781783475780


Chittenden, O. (ed.) (2012) The Future of Money, Virgin Books, UK.
Economist, The (2014a) Special Report: Cyber-Security, 12–18 July 2014, p. 4.
Economist, The (2014b) Bonded Labour, 29 November–December 2014, p. 62.
Financial Action Task Force (2013) Money Laundering and Terrorism Financing through Trade in
Diamonds, Paris.
Gallagher, D.M. (2013) ‘Challenges Facing Compliance Officers’, The Harvard Law School Forum on
Corporate Governance and Financial Regulation. Posted on the SEC website (https://www.sec.gov/) on 26
April 2013.
Jayasuriya, D.C. (2009) ‘Anti{money Laundering Efforts, Stock Market Operations and Good Governance’,
Qualitative Research in Financial Markets, Vol. 1 (1), pp. 46–58.
Kersanti, R. (2014) Global Capital Markets, Opportunities and Challenges for Emerging Economies,
Central Bank of Sri Lanka, Occasional Paper 71.
Leeson, N. (1996) The Rogue Trader, Sphere, London, p. vi.
Mills, A. (2008) Essential Strategies for Financial Services – Compliance, John Wiley & Sons Ltd,
Chichester.
Parlour, R. (2013) ‘Bribery and Corruption: An International Update’, Company Lawyer, Vol. 34 (7),
pp. 218–221.
PwC (2014) ‘What It Means to be a “Chief” Compliance Officer: Today’s Challenges, Tomorrow’s
Opportunities’, 2014 Survey.
Rider, B. (2014) Compliance – An International Perspective on Some of the Challenges Facing Global
Compliance Today, Central Bank of Sri Lanka, Occasional Paper 72.
Securities Industry Financial Markets Association (2013) White Paper: The Evolving Role of Compliance,
March 2013.
Sharma, R. (2012) Breakout Nations: In Search of Next Economic Miracles, Allen Lane, UK.
Stiglitz, J.E. (2007) Making Globalization Work, W.H. Norton and Company, New York.
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24. Compliance – the risks and obligations

Stuart Bazley
INTRODUCTION
This chapter is concerned with law and regulation in the United Kingdom that is
directed at financial services businesses for the purpose of countering financial crime.
(For convenience in this chapter a financial services business will be referred to as a
‘firm’). In many respects such law and regulation creates obligations not to engage in
predicate offences and is supported by the prospect of either prosecution or adminis-
trative regulatory action for those firms that do. It can be identified, however, that
certain offences operate within a framework of law and regulation which additionally
imposes upon a firm an obligation to establish and operate systems of control, for the
purpose of limiting the extent to which it might engage in or be used for the offence in
question. Moreover, such regulation is often supported by an enforcement outcome
where a firm fails to meet the internal control requirements. This chapter will thus
examine both criminal law and administrative law compliance enforcement.
Financial Services regulation can be described as giving rise to a regime for
‘compliance’, where non-compliance may be seen as a risk to a firm’s lawful
obligations. This chapter will however illustrate that compliance risk is more dynamic
and complex than a simple binary question of compliance versus non-compliance. A
diverse range of issues touching upon matters such as the nature of a firm’s business
and the profile of its clients, the adequacy of process design, corporate governance,
staff competence, culture and ethics all interplay to shape whether a firm is capable of
meeting its compliance obligations and thus suggest the types of risks that can lead to
a compliance failure.
There may be a temptation to identify an appropriate definition for the meaning of
the word ‘compliance’. In its literal form the word can be defined as the act of
‘yielding, agreement, complaisance, assent, submission …’.1 The International Compli-
ance Association defines compliance as ‘… the ability to act according to an order, set
of rules or request’,2 but the Association adds texture to the definition by considering
that the definition in relation to financial services compliance operates at both the levels
of compliance with ‘external’ obligations and ‘internal’ controls ‘imposed to achieve
compliance with the externally imposed rules’.3
1
The Chambers Dictionary, Chambers Harrup Publishers, 1998.
2
The International Compliance Association website <http://www.int-comp.org/faqs-
compliance-regulatory-environment> accessed 26 January 2015.
3
n2.
288
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Compliance – the risks and obligations 289
Risk may be defined as a ‘hazard, danger, chance of loss or injury’,4 and thus risk in
the context of financial crime compliance may be construed as being concerned with
threats to a firm’s ability to comply with the law or meet its regulatory obligations.
Although no definition for the word ‘risk’ is provided in the various prudential rules
applicable to different classes of investment firms, the discrete definitions for different
categories of risk provide insight into the circumstances that can give rise to the risk or
threat. For example, in the UK Financial Conduct Authority’s (FCA) Prudential
Sourcebook for Investment Firms (IFPRU)5 operational risk is defined as ‘the risk of
loss resulting from inadequate or failed internal processes, people and systems or from
external events, including legal risk’. The process of risk identification and risk
management is, however, not a one dimensional activity and risk management
techniques as well as risk-focused financial services regulation require that risk is
considered in terms of both the probability or likelihood of a risk event occurring and
the impact that such an event would have if it were to occur. Indeed, likelihood and
probability assessment is deployed by the FCA in its approach to risk-based super-
vision of authorised firms.6 Moreover, risk identification is strengthened when combin-
ing identification of the probability and impact of materialised as well as emerging risk.
Risk management, however, is not necessarily concerned with the elimination of a
risk event, and indeed in the context of compliance risk and financial crime, the
Financial Services Authority (FSA) confirmed in a letter in 2004 to the Joint Money
Laundering Steering Group (JMLSG) its view that, ‘We also recognise that any regime
that is risk-based cannot be a zero failure regime. We appreciate the importance of a
non-zero failure regime; not least because a 100% standard will not be cost effective
and will damage innovation, competition and legitimate commercial success.’7
The various prudential rules address risk in terms of the amount of and availability
(liquidity) of capital in order to ensure that an authorised person can meet its liabilities.
For example, IFPRU 2.2.1R provides that ‘A firm must, at all times, maintain overall
financial resources and internal capital, including own funds and liquidity resources
which are adequate both as to amount and quality to ensure there is no significant risk
that its liabilities cannot be met as they fall due.’ However, the use of capital to manage
risk may not provide the complete solution or be the most appropriate response. There
are certainly occasions where organisations should focus on risk controls, including
internal policies and procedures, as an additional method of managing risk. The use of
controls is certainly a regulatory expectation. For example, the FCA Senior Manage-
ment Systems and Controls Sourcebook (SYSC)8 at SYSC 7.1.2R along with Art 7
4
n1.
5
Financial Conduct Authority Prudential Sourcebook for Investment Firms as at 7 February
2015 <http://fshandbook.info/FS/html/handbook/IFPRU>.
6
See Financial Conduct Authority, How We Supervise Firms, Risk Management, Financial
Conduct Authority website <http://www.fca.org.uk/about/what/regulating/how-we-supervise-
firms/risk-management> accessed 7 February 2015.
7
The Financial Services Authority Letter from Philip Robinson, Financial Crime Sector
Leader, to Ian Mullen, Chairman of the JMLSG, 25 October 2004 <http://www.fsa.gov.uk/pubs/
other/money_laundering/jmslg.pdf> accessed 7 February 2015.
8
Financial Conduct Authority Senior Management Systems and Controls Sourcebook
<http://fshandbook.info/FS/html/handbook/SYSC> accessed 7 February 2015.
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(1)(a) of the Markets in Financial Instruments Directive (MiFID) implementing

measures9 require firms to ‘… establish, implement and maintain adequate risk
management policies and procedures, including effective procedures for risk assess-
ment, which identify the risks relating to the firm’s activities, processes and systems,
and where appropriate, set the level of risk tolerated by the firm’. As will be examined
in the following sections of this chapter, the establishment and maintenance of
appropriate and robust systems and controls can be crucial for compliance with certain
financial crime regulation and can in certain cases act as a defence to criminal offences
and administrate law enforcement.
COMPLIANCE – THE LAW AND SYSTEMS OF CONTROL

The need for internal systems of business controls arguably can be found cemented by
a number of criminal offences targeted at the financial sector. Offences such as those
concerned with money laundering under the Proceeds of Crime Act 2000 and
associated Money Laundering Regulations 2007, Terrorist financing under the Terror-
ism Act 2000 and bribery and corruption pursuant to the Bribery Act 2010 each provide
the financial sector with defences where a person can show they have followed
approved regulatory guidance and in some cases have established and followed
appropriate systems of control. For example, in determining whether a person has
committed an offence of failure to disclose knowledge or reasonable suspicion that a
person is engaged in money laundering, the Court is required under s330(8) Proceeds
of Crime Act 2000 to take into account whether the person
… followed any relevant guidance which was at the time concerned

(a) issued by a supervisory authority or any other appropriate body,
(b) approved by the Treasury, and
(c) published in a manner it approved as appropriate in its opinion to bring the guidance to
the attention of persons likely to be affected by it.
Additionally, Market Abuse behaviours addressed by administrative sanctions in the

United Kingdom under Part 8 Financial Services and Markets Act 2000 (FSMA) in
essence provide for a defence of behaviour based on ‘reasonable grounds’. That is
under s123(2) FSMA the FCA may not impose a market abuse financial penalty if it is
satisfied on reasonable grounds that the person concerned:
(a) believed, on reasonable grounds, that his behaviour … [did not amount to market abuse],
or (b) he took all reasonable precautions and exercised all due diligence to avoid behaving in
a way which [amounted to market abuse] …
In the context of and to provide clarity for the s123 defence, the FCA is required to
publish both a market abuse code under s119 FSMA, that includes descriptions of
9
The EU Markets in Financial Instruments Directive 2006/73/EC Implementing Directive
2004/39/EC as regards organisational requirements and operating conditions for investment
firms.
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behaviours that are and are not accepted market practices and, pursuant to s124 FSMA,
a statement of enforcement penalties that is to include, pursuant to s124(3), ‘an
indication of the circumstances in which the … [FCA] is to be expected to regard a
person as a) having reasonable belief that his behaviour did not amount to market
abuse; or b) having taken reasonable precautions and exercised due diligence to avoid
engaging in market abuse’. To some extent the FCA’s current market abuse statement of
penalty (which is set out in Chapter 6 of its Decision Procedure and Penalties manual
(DEPP)) links the reasonable grounds defence to compliance with its code of market
conduct (see DEPP 6.3.2(1)G). The availability of the defence does, however, extend to
additional factors that allow persons to rely on obtained advice and guidance,
compliance with market rules and the takeover code and potentially compliance with
internal procedures. Thus, for example, the FCA provides at DEPP 6.3.2(6)G that it
will take into account ‘whether, and if so to what extent, the person followed internal
consultation and escalation procedures in relation to the behaviour (for example, did
the person discuss the behaviour with internal line management and/or internal legal or
compliance departments)’.
On further analysis one may identify what may be described a procedural compli-
ance defence arrived at through a combination of compliance with the reasonable
grounds described in the market abuse penalties code together with control obligations
such as SYSC 6.1.1R which requires firms to have in place ‘adequate policies and
procedures sufficient to ensure compliance of the firm including its managers,
employees … with its obligations under the regulatory system and for countering the
risk that the firm might be used to further financial crime’.
Certain provisions in the Money Laundering Regulations 2007 illustrate the signifi-
cance of organisational systems of control in the prevention of financial crime, whereby
pursuant to regulation 45 it is an offence for a person not to comply with what may be
described as positive control obligations including: customer due diligence (reg 7);
carry-out ongoing monitoring (reg 8); conduct enhanced due diligence and ongoing
monitoring (reg 14); maintain records (reg 19); policies and procedures (reg 20); and
provide staff training (reg 21). By way of example, firms are required, pursuant
regulation 20(1), to
establish and maintain appropriate and risk-sensitive policies and procedures relating to –
(a) customer due diligence measures and ongoing monitoring;
(b) reporting;
(c) record-keeping;
(d) internal control;
(e) risk assessment and management;
(f) the monitoring and management of compliance with, and the internal communication of,
such policies and procedures,
in order to prevent activities related to money laundering and terrorist financing.
The regulation 45 offence requires the Court, at regulation 45(2), in determining

whether the offence has been committed, to consider whether the person concerned has
followed relevant guidance such as that provided by the JMLSG. Moreover, it is worth
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noting that individual responsibility can arise under regulation 45 where there has been
a corporate process and control failure, and where it can be shown
(a) to have been committed with the consent or the connivance of an officer of the body
corporate; or
(b) to be attributable to any neglect on his part,
the officer as well as the body corporate is guilty of an offence and liable to be proceeded
against and punished accordingly.
The JMLSG guidance notes for the financial sector have thus become significant in the
sector’s efforts to comply with its obligations under the Proceeds of Crime Act, the
Money Laundering Regulations 2007 and the Terrorism Act 2000. Although a detailed
examination of JMLSG guidance is beyond the scope of this chapter, it is important to
note that in addition to providing guidance on areas such as customer identification,
due diligence and suspicious activities, guidance is provided in relation to both the
nature of appropriate controls to prevent financial crime and the risk-based approach to
anti-money laundering (AML) compliance, that is, the notion of risk aware systems of
control. Thus at s4.12 JMLSG sets out a series of steps to assess firms’ risk exposure,
process and control design and operation, stating:
These steps are to:

+ identify the money laundering and terrorist financing risks that are relevant to the firm;
+ assess the risks presented by the firm’s particular
∘ customers and any underlying beneficial owners;
∘ products;
∘ delivery channels;
∘ geographical areas of operation;
+ design and implement controls to manage and mitigate these assessed risks, in the
context of the firm’s risk appetite;
+ monitor and improve the effective operation of these controls; and
+ record appropriately what has been done, and why.
The s7 Bribery Act 2010 offence arising where a commercial organisation fails to
prevent bribery offers under s7(2) a not dissimilar internal process compliance defence.
The s7(2) defence is available where the commercial organisation can show that
notwithstanding a person associated with it bribing another, it had in place appropriate
bribery prevention procedures. The difficulty with an offence such as bribery, which
applies to a broad spectrum of commercial organisations, is what might constitute
‘appropriate’ procedures. Although the determination of what might be appropriate
requires objective considerations, commercial organisations will undoubtedly have
some concern about whether the procedures they adopt and operate will be sufficient.
Section 9 of the Act attempts to address concerns about the sufficiency of internal
processes and requires the Secretary of State to publish guidance on bribery prevention
procedures. However, one may argue that such guidance serves to increase a business’s
concerns, in that there is now an obligation to consider how to interpret the guidance
and create and implement arrangements that meet/comply with it. The focus of the
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current guidance published by the Ministry of Justice10 is on process proportionality,

and indeed the Rt Hon. Kenneth Clarke MP states in the foreword to the guidance,
‘… combating the risks of bribery is largely about common sense, not burdensome
procedures. The core principle it sets out is proportionality.’ The core of the Bribery Act
guidance is based on six guiding principles, covering: 1) proportionate procedures;
2) top level commitment; 3) risk assessment; 4) due diligence; 5) communication
(including training); and 6) monitoring and review. The tone of the combined effect of
these principles reflects a drive for firms to adopt a risk-based approach controlling
their risk of bribery, with principle 1 in particular stressing that ‘… bribery prevention
procedures ought to be proportionate to the bribery risks that the organisation faces. An
initial assessment of risk across the organisation is therefore a necessary first step.’11
AUTHORISATION, SYSTEMS OF CONTROL AND COMPLIANCE

Certain defined investment activities conducted by way of business are regulated and as
such require the person carrying out the activity to be authorised to do so. In general
terms, following amendments to FSMA by the Financial Services Act 2012, authorisa-
tion for the business of banking, credit unions, building societies, insurance and
significant investment firms is provided by the Prudential Regulation Authority (PRA),
with all other regulated investment business authorised by the FCA. Once authorised, a
series of ongoing regulatory obligations attach themselves to the authorised person and,
in certain circumstances, persons working for the authorised person. The decision to
grant authorisation is subject to a statutory framework requiring the regulatory agency
in question to consider a range of areas that may be broadly defined as areas that
address the person’s ‘fitness and properness’ to be an authorised person. Schedule 6
FSMA defines these areas as the ‘Threshold Conditions’. Before examining the extent
to which consideration is given within the Threshold Conditions to issues that affect a
person’s financial crime compliance obligations and the extent to which its compliance
arrangements may robustly withstand threats of potential risk, it is important to
highlight that compliance itself with the Threshold Conditions must be maintained for
a person to remain authorised and must not be viewed merely as a test to be satisfied
during an authorisation application.
The FSMA Threshold Conditions Order 201312 provides a series of Threshold
Conditions by reference to whether the authorised person is PRA or FCA authorised. In
the following example, for convenience reference is made to the FCA conditions. In
general terms, conditions relating to a person’s suitability and resources are applicable
to all categories of firms and interact to allow consideration of a person’s systems of
control, including those relevant to financial crime. Condition 2E, being applicable to
authorised persons that are not PRA authorised, describes that a person must be fit and
10
HM Ministry of Justice, The Bribery Act 2010 – Guidance. March 2011
<www.justice.gov.uk/guidance/bribery.htm> accessed on 7 February 2015.
11
n10 para 1.2 p21.
12
The Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013 SI
2013/555.
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proper by reference to their suitability, which will include, at 2E(f),‘whether A’s [the
person’s] business is being, or is to be, managed in such a way as to ensure that its
affairs will be conducted in a sound and prudent manner’ and, at 2E(g), ‘the need to
minimise the extent to which it is possible for a business carried on by A, or to be
carried on by A, to be used for a purpose connected with financial crime’. In its
Threshold Condition Sourcebook (COND), at 2.5.6(17)G the FCA provides that it
includes in its assessment whether ‘the firm has in place appropriate systems and
controls against financial crime, including, for example, money laundering’.
It is submitted that the suitability condition described above necessarily overlaps
with conditions relating to non-financial resources (such as human resources and
organisational systems). For example, Threshold Condition 2D(4)(b) sets out that the
adequacy of non-financial resources includes consideration of ‘whether A’s non-
financial resources are sufficient to enable A to comply with (i) requirements imposed
or likely to be imposed on A by the FCA in the exercise of its functions’ and at COND
2.4.2(2)G the FCA includes with its consideration of ‘resource’, matters relevant to
‘human resource’ and ‘effective means by which to manage risk’. Moreover, at COND
2.4.4(2)(d)G the FCA identifies the overlap between non-financial resources and
appropriate risk-orientated systems of control, stating that consideration is given to
‘whether the firm has taken reasonable steps to identify and measure any risks of
regulatory concern that it may encounter in conducting its business and has installed
appropriate systems and controls and appointed appropriate human resource to measure
them prudently at all times’.
The addition, however, of a business model Threshold Condition at 2F, following
amendments in the Threshold Conditions Order, now allows the FCA to consider how
an authorised person’s ‘strategy for doing business’ may affect their ability to comply
with regulatory obligations, as well as the impact the strategy may have on the financial
market. Business model issues that the FCA may consider include, at Condition 2F(2):
(a) whether the business model is compatible with A’s affairs being conducted, and
continuing to be conducted, in a sound and prudent manner;
(b) the interests of consumers;
(c) the integrity of the UK financial system.
This wider business model assessment draws in issues such as the risk presented by the
authorised person’s business strategy (COND 2.7.8(7)G), the person’s controls and
governance arrangements (COND 2.7.8(6)G) and, significantly, at COND 2.7.10G,
whether firms test the ‘sustainability’ of their businesses following negative scenarios
and their business’s vulnerability to specific events and risks. It is submitted that such
testing may for certain firms include assessment of the threat of financial crimes.
CONTROLLING FINANCIAL CRIME RISK – GOVERNANCE AND

CONTROL
The Financial Services handbook of rules sets out a series of obligations for authorised
persons to establish internal systems of control. Many of such rules are drafted in order
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to allow flexibility in their application, relying on objective standards such as

‘appropriateness’ and ‘reasonableness’. The FCA’s High Level Principles for Business
(Prin)13 require at Principle 3 that ‘A firm must take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk management systems.’
Similarly, for PRA authorised firms subject to the EU Capital Requirements Regu-
lations,14 risk and control is addressed by a combination of Fundamental Rule 5, ‘A
firm must have effective risk strategies and risk management systems’, and Funda-
mental Rule 6, ‘A firm must organise and control its affairs responsibly and effectively.’
The handbook positions compliance with the high level principles such as supple-
menting the Threshold Condition on suitability and further outlines in guidance at Prin
1.1.4G that a breach of the principles impacts an authorised person’s fitness and
properness. Although Principle 5 specifically addresses a firm’s internal controls, other
organisational orientated principles can be applied so as to create obligations regarding
a firm’s financial crime related compliance arrangements. For example, Principle 1
deals with matters of integrity (an issue which can so often compromise a person’s
ability to comply with the law), providing: ‘A firm must conduct its business with
integrity.’ Principle 2 is addressed at standards by which persons are to conduct
business, stating, ‘A firm must conduct its business with due skill, care and diligence’;
and Principle 8 is addressed at the need to control conflicts of interest and provides, ‘A
firm must manage conflicts of interest fairly, both between itself and its customers and
between a customer and another client.’
Wider and more generic organisational requirements may be described as imposing
requirements for firms to operate within a framework of corporate governance in which
risk management operates. This is in order to inform the firm’s senior management of
matters that allow it to develop and implement necessary systems of control and of
threats to the lawful and prudent operation of its business. Thus FCA rules in the SYSC
include the requirement at SYSC 4 (drawn from the MiFID15) that firms are obliged to
… have robust governance arrangements, which include a clear organisational structure with
well defined, transparent and consistent lines of responsibility, effective processes to identify,
manage, monitor and report the risks it is or might be exposed to, and internal control
mechanisms, including sound administrative and accounting procedures and effective control
and safeguard arrangements for information processing systems.
This is supplemented by SYSC 4.1.2R, ‘… the arrangements, processes and mechan-

isms referred to in SYSC 4.1.1R must be comprehensive and proportionate to the
nature, scale and complexity of the risks inherent in the business model and of the …
firm’s activities …’, thus allowing for a firm’s internal arrangements to be designed
13
Financial Services handbook High Level Principles for Business. <http://fshandbook.info/
FS/html/FCA/PRIN/2/1> accessed 9 February 2015.
14
Directive 2013/36/EU on access to the activity of credit institutions and the prudential
supervision of credit and investment firms, amending Directive 2002/87/EC and repealing
Directives 2006/48/EC and 2006/49/EC. Also Regulation (EU) No 575/2013 of 26 June 2013 on
Prudential Requirements for credit institutions and investment firms and amending Regulation
(EU) No 648/2012.
15
EU Directive 2004/39/EC on Markets in Financial Instruments.
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with the firm’s own business and its particular risks in mind. In effect, the application
of the compliance requirement can flex to meet the threats presented by individual
financial services activities.
The importance of the strength of corporate governance, along with the role played
by and responsibility to be taken by a firm’s senior management, is stressed by the
FCA in its Financial Crime Guide,16 which suggests that firms test the strength of their
arrangements through a series of self-assessment questions such as ‘when did senior
management, including the board or appropriate sub-committees, last consider financial
crime issues? What action followed discussions?’ and using good practice examples
including that of ‘a firm has a strategy for self-improvement on financial crime’ and
perhaps more telling, examples of poor practice such as ‘there is little evidence of
senior staff involvement and challenge in practice’.
Furthermore, it must be recognised that the cultural foundations within a business
often have a significant influence on the manner in which a firm and its staff approach
the conduct of the firm’s business and arguably its ability to meet its legal and
regulatory obligations, that is, its ability and willingness to comply. Whilst it is difficult
to pinpoint provisions of regulation that might be considered to regulate corporate
culture, there is nonetheless clear direction on the significance played by culture and
ethics in good business practice.17 In its Financial Crime Guide,18 when addressing the
importance of good governance, the FCA points to ‘the right tone’ being set by senior
management.
The FCA’s Financial Crime Guide also addresses ‘the importance of organisational
structure’, and whilst recognising that there is no one organisational model that can be
applied to all firms, ‘coordination’ and ‘information sharing’ are at the core of an
effective structure.19 Using a series of self-assessment questions, along with examples
of good and bad practice, the FCA guidance illustrates the importance of factors such
as management responsibility, accountability, seniority and the overall adequacy of a
firm’s financial crime resource in demonstrating that it has an effective organisational
structure.
The FCA’s Financial Crime Guide addresses general issues relating to policies and
procedures and provides useful texture to the general requirement in SYSC 5.1.12R, ‘A
common platform firm and a management company must ensure that its relevant
persons are aware of the procedures which must be followed for the proper discharge of
their responsibilities.’ In general terms, the guidance suggests firms should be satisfied
that their internal procedures are appropriate and up to date and ‘readily accessible,
effective and understood by all relevant staff’. Furthermore, aspects of the FCA’s
self-assessment questions confirm the importance of the interplay between a firm’s risk
assessment and construction of process and procedure by encouraging firms to consider
‘What steps does the firm take to ensure that relevant policies and procedures reflect
new risks or external events?’ and ‘How quickly are any necessary changes made?’
16
FCA Financial Crime: A Guide for Firms. April 2014. <http://media.fshandbook.info/
Handbook/FC1_FCA_20140401.pdf> accessed 7 February 2015.
17
For example, see Lambert R. The Banking Standards Review. 19 May 2014.
18
n16 s2 Financial crime systems and controls, p11.
19
n16 box 2.2 p12.
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COMPLIANCE AND RISK MANAGEMENT

Whilst many authorised firms have specific obligations in term of establishing and
operating a compliance function with responsibility for advising on regulatory obliga-
tions and providing oversight of the authorised firm’s compliance (see SYSC 6.1.3R
and SYSC 6.1.4R), it is perhaps obligations for risk management and how they can be
deployed to control an authorised firm’s financial crime threats that is more worthy of
greater consideration. The FCA uses its Financial Crime Guide20 to illustrate the
importance of effective risk management and financial crime threat control. The
guidance identifies that effective financial crime risk assessment can positively inform
the design of a firm’s systems and controls. It is submitted that the risk-focused
self-assessment questions set out by the FCA in the guide are also indicative of the type
of arrangements that the FCA considers will meet the overriding risk management
obligation in SYSC 7.1.2R as well as highlighting the interplay between the SYSC
rules on risk, compliance and general governance. This includes questions such as
‘How does the firm seek to understand the financial crime risk it faces?’, ‘When did the
firm last update its risk assessment?’ and ‘How do you identify new or emerging
financial crime risks?’ to show the need for firms to ensure that financial crime risk
assessment is both relevant and contemporary. Furthermore, the FCA’s poor practice
example of where ‘Risk assessment is a one-off exercise’ in essence highlights that
effective risk assessment must keep up to date with the ever changing landscape of a
firm’s products and services as well as the changing nature of client behaviour and the
financial services market.
OVERSIGHT AND SURVEILLANCE

It would be remiss not to briefly touch upon the importance that monitoring and
surveillance has in supporting an effective compliance control environment. The senior
management systems and controls, as well as internal compliance obligations described
earlier, such as that in SYSC 6.1.3R in particular, require firms to have in place
arrangements to monitor for compliance. Using its Financial Crime Guide, the FCA
draws attention to the importance of the quality of a firms’ internal oversight by
reference to the experience of the staff involved in carrying out that activity, as well as
the benefit that regular challenge can have for the effective design and operation of
financial crime systems of control. The FCA’s self-assessment questions include
consideration of how comprehensive a firm’s reviews are, along with the findings of
recent internal audit and compliance reviews. Indeed, the FCA uses best practice
examples to highlight the importance of the role played by both a firm’s Internal Audit
and Compliance functions to test financial crime ‘defences’ together with the need for
a firm’s senior management to ‘engage constructively with processes of oversight and
challenge’.
20
n16.
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RISKS TO THE COMPLIANCE OBJECTIVE

It is perhaps evident from what has so far been examined that persons authorised to
carry on regulated activity under Part II FSMA are at risk of criminal prosecution and
administrative sanctions (or potentially parallel proceedings of prosecution and termin-
ation of authorisation) where there has been a failure to implement relevant procedural
and organisational requirements. To date, however, such failings in authorised firms’
systems of control have been addressed through Administrative law regulatory proceed-
ings, some by reference to breaches of authorised firms’ general obligations. The
regulator’s approach to systems and control weakness it identifies during its supervi-
sory work as well as the nature of weaknesses that may arise can be illustrated by an
examination of recent FSA and FCA enforcement cases. In the FSA Final Notice to
Coutts & Co of 23 March 2012,21 which included a financial penalty of £8.75 million,
concern was identified with regard to Coutts’ systems of control for the risks associated
with its dealings with its ‘higher risk’ customers, including those classed as ‘politically
exposed’. In general terms, the administrative disciplinary action was taken in the
context of process weaknesses giving rise to heightened risk. The FSA stated in its
Final Notice that ‘These weaknesses in the Firm’s systems and controls resulted in an
unacceptable risk of Coutts’ handling the proceeds of crime through its PEP and other
high risk customer relationships.’22 More specifically, however, the FSA’s identified
weaknesses at the Bank fell into three distinct categories: (1) those involving risk
identification and due diligence for its prospective and existing clients, (2) the
adequacy of its AML monitoring and (3) the ongoing review of the adequacy of its
AML processes.
Standard Bank plc was subject to the FCA’s administrative enforcement action dated
22 January 2014,23 but brought pursuant to regulation 42 of the Money Laundering
Regulations. The Decision Notice specifically addressed Standard Bank’s failure to
comply with regulation 20(1) (covering such matters as customer due diligence, risk
assessment and monitoring, which were examined earlier in this chapter), and resulted
in a financial penalty of £7.64 million, in that the FCA determined that Standard Bank
had ‘failed to take reasonable care to ensure that all of aspects of its AML policies and
procedures were applied appropriately and consistently in relation to corporate cus-
tomers connected with politically exposed persons’. The specific identified failings
were concerned with risk-related aspects of client due diligence and monitoring,
providing further indication of the interplay between risk assessment and compliance.
Administrative disciplinary action against an insurance broking business, Besso
Limited, on 17 March 201424 in respect of weakness in its anti-bribery controls
21
FSA Final Notice to Coutts & Company. 23 March 2012 <http://www.fca.org.uk/static/
pubs/final/coutts-mar12.pdf> accessed 6 February 2015.
22
n21 para 69 [14].
23
The Financial Conduct Authority. Decision Notice to Standard Bank plc 22 January 2014
<https://www.fca.org.uk/static/documents/decision-notices/standard-bank-plc.pdf> accessed 7
February 2015.
24
The Financial Conduct Authority. Final Notice Besso Limited 17 March 2014. <https://
www.fca.org.uk/static/documents/final-notices/besso-limited.pdf> accessed 7 February 2015.
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concerned with payments to a third party was constructed by reference to failings to

meet high level principle for business 3: ‘A firm must take reasonable care to organise
and control its affairs responsibly and effectively, with adequate risk management
systems’.25 Although directed at the firm’s anti-bribery procedures, the nature of the
action in some respects followed a similar theme to that of Coutts & Co and Standard
Bank in that weaknesses were identified in relation to the adequacy of Besso’s policies
and procedures, its risk assessment and due diligence and monitoring arrangements.
Confirming the imperative of systems of control for the purpose of compliance, the
FCA stated: ‘Unless firms have in place robust systems and controls which govern the
circumstances in which payments may be made to Third Parties and then ensure those
systems and controls are followed, they risk leaving themselves open to involvement in
corrupt practices or actions contravening UK or overseas anti-bribery laws.’26
CONCLUDING REMARKS
Financial crime poses a significant threat to financial markets, and the financial crime
compliance obligations examined in this chapter illustrate that the interplay between
risk management, effective procedures and overall organisation control provides a
mechanism for reducing the extent to which individual institutions may be exposed to
heighted risk. Given the potential significance that weak systems of control can have in
the fight against financial crime, it is perhaps unsurprising that reference to effective
and adequate systems of control appears within the very framework for regulation of
the financial services sector.
25
n13.
26
n24 para 2.2.
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25. Practicalities of financial crime deterrence

Richard Parlour
INTRODUCTION
This chapter is an introduction to the key practicalities of financial crime deterrence. It
is based on 25 years’ experience in financial markets, including what has been
described as the leading example of compliance turnaround, and the leading transform-
ation of a country’s financial markets. The chapter covers what has been shown to work
in the ten key deterrence elements:
1. Threat analysis – the first step in deterrence is to carry out an assessment of how
an organisation may be affected by underlying criminal activity including drug
trafficking, money laundering, bribery and corruption, fraud, cybercrime, terror-
ism, nuclear weapon proliferation, organised crime and sanctions.
2. Vulnerability analysis – the second step is to carry out an assessment of how an
organisation may be vulnerable to underlying criminal activity by looking at the
products and services offered by an organisation, its staff, recruitment policies, IT
systems, partners, agents, introducers and referrers, and assessing where the
vulnerabilities are in the organisation.
3. Risk management is fundamental to an organisation in structuring its deterrence
architecture. This element is far easier to accomplish once the first two steps have
been carried out. Risk management consists of an assessment of the likelihood of
certain risk events occurring, and the size and type of impact should that risk
event occur. It is then a question of prioritising the risks concerned, assessing
relevant mitigators and putting all of this assessment into a coherent risk plan.
4. Deterrence model – once the threats and vulnerabilities are known, and risk
management carried out, the deterrence model can be assembled. To be effective,
the model must contain a number of key elements. It also needs to be operated in
a proactive fashion. The worst thing to do is to let the criminal seize or maintain
the initiative.
5. Due diligence – this is fundamental to successful financial crime deterrence. It is
rarely carried out in sufficient depth, however, largely due to organisations
carrying out an inappropriate cost benefit analysis of the amount of due diligence
required. Those who do this element well often discover large commercial
benefits which erstwhile competitors miss. Difficulties here relate to what is
required to be known, what investigation techniques may be allowed in certain
jurisdictions and what resources may need to be committed to the exercise.
6. Reporting – once an organisation has data on financial crime, or suspected
financial crime, then that needs to be analysed. If thought suspicious, it may need
to be reported. There are certain parameters around reporting which need to be
300
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Practicalities of financial crime deterrence 301
complied with and obligations of client confidentiality, disclosure and whistle-

blowing which merit consideration.
7. Record keeping – this is a fundamental part of deterrence since records may
represent the evidence required in the event of further action being taken. In the
event of a criminal prosecution, every element of a transaction chain must be
proved beyond all reasonable doubt. Law enforcement is likely to be somewhat
underwhelmed if the transaction trail has been broken due to a failure in record
keeping or destruction of records earlier than allowed under time requirements.
8. Training – training is vital to the deterrence of financial crime. It is rarely carried
out well, however, and much of it has become rote. Training is often carried out
merely as a regulatory necessity, but in reality training is related to the
performance of an organisation. Training needs to be matched to learning styles.
There needs to be a training plan to assess how the success of the training will be
measured, in advance of the training being undertaken. Training needs to be
aligned to the performance improvement plan of the organisation.
9. IT and social media are growing in importance. Although in essence just a mode
of communication and a way to increase efficiencies, their potency deserves
separate consideration. Cybercrime is the world’s fastest growing crime, already
on a par with global drug trafficking. Its popularity is taking off as criminals
realise that it does not hold the same kinds of risks as “normal” crime and is far
easier to commit, especially across borders. Social media is changing the
psychology of those using it and therefore the nature of compliance.
10. Business continuity planning – an organisation needs to focus on dealing with
unexpected challenges for the simple reason that one in four organisations that hit
a major compliance issue do not survive. The business continuity plan, often also
known as the disaster recovery plan, arises from the work done on risk
assessment. These plans are only effective if practised and regularly updated.
1. THREAT ANALYSIS
The first step in financial crime deterrence is to carry out an assessment of how an
organisation may be affected by underlying criminal activity including drug trafficking,
money laundering, bribery and corruption, fraud, cybercrime, terrorism, nuclear
weapon proliferation, organised crime and sanctions. Without such a step, any
deterrence system is likely to be skewed, or at worse irrelevant.
The general policy direction at international level is towards a risk based system of
deterrence, in an attempt to make best use of limited resources. This is being
introduced at the level of market participants, but has yet to permeate through at
jurisdiction level, however. For example, some countries do not face any terrorist threat,
or the threat they face may be greatest from drug trafficking or organised crime. Yet
they are still being subjected to the standard requirements of international organisations
such as the Financial Action Task Force, which names states it feels are not up to the
mark. This often leads to misinterpretation at the level of market participants. For
example, many financial institutions have seen that jurisdictions such as Turkey have
been classified as jurisdictions with money laundering deterrence deficiencies. This
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classification has led them to regard such jurisdictions as jurisdictions of high risk and
even to abandon transactions involving such jurisdictions. At the same time, the UK
government is pressing for increased links with Turkey, and indeed has set the doubling
of trade as a target. Communication about what such classifications are meant to
represent will help to avoid such distortion in threat analysis and deterrence systems.
Different types of organisations also face different types of threat. For example, retail
organisations will usually find that the threats they face are more related to shoplifting,
criminal damage, arson and fraud, rather than crimes such as terrorist financing or
money laundering. Financial institutions other than banks are unlikely to face risks of
being used for terrorist financing, though they are at a far greater risk of being used to
funnel the proceeds of drug trafficking and organised crime, bribery and corruption and
even nuclear weapons proliferation financing.
Threat analysis needs to be carried out on a regular basis to ensure that the threats
have not changed and that the analysis fits not only the current external situation, but
also the internal structure of the business. For example, in terms of trafficking of
heroin, the main route from Afghanistan, the major source of heroin for the UK market,
has traditionally been overland, passing through central Asia and then the Balkans.
Recent changes have seen shipments pass around the horn of Africa. Similarly, major
cocaine routes from Latin America to Europe, which traditionally used to pass through
the Caribbean and then across the Atlantic, have started to switch to a passage across
the southern Atlantic to Western Africa, before making their way northwards towards
the Iberian peninsular.
Similarly, market participants need to keep an eye on development of their products,
services and markets, and changes to their business model. They need to be alive to the
potentially different threats which dealing in new products, services and markets may
bring.
It must be borne in mind that threat analysis is an art rather than a science. Much
depends upon awareness of the threats and their changing nature and extent, which in
turn relies on the quality of the feedback provided by the authorities. Attempts at
providing generic threat analysis have been made by the US State Department in
relation to what are thought to be major money laundering countries and countries
involved in significant drug production and trafficking, but this is compiled from a US
perspective and the reality for other countries may be rather different. Transparency
International attempts the same in relation to perceived levels of corruption. For market
participants, however, the basis of perception appears to have been overlooked, with
perception being treated as reality, which again can skew the analysis. Other organ-
isations attempt to provide global data coverage on other crimes. However, all have a
number of flaws, and this will remain the case until there is some attempt to harmonise
definitions, to collect data on a more uniform basis and to disseminate data in a
common fashion.
2. VULNERABILITY ANALYSIS
The second step is to carry out an assessment of how an organisation may be
vulnerable to underlying criminal activity by looking at the products and services
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offered by an organisation, as well as its staff, recruitment policies, IT systems,

partners, agents, introducers and referrers, and assessing where the vulnerabilities are in
the organisation. The stance of the organisation in relation to this step must be to stand
in the shoes of the criminal and see where there appear to be weaknesses in the
organisation. These gaps can then be closed, or if they are important to the business
aims of the organisation, then the gaps need to be monitored effectively.
In terms of products, a simple bank account will be much more vulnerable to
financial criminals than more sophisticated products such as derivatives, or products
which have a long term element to them such as pensions. However, it must not be
forgotten that financial criminals do not look upon money in the same manner as the
rest of the population. They look at the economic attributes of money. These attributes
are as a store of value, a medium of exchange and a unit of account. There are many
products which have these same economic attributes. Examples include airline tickets,
real estate, mobile phones, designer lingerie and even human body parts. Organisations
therefore need to be creative in their thinking when carrying out a vulnerability
analysis.
Similarly, some services will be more vulnerable than others. Cross border money
transmission will have a high element of natural vulnerability. For certain services,
such as black box trading of securities, recognition of potential financial criminals will
be next to impossible. Here, the key element of deterrence will be reliable record
keeping of transactions so as to enable an audit trail to be followed.
Many organised crime groups have as a common element the involvement of
someone on the inside in an organisation, someone who knows the systems, the people,
who has a highly tuned knowledge of where the true vulnerabilities lie. Commercial
espionage is now fairly common and increasing. This means that organisations need to
pay attention to their recruitment policies, the checks and balances within their
organisation, corporate governance, reporting lines, limits of authority and operation of
the “four eyes” principle as part of their vulnerability analysis.
A further element is how products and services are delivered to customers.
Increasing numbers of organisations are delivering electronically through websites, but
this brings with it its own issues such as remoteness from the customer and reliance
upon database checks to establish and verify identity. Similar issues arise through
telephone delivered services, though at least more forensic indicators are available.
Many organisations deliver products and services through a network of agents,
partners, introducing agents, franchisees and other types of representative. This class of
representative needs to be looked upon as “quasi employees”, with similar thought
given to communication, contractual arrangements and training, to reduce potential
vulnerabilities.
3. RISK MANAGEMENT
Risk management is fundamental to an organisation in structuring its deterrence
architecture. This element is far easier to do once the first two steps have been carried
out. Risk management consists of an assessment of the likelihood of certain risk events
occurring, and the size and type of impact should that risk event occur. It is then a
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question of prioritising the risks concerned, assessing the mitigators and putting all of
this assessment into a coherent risk plan.
It is important to use a developed and detailed risk cycle:
a. Establish the context – the context of use of the risk cycle needs to be established
from the start. For example, is the risk assessment meant to cover the whole of an
organisation or only a certain part of it? Is it intended to be a detailed in depth
review or just an initial first pass? Is it intended to cover certain subject areas
rather than others?
b. Identify – risks need to be identified. A simple way of doing this is to ask “So
what?” at each stage of the risk identification. For example, an opening category
may be the risk of trading in certain offshore jurisdictions. To the issue of
jurisdiction, ask the question “so what?” which will lead to a need to list the
jurisdictions in which an organisation operates. A further “so what?” may identify
a need to split jurisdictions into those in which the organisation has a physical
presence and those in which it does not. A further “so what?” may identify a need
to list the key threats at large in the jurisdictions concerned. There may be
multiple answers, and each answer will need to be analysed. Keep going until
there are no answers to the “so what?” question and this will identify the risks.
c. Analyse the risks identified to see what the risk really is. Use a variety of analysis
techniques, whether these techniques consist of logic, reasoning, brainstorming,
competing hypotheses, the six thinking hats, or other techniques.
d. Assess the risks in terms of two critical elements. The first of these is the
likelihood of the risk event occurring (which can be categorised for example as a
high, medium or low likelihood). The second element is the likely impact of the
event (which can also be categorised for example as a high, medium or low
impact).
e. Prioritise the risks identified. Most organisations will prioritise those identified as
having a high likelihood of occurrence and a high impact. There is likely to be
some discussion as to which to prioritise as between medium impact but high
probability and high impact but medium probability.
f. Plan how the identified risks will be dealt with and by whom, as well as how
mitigating action will be measured.
g. Implement the risk plan, setting deadlines for when mitigating action must be
taken.
h. Report the impact of the mitigation.
i. Mitigate the risks still further.
j. Monitor how that mitigation affects the business and its impact on performance.
k. Review the risk plan and identify areas for potential improvement.
l. Reformulate the risk plan.
m. Document all of the above.
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4. DETERRENCE MODEL
Once the threats and vulnerabilities are known, and risk management carried out, the
deterrence model can be assembled. To be effective, the model must contain a number
of key elements. Some organisations operate a three tier level of defence, for example
the compliance team, then a broader management team and finally senior management.
This may prove to be rather static and reactive, however. For a deterrence model to
work, defences need to be structured on an integrated layered basis, and for a model to
achieve maximum effect it needs to be operated in a proactive fashion. The worst thing
to do is to let the criminal, or other stakeholders, seize or maintain the initiative.
The key elements to include in a deterrence model are:
a. Objectives – focus on what the deterrence model is designed to achieve. Is it to

deter, disrupt, deny, or destroy? What will successful operation of the model look
like, what will the costs be, what other resource requirements are there and what
training will be needed?
b. Governance – work out who will be responsible for which elements of the
deterrence model, what reporting lines will be needed, how the response will be
co-ordinated. There will be a number of team roles to be filled. Key will be
ensuring the right people are carrying out roles suitable to their expertise and
experience.
c. Risk – ensure all the elements identified by the risk assessment exercise are built
into the deterrence model.
d. Integrated layered defences – what are the defences which will be operated, how
will they work together and how do they look to a potential financial criminal?
e. Battle rhythm – what meetings will be needed, with what staff or stakeholders,
and with what regularity, indicators, inputs and outputs?
f. Modus operandi – how does the model interact with the ten key principles:
i. Selection and maintenance of the aim
ii. Maintenance of morale
iii. Offensive action
iv. Security
v. Surprise
vi. Economy of effort
vii. Concentration of force
viii. Flexibility
ix. Co-operation
x. Administration
g. Business continuity – more is discussed concerning business continuity in the last
section of this chapter. A key element of business continuity will be penetration
testing, to check how effective the defences are against various types of attack
from various types of threat.
h. Records – record keeping in a fast moving environment will be crucial. How will
this be undertaken and how will the records be used? How will they feed into the
battle rhythm?
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i. Training – more is outlined on training elsewhere in this chapter, but effective

training will be particularly important.
5. DUE DILIGENCE
Due diligence is fundamental to successful financial crime deterrence. It is rarely
carried out in sufficient depth, however, largely due to organisations carrying out an
inappropriate cost benefit analysis of the amount of due diligence required. Those who
do this element well often discover large commercial benefits which erstwhile
competitors miss. Difficulties here relate to what is required to be known, what
investigation techniques may be allowed in certain jurisdictions and what resources
may need to be committed to the exercise.
In this electronic age, computers are reducing the degrees of separation between
people, yet they are also reducing human interaction and the clues which face to face
contact gives. Criminals and others exploit this, so the risks are increased. At the same
time, new laws require more to evidence relationships, and regulators and an ever more
global media are ready to pounce on transgressions. Enhanced due diligence really does
help establish the true picture, reduce risk and ringfence reputation.
Due diligence in many organisations is often merely reduced to collecting copies of
passports and invoices. In some organisations, not even that is done, management
preferring to rely on a client identification remediation exercise every few years or so.
These approaches do not give adequate protection and also result in commercial
opportunities being missed. How can anyone seriously know about anyone else on the
basis of a copy of their passport and a utility bill? Due diligence consists of detailed,
painstaking planning, collection, collation, checking, rechecking, deconfliction, ana-
lysis and scenario testing, turning over every stone, if it is intended to get near the real
answer to the question “Who am I really dealing with?”
Due diligence comprises rigorous procedures, checking legal requirements for
identification and verification and obtaining missing elements from third party sources
without disturbing the client or potential client, as well as detailed examination of
Politically Exposed Persons (PEPs) and Ultimate Beneficial Owners (UBOs), all
designed to obtain the true picture.
Ninety per cent of an iceberg lies below water. In due diligence terms, the “identity
iceberg”, most look at basic surface identity and obtain passport and utility bills, and
may check sanctions and PEPs. Penetrating below the surface of the identity iceberg
shows where the real risks lie, however. It is not only where the real risks lie, but also
the real opportunities and rewards. See the Figure 25.1.
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Name
Address
Passports, Utility Records, Sanctions
Politically Exposed Persons, Ultimate Beneficial Owners
Nicknames, Aliases, Family Structure, Social Networks, Lifestyle, Holidays, Schools, Education, Career,
Offices, Languages, Travel, Cars, Driver Records, Interests, Health, Physical Traits, Leisure, Teams, Property,
Surroundings, Media Footprint, Court Records, Grapevine, Reputation, Imagery, Trading Names, Business
Networks, Electronic Footprint, Financials, Credit History, Personalities, Psychographics, Demographics,
Skills, Beliefs, Values, Ethics, Religion, Traditions, Doctrine, Cultures, Ideology, Politics, Role Models,
Influencers, Followers, Popular Support, Referees, Detractors, Enemies, Charities, Attitude towards Law and
Regulation, Organisation, Resources, Equipment, Teachers, Mentors, Coaches, Courses, Experience,
Capabilities, Morale, Will, Commitment, Resilience, Susceptibility to Stress and Deception, Strengths,
Weaknesses, Critical Vulnerabilities, Personal History, including Dramas, Habits, Foibles, Vices,
Communications, Structures, Reporting Lines, Positions in Organisations, Committees, Honours, Awards,
Qualifications, Standard of Training, Control Behaviour, Modus Operandi, Intentions, Decision-Making
Process, Predictability, Spontaneity, Handicaps
Figure 25.1 The identity iceberg
6. REPORTING
Once an organisation has data on financial crime, or suspected financial crime, then
that needs to be analysed. If thought suspicious, it may need to be reported. There are
certain parameters around reporting which need to be complied with and obligations of
client confidentiality, disclosure and whistleblowing which merit consideration.
Reporting is the crux of financial crime deterrence. Although 90 per cent of the
investigative capability of the UK lies in the private sector, suspected crimes will
usually need to be reported to law enforcement for an investigation to be conducted to
criminal law standards.
However, not all crimes need to be reported to law enforcement. There is much law
around the reporting of suspicions of money laundering to law enforcement, but this
requirement to report does not relate to the underlying offences. There are some crimes
where reporting may be advisable, such as reporting suspicions of bribery and
corruption to the Serious Fraud Office, but in the main, the reporting of suspicions of
criminal activity is currently restricted to suspicions of money laundering (whether
these suspicions arise on a subjective or objective basis). This remains the only area of
English criminal law which is based upon suspicion. It seems peculiar in light of the
fact that the vast majority of suspicions of money laundering are not even read, let
alone actioned. It seems all the more curious in light of the fact that if the suspicion
arises before the transaction, then consent of law enforcement must be obtained, law
enforcement being given a clear seven days in which to consider their view, a time limit
which is unhelpful in fast markets. It also places unfair pressure on law enforcers, the
vast majority of whom hold no financial markets qualification and are therefore unable
to opine effectively on the more complex financial transactions. Be that as it may,
reporting is vital, and it is important to pass on sufficient intelligence so that action can
be taken. It is also important to practise reporting to overcome concerns about the
process and ensure staff appreciate the standard of objectivity required.
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Reporting has to be bona fide; in other words, it must be justifiable. Such reports
should be kept confidential by law enforcement, but in certain cases have been ordered
to be disclosed by the courts and in other cases have been compromised. This is a grave
concern where such reports are sensitive in nature as the reporter may be named or
discovered. A further concern arises in that the reporting requirement is naturally in
conflict with duties of client confidentiality, though this duty is overridden by the duty
to report. It is therefore best to establish a clear reporting system, through certain
established channels, in order to avoid the legal and regulatory pitfalls.
It may also be useful to establish a whistleblowing system in order to enable internal
reporting to take place without retaliation on sources. Whistleblowers have rarely been
given full protection; in fact the reverse has been true, particularly in cases involving
the authorities. The most effective protection of both the organisation and the
whistleblower is to arrange for external reporting to an independent body and the
creation of an alternative credible source of the information reported.
7. RECORD KEEPING
Record keeping – this is a fundamental part of deterrence since records may represent
the evidence required in the event of further action being taken. In the event of a
criminal prosecution, every element of a transaction chain must be proved beyond all
reasonable doubt. Law enforcement is likely to be somewhat underwhelmed if the
transaction trail has been broken due to a failure in record keeping or destruction of
records earlier than allowed under time requirements.
There are further considerations relating to record keeping requirements:
a. The language in which records must be kept – in the UK the requirement in

general is for records to be maintained in English, with translations available if
needed of foreign language records.
b. The jurisdiction in which records must be kept – in the UK the requirement in
general is for records to be maintained in the UK, or at least for the records to be
obtainable within a realistic timeframe.
c. The length of time for which records must be kept – there are many requirements
on time limits, many of which are contradictory, so the best approach is to
maintain records for the longest relevant time period and to adopt a strict policy
on record destruction.
d. The format in which records must be kept – in general records should be kept in
hard copy, but may be kept in electronic copy if they can be reduced to hard copy.
Some jurisdictions insist on hard copy. Reducing documents to electronic copy
only can reduce the forensic value of such documents.
e. The length of time in which records must be produced pursuant to a court order
– in the UK the requirement in general is for records to be produced pursuant to
a court order in seven days. A request for an extension may be made but an
extension is unlikely to be greater than 14 days in total.
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Any record retention policy should therefore include time limits, disclosure, authority,
destruction, medium of retention, location and language.
8. TRAINING
Training is vital to the deterrence of financial crime. It is rarely carried out well,
however, and much of it has become rote. Training is often carried out merely as a
regulatory necessity, but in reality training is related to the performance of an
organisation. Training needs to be matched to learning styles. There needs to be a
training plan to assess how the success of the training will be measured, in advance of
the training being undertaken. Training needs to be aligned to the performance
improvement plan of the organisation.
Training needs to be relevant, interactive and credible. Yet training often does not
achieve much in the way of performance improvement for the simple fact that it is not
assembled and transmitted in the manner in which recipients prefer to learn. There are
four key representational preferences:
a. Kinaesthetic – these are people who learn by doing, who need exercises to make
training come to life and who hate presenters who merely read script or lists of
bullet points from a screen.
b. Auditory digital – these are people who need to have lots of information, who
prefer graphs, tables, but who do not on the whole like exercises.
c. Auditory – these are people who are often musical, who like to hear what is being
presented in an effective way, often accompanied by music. Music needs to be of
the right type, however. For example, the brain works in the same metre as
baroque music.
d. Visual – these people are often artists or photographers. They need good visuals
to take messages on board and may prefer presentation in mind maps.
Training needs to be well planned. The best way of doing this is to carry out a training
needs analysis. Assess what skills and experience the organisation needs, work out
where the gaps are and introduce training courses to improve performance in the
designated areas. Work out how measurement of training performance will be carried
out in advance of compiling the training. There are four areas to consider:
a. Reaction – how did recipients feel about the training – test through a feedback
survey.
b. Learning – what did recipients learn – organise a test on the content of the
training.
c. Behaviour – what behavioural change are recipients required to make – this
usually takes a minimum of nine months.
d. Results – what performance improvements are required – this requires setting
performance indicators.
There are three distinct steps to learning, being:
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a. Introduction of what is required to be learnt, so all recipients start from the same
baseline, no matter what their previous training may have been.
b. Assimilation of what is required to be learnt, so recipients can practise their new
knowledge or skills.
c. Testing of what is required to be learnt, so the organisation can be sure that the
key learning points have been understood, accepted and practised.
There are a variety of techniques to ensure that learning sticks in the memory. Most
recipients remember far more of what they have heard, seen and practised, as opposed
to merely having heard or read.
9. IT AND SOCIAL MEDIA

IT and social media are growing in importance. Although in essence just a mode of
communication and a way to increase efficiencies, their potency deserves separate
consideration.
In terms of deterrence of financial crime, IT does not really bring about any new
offences, as discovered by a study conducted by the Centre for the Study of Financial
Innovation some years ago. Current laws already cover the types of behaviour; it is just
the mode of commission which differs.
IT and social media are changing the psychology of those using it and therefore the
nature of compliance. They result in increased social isolation of those using it.
Language is often less formal than it would be if the same wording were put into a
letter and mailed through the post, as the sender feels less associated with the
consequences of email. Inhibitions are often lost and wording increases in emotional
intensity. Although productivity may increase, it can equally decrease through addiction
involving unprofitable behaviours such as needless internet surfing. Open source
internet searching can skew results and analysis markedly. This is because the major
search engines in popular use (which are more libraries than search engines) only pick
up 1–2 per cent of what is available on the internet, so the internet analyst must know
where to look, have access to certain sources which are not always immediately
apparent or free, and check the source of materials presented to make an assessment of
their truth, accuracy and reliability.
From the perspective of the financial crime analyst, IT offers other challenges since
body language signals are lost and impression formation can be easily manipulated.
Clues as to age, ethnicity, sex, and so on, are lost, and bearing in mind that 70 per cent
of communication is thought to be non-verbal, this increases the challenge of knowing
who a conversation is really with. Examples of this include a New Jersey teenager
getting access to the stock market and using chat rooms to manipulate stock prices. His
fine of $273,000 shows how successful he was.
The IT age has also seen the rise of computer based training, an attempt to make use
of IT to train people more effectively and at lower cost. This is generally accepted to be
less effective than face to face learning. A key difficulty is that there is generally a drop
out rate of 75 per cent in computer based training. Accordingly, special techniques have
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been developed to reduce this drop out rate. Often, staff pass on log-in details so others
can complete a test for them, so results may not be what they seem to be.
Cybercrime is the world’s fastest growing crime, already on a par with global drug
trafficking. Its popularity is taking off as criminals realise that it does not hold the same
kinds of risks as “normal” crime, and is far easier to commit, especially across borders.
This means that financial crime analysts need to be aware of the latest schemes and
collaborate closely with IT departments to reduce risk.
Cybersecurity is a growing related concern. Some government agencies have been
advocating stronger passwords, but bearing in mind that even strong passwords take
less than five minutes to crack with the right equipment, this is a forlorn hope and
effort may be better spent on determining what data needs to be on an IT system which
is linked to the internet, or whether it should be on a standalone IT system without
access. Accessing data through wifi systems in hotels and airports is becoming
increasingly popular, but again represents an area of potential IT leakage. More
traditional methods of communication may offer greater security. Governments are
beginning to insist on certain standards of IT compliance if companies are to be eligible
for government contracts.
10. BUSINESS CONTINUITY PLANNING

An organisation needs to focus on dealing with unexpected challenges for the simple
reason that one in four organisations that hit a major compliance issue do not survive.
The business continuity plan, often also known as the disaster recovery plan, arises
from the work done on risk assessment. These plans are only effective if practised and
regularly updated.
Business continuity planning is designed to assist with survival in extreme circum-
stances ranging from terrorist bomb to fire, to financial market meltdown. There are a
large number of stakeholders involved in such situations and little or no time to
rehearse, which is why running through an exercise is vital for the plan to have a
chance of success. The sorts of stakeholders involved may include the following:
a. Staff
b. Clients
c. Counterparties
d. Insurers
e. Bankers
f. Regulators (financial, health and safety, data protection, etc.)
g. Law enforcement
h. Politicians
i. Whistleblowers
j. Professional advisors (lawyers, accountants, tax advisors)
k. IT and communications specialists
l. Shareholders
m. Media (TV, radio, social media, general media and trade press)
n. Exchanges
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o. Clearing houses
p. Landlord
q. Property advisors
Those conducting business internationally may expect the number of stakeholders to be

multiplied by the number of countries they are involved in.
At the same time as dealing with the above, organisations will need to keep the
business going, so more staff may be needed to cover gaps in the short term. Experts
may also be needed depending on the situation.
Social media is of growing importance. First, there is a need to gather information
about what is being said about the organisation. Alerts can be set up to identify what is
being said on the internet as well as on YouTube, Twitter, Facebook, LinkedIn, and so
on. Second, there is a need to push information out on such channels, including
Slideshare and Wordpress. Tweets can be managed in advance by using a tool like
Tweetdeck or Buffer App. Key to the public relations part of the plan is a single point
of contact for such communications and being proactive rather than reactive.
Rehearsal is vital as it will identify any areas of weakness, as well as to emphasise
the point that prevention is far better than the cure. Practice needs to be undertaken at
least annually, being run from an incident room. A large part of the plan will involve
establishing a communications network and working out how to deal with the incident,
setting daily plans and establishing “battle rhythm”. If it is possible to take decisions
quicker than the stakeholders involved, then it is possible to get inside their decision
cycle. This means that the business continuity team will be on the crest of the wave
rather than constantly trying to catch up with events. A good business continuity plan
can be worth its weight in gold. Certain companies which had this at the time of the
Buncefield explosion, the largest fire in Europe since World War II, were fully up and
running again from a new location within a week. Taking responsibility and developing
good battle rhythm can be very effective too. Contrast the responses to major fraud as
between the management teams of Société Générale and Barings Bank.
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PART V
FRAUD
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26. Fraud in civil and criminal law

Jonathan Fisher
1. INTRODUCTION
This chapter presents an overview of the legal response to fraudulent behaviour,
covering both civil law and criminal law aspects. Civil law is engaged on occasions
where victims of fraud seek to recover the losses which they have sustained as a result
of a fraudster’s activities. Invariably, monies will have passed through the fraudster’s
hands and he will have no assets against which the victim can recover. Proverbially, he
is known as a “man of straw”. In this situation, victims will look towards other
potential defendants such as bankers, solicitors and accountants who have assisted the
fraudster in his nefarious endeavours, as a potential source for the recovery of their
funds. Criminal law, however, is engaged for an entirely different reason. Primarily, the
objective of the criminal law is to punish a wrongdoer for the harm he has caused to
society, and in serious fraud cases the punishment will usually consist of a lengthy term
of imprisonment. Invariably, a fraudster commits a number of different criminal
offences when perpetrating a fraud, ranging from an offence under the Fraud Act 2006
to offences involving false accounting and making misrepresentations to the financial
markets. The criminal law does facilitate victim compensation, and there are provisions
to this effect, but if asset recovery is the focus of the victim’s response the civil law is
a better forum for his endeavours.
Unfortunately, fraud has become an endemic part of modern life. In 2013–14, it was
estimated that 73 per cent of European companies and 66 per cent of US companies
were hit by at least one fraud.1 The Association of Certified Fraud Examiners has
estimated that the typical organisation loses 5 per cent of its revenue to fraud each year;
applying that figure to the 2011 gross world product, it gives an estimated loss of more
than $3.5 trillion.2 According to the UK’s National Fraud Authority,3 the loss to the UK
economy from fraud currently stands at £52 billion per annum; with private sector
losses estimated to be £15.9 billion, public sector losses at £20.6 billion, charity sector
losses across Great Britain at £147.3 million and fraud against individuals at
£9.1 billion.
1
Kroll, 2013/2014 Global Fraud Report.
2
Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud
and Abuse, 2012 Global Fraud Study.
3
National Fraud Authority, National Fraud Indicator, June 2013.
315
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2. CIVIL FRAUD
The civil law provides victims of fraud with a means by which they can seek to recover
the losses they have suffered. Where there has been a clear case of fraud, such as fraud
by misrepresentation or deceit, the victim has a number of remedies in civil law.
2.1 Deceit
The common law has long allowed a cause of action to be brought on the basis of
deceit. The cause of action can be traced to the decision in the case of Pasley v
Freeman4 in 1789. Three elements of the action must be shown in order for a claim of
deceit to succeed: (1) that a false representation was made, (2) that the representation
was intended to influence the claimant and (3) the representation did in fact influence
the claimant.5 The standard of proof required in order to show common law deceit is
the ordinary civil standard, on the balance of probabilities.6
In relation to the first element of the action, a defendant must be shown to have made
a representation, either of past or existing fact or law. Such a representation may be
express or implied. “Mere silence, however morally wrong, will not support an action
of deceit.”7 However, misrepresentation can be deemed to have occurred through
conduct alone.8 According to the House of Lords in the case of Derry v Peek:9
[I]n order to sustain an action of deceit, there must be proof of fraud and nothing short of that
will suffice. Secondly, fraud is proved when it is shown that a false representation has been
made (i) knowingly, (ii) without belief in its truth, or (iii) recklessly, careless whether it be
true or false.
Non-disclosure, where there is a pre-existing duty to disclose, may also ground a claim
for deceit at common law.10 However, opinions, promises or statements of intention
will not render a defendant liable for deceit.11 A claimant must also show damage as a
result of the representation, as without proof of damage, a claim of deceit will fail.12
The decision in MacDonald v Polaine & Hill Publishing13 is a good illustration of
how the tort of deceit is applicable to investors who wish to recover their losses. In that
case, the defendants made representations to the plaintiff that there were no other
buyers interested in purchasing the defendant’s shareholding in a company. The
claimants suffered damage when they were induced to sell the shares on the back of
4
[1789] 3 TR 51.
5
Holmes v Jones [1907] 4 CLR 1692.
6
Hornal v Neuberger Products Ltd [1957] 1 QB 247.
7
Bradford Third Equitable Benefit Building Society v Boarders [1941] 1 All ER 205 at 211.
8
Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15.
9
[1889] 14 App Cas 337.
10
JD Wetherspoon plc v Van de Berg & Co Ltd [2007] EWCH 1044 (Ch).
11
British Airways Board v Taylor [1976] 1 WLR 13; Bisset v Wilkinson [1927] AC 177.
12
Smith v Chadwick [1884] 1 App Cas 187.
13
(unreported) 11 February 2002.
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Fraud in civil and criminal law 317
this representation. The respondents were held liable for deceit and liable to compen-
sate the claimants for their actual loss.
2.2 Misrepresentation
Where one party to a contract is induced to enter into the contract as a result of a
misrepresentation made by the other party to the contract, or their agent, the contract is
deemed to be voidable. The misrepresentation may be made by words or by conduct,
and may be negligent14 or fraudulent.15 The representation must be false at the time of
the contract and “it must be of such a nature as to be capable of inducing the party into
entering into the contract in question”. In addition, the maker of a fraudulent
representation may also be liable for damages. However, the maker will not be deemed
a constructive trustee of the property transferred pursuant to the contract.16
2.2.1 The Misrepresentation Act 1967

Many actions for asset recovery continue to be brought under the terms of the
Misrepresentation Act 1967. The Act applies only where the misrepresentation in
question induced the recipient to enter into a contract. The most significant aspect of
the Misrepresentation Act is that it places the onus on the defendant accused of making
a misrepresentation to establish that he has reasonable grounds to believe, and did in
fact believe, that the representation in question was true.17 The Act provides in section
2(1):
Where a person has entered into a contract after a misrepresentation has been made to him by
another party thereto and as a result thereof he has suffered loss, then, if the person making
the misrepresentation would be liable to damages in respect thereof had the misrepresentation
been made fraudulently, that person shall be so liable notwithstanding that the misrepresen-
tation was not made fraudulently, unless he proves that he had reasonable ground to believe
and did believe up to the time the contract was made the facts represented were true.
In order for liability under the Misrepresentation Act to attach, it is necessary for the
defendant to have made a positive assertion. A failure to disclose relevant information
will not be sufficient to ground liability under the Act.18 Section 2(1) also covers
situations of innocent or negligent misrepresentation. For example, in Royscot Trust Ltd
v Rogerson19 the respondent car dealer was found liable for damages to a hire purchase
company where he had misstated the selling and deposit price of a car sold on hire
purchase to a buyer, who later sold the car without completing the schedule of
payments to the hire purchase company.
14
See Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
15
See Derry v Peek [1889] 6 Bing 396.
16
Lonrho v Al Fayed (No 2) per Millet J [1992] 1 WLR 1.
17
Howard Marine and Dredging v A Ogden & Sons (Excavations) [1978] QB 574.
18
Banque Financiere v Westgate Insurance [1989] 2 All ER 952.
19
[1991] 2 QB 297.
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2.3 Liability in Constructive Trust
2.3.1 Constructive trusts in fraud cases

Constructive trusts can be used as a civil remedy to compensate the victims of fraud.
Courts may deem a constructive trust to exist where a third party such as a bank or
financial adviser has handled a victim’s money in circumstances where the third party
realised, or must have realised, that the money had been obtained in a fraudulent
manner. When deciding whether to recognise the existence of a constructive trust, a
court will look to see if there have been “unconscionable dealings” with the money
which should operate to prevent the handler from benefiting from unconscionable
behaviour.20 An example of a constructive trust in a fraud case can be seen in JJ
Harrison (Properties) Ltd v Harrison21 where a company director acted fraudulently
and in breach of fiduciary duty by transferring company property into his own name.
The Court held that directors who dispose of a company’s property in breach of their
fiduciary duties are treated as having committed a breach of trust. Moreover, a person
who receives this property with knowledge of the breach of duty is treated as holding
the property upon trust for the company. He is said to be a constructive trustee of the
property.22
2.3.2 Liability to account for breach of trust

Accordingly, constructive trusts may be used to impose liability on third parties for
breach of trust. Such a situation may occur where a person dishonestly assists in a
breach of trust (“dishonest assistance”), or knowingly receives property which has been
obtained as a result of a breach of trust (“knowing receipt”). Those found to have acted
in such a way will be found liable to account to the trust as constructive trustees.
Knowing receipt A third party to a trust will be held liable for knowing receipt where
he receives trust property in breach of trust. In order to establish liability for knowing
receipt, it is necessary to show that the third party actually obtained either control or
possession of the property.23 Whether or not a constructive trust will be imposed
depends on the knowledge of the recipient, the basic question being “whether the
conscience of the recipient is sufficiently affected to justify the imposition of such a
trust”. Knowledge in this context is not confined to actual knowledge, but also includes
actual knowledge that would have been acquired but for shutting one’s eyes to the
obvious, or wilfully and recklessly failing to make such inquiries as a reasonable and
honest man would make.24
El-Ajou v Dollar Land Holdings25 is a good example of a knowing receipt claim
involving international commercial fraud. The plaintiff in El-Ajou was a victim of a
fraud carried out in Amsterdam by three Canadians. He claimed he was able to trace
20
Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, per Millet LJ.
21
[2002] 1 BCLC 162.
22
Para 6.
23
Agip v Jackson [1990] Ch 265 at 286 per Millet J.
24
In Re Montagu’s Settlement Trusts [1987] Ch 264.
25
[1994] 2 All ER 685.
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some of the proceeds of the fraud to a joint venture in London, Dollar Land Holdings
plc (DLH). The plaintiff sought to recover from DLH on the basis of knowing receipt,
alleging that DLH’s chairman possessed the necessary knowledge that the funds
represented the proceeds of fraud and that his knowledge was imputable to DLH. The
Court of Appeal found that the chairman had arranged for the investment while acting
as the directing mind and will of the company and held that the chairman had
knowledge of the underlying fraud. As a result, his knowledge was attributable to the
company and DLH was found liable for knowing receipt of the funds.
Dishonest assistance A third party may also be held liable to account to the trust for
any loss suffered where he assists in the commission of a breach of trust. However,
mere knowledge of a breach of trust is not sufficient to establish liability; it must be
shown that the third party actively assisted in the breach. Unlike knowing receipt, the
third party need not possess or control trust assets at any time in order to be found
liable.26 The third party will be held liable to account to the trust as a constructive
trustee for the loss which stems from their assistance.27
In order to establish liability, it must be shown that the third party acted dishonestly.
Dishonesty will be considered by an objective standard.28 However, for liability as an
accessory to arise the defendant must himself appreciate that what he was doing was
dishonest by the standards of honest and reasonable men.29 In the context of investor
loss, dishonest assistance can occur in a number of ways. For example, Royal Brunei
Airlines v Tan involved a claim for loss caused to a customer as a result of a reckless
investment strategy by an investment adviser.30 The Court held that such behaviour
could found a claim for dishonest assistance.
2.3.3 Tracing
Tracing is a process by which a claimant seeks to identify property in the hands of the
defendant, over which the claimant is asserting a prior right. This process is often used
where property is held by a third party on constructive trust for a victim of fraud. As
Millet J explained in Boscawen v Baywa:
Tracing … is the process by which the plaintiff traces what has happened to his property,
identifies the persons who have handled it or received it, and justifies his claim that the
money which they handled or received (and if necessary still retain) can properly be regarded
as representing his property. He needs to do this because his claim is based on the retention
by him of a beneficial interest in the property which the defendant handled or received.31
26
Twinscetra v Yardley [2002] 2 AC 164 at 194.
27
Derkson v Pillar [2002] All ER (D) 261 at 31.
28
Royal Brunei Airlines v Tan [1995] 3 All ER 97; the test of dishonesty as an objective
standard was also confirmed in Barlow Clowes v Eurotrust [2006] 1 All ER 333.
29
Twinscetra v Yardley [2002] 2 AC 164 at 387 per Lord Hutton.
30
Royal Brunei Airlines v Tan [1995] 2 AC 378.
31
Boscawen v Baywa [1995] 4 All ER 769 at 776g.
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The case of Barlow Clowes International Ltd (In Liquidation) v Vaughan32 illustrates
the difficulties that can be involved in a tracing claim. Over a period of time, a number
of investors had been fraudulently induced into paying large amounts of money to
Barlow Clowes International Limited (BCI) or associated entities for investment.
However, when receivers were appointed and BCI went into liquidation the amount of
assets available fell far short of what would be needed to satisfy all the investors’
claims. The appeal was brought by the liquidators and receivers of BCI in order to
obtain the directions of the Court as to the basis on which assets and moneys in the
hands of the receivers should be distributed. The Court of Appeal decided to distribute
the traced funds pari passu rateably in proportion to the amounts due to them.
2.4 Civil Recovery under Part 5 of POCA
The Proceeds of Crime Act 2002 (POCA) was the first piece of UK legislation to
introduce the concept of civil recovery for assets derived from criminal conduct.
Recourse to civil law remedies is essential in fraud cases, as it is not always possible to
launch criminal proceedings. For example, if the fraudster in question has absconded or
is dead, criminal action may no longer be possible, but assets may still be recoverable.
Today, the civil law remedies in POCA exist alongside the common law remedies but
critically the remedy cannot be pursued by a private litigant such as an aggrieved
investor. Civil recovery proceedings can be initiated only by the government enforce-
ment agencies, such as the National Crime Agency, the Serious Fraud Office and the
Crown Prosecution Service (CPS).
The purpose of the civil recovery provisions is to enable recovery of property which
is (or represents) property obtained through unlawful conduct, and cash which is (or
represents) obtained through unlawful conduct, or which is intended to be used in
unlawful conduct, to be forfeited.33 Under POCA “unlawful conduct” is conduct
deemed unlawful under the criminal law34 and “property obtained through unlawful
conduct” is defined as property obtained through unlawful conduct, if obtained by or in
return for that conduct.35
Part 5 of POCA allows for the UK enforcement authority to apply to the Court for
the grant of a recovery order and/or an interim receiving order.36 Proceedings for a
recovery order are brought before the High Court.37 The property which is to be the
subject of the recovery order is to be specified in the application, and if not, it must be
described in general terms and the form must state whether it is alleged to be
recoverable property or “associated property”.38 POCA describes “associated property”
as property which is not the recoverable property, but constitutes any interest in the
32
[1992] 4 All ER 22.
33
Section 240 POCA.
34
Section 241(1) POCA.
35
36
Section 243 POCA.
37
38
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recoverable property and any other interest in the property in which the recoverable
property subsists.
2.5 Freezing Orders
The High Court has the power under section 37(1) of the Supreme Court Act 1981 to
grant freezing orders over a person’s assets. Freezing orders prevent the subject from
dealing with or disposing of assets. Freezing injunctions are granted for an important
but limited purpose: to prevent a defendant dissipating his assets with the intention or
effect of frustrating enforcement of a prospective judgment. These orders can be an
important tool in fraud cases since it is often a problem that the fraudster’s assets have
dissipated before the case can be brought to court. The granting of such orders can help
to secure any available assets which can then be made the subject of a confiscation
order. An aggrieved investor can apply for a freezing order in any case where he has a
cause of action to recover his monies which stands a reasonable prospect of success
and there is risk that the defendant will dissipate the monies before the case comes to
trial.
In cases involving cross-border transactions, section 25 of the Civil Jurisdiction and
Judgments Act 1982 provides UK courts with the power to grant interim relief in
respect of proceedings which have been, or are about to be, commenced in foreign
jurisdictions. This includes the granting of freezing orders. The Evidence (Proceedings
in Other Jurisdictions) Act 1975 and Rules of the Supreme Court Ord. 70 also allow
requests to be made by the relevant authorities in foreign jurisdictions to the UK High
Court for assistance in obtaining evidence in the UK. In addition, the UK is bound by
the civil enforcement regime of the Lugano Convention39 and the Brussels Regu-
lation.40
3. CRIMINAL FRAUD
Prosecutors have a number of offences open to them to charge in any fraud case. Where
the defendant in question is a company, the default offence for a prosecutor to charge
the company with is fraudulent trading. However, notwithstanding the introduction of
the Fraud Act 2006, prosecutors have tended to continue to charge defendants with the
common law offence of conspiracy to defraud, and it remains the prosecutor’s weapon
of choice. This is because conspiracy to defraud is simple to indict and, when pursuing
a case of conspiracy, the prosecution can put all of the evidence into one charge.
It is open to victims of fraud to indict the fraudster as a private prosecutor.41 Where
a private prosecution is launched, it is treated in the same way by the courts as if it had
39
Convention on jurisdiction and the recognition and enforcement of judgments in civil and
commercial matters 2007/712/EC.
40
Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the
recognition and enforcement of judgments in civil and commercial matters.
41
The right to bring a private prosecution is enshrined in section 6 of the Prosecution of
Offences Act 1985.
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been brought by the CPS. A private prosecutor, however, does not have the right to
demand access to evidence held by the CPS such as witness statements or other reports
or documents.42
3.1 The Fraud Act 2006
The Fraud Act 2006 was introduced to clarify and modernise the law, and to make
fraud law more straightforward for juries and practitioners.
3.1.1 Fraud offences

Section 1 of the Fraud Act 2006 established the general offence of fraud, while sections
2 to 4 criminalise specific ways of committing the offence, namely, fraud by false
representation, fraud by failing to disclose information and fraud by abuse of position.
A person commits fraud by false representation43 (section 2), where he dishonestly
makes a false representation and intends by making the representation to make a gain
for himself or another, to cause loss to another or expose another to a risk of loss.44
“Representation” means any representation as to fact or law and may be express or
implied.45 A representation will be considered false if it is untrue or misleading, and the
person making the representation knows that it is, or might be, untrue or misleading.46
It is also important to note that the representation in question need not cause the
representee to act in reliance on the information in order for the offence to have been
committed; the offence is committed once the representation itself is made.
Fraud by failing to disclose information47 (section 3) is committed where a person
dishonestly fails to disclose to another person information which he is under a legal
duty to disclose, and intends, by failing to disclose the information, to make a gain for
himself or another, to cause loss to another or expose another to a risk of loss. The duty
to disclose may derive from statute, contract, custom in trade, or through a fiduciary
relationship.48 Therefore, this offence covers a broad array of situations and its exact
ambit is unclear.
Fraud by abuse of position49 (section 4) occurs where a person occupies a position in
which he is expected to safeguard, or not to act against, the financial interests of
another person and he dishonestly abuses that position, intending to make a gain for
himself or another, to cause loss to another or expose another to a risk of loss.50 The
type of position involved here is the relationship between a company and its director, a
beneficiary and trustee, an employer and employee, an agent and principal, and a
professional service provider and his client. There is no definition of abuse in the
42
R v DPP ex parte Hallas [1988] 87 Cr App R. 340.
43
Fraud Act section 2.
44
Fraud Act section 2(1).
45
Fraud Act section 2(3) and 2(4).
46
47
48
The Law Commission (LAW COM No 276) Report on a reference under section 3(1)(e)
of the Law Commissions Act 1965, Cm 5560, July 2002, at para 7.28.
49
50
Abuse of position can occur through both acts and omissions (section 4(2)).
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legislation. The Court of Appeal has recently stated that “a good working meaning
might be ‘uses incorrectly’ or ‘puts to improper use’ the position held in a manner that
is contrary to the expectation that arises because of that position”.51 A recent example
of where the courts have found abuse of position to exist is where the medical practice
manager at a doctors’ surgery forged doctors’ signatures on a number of cheques for
her own benefit to the sum of £17,000.52 In another recent case, a solicitor was found
to have abused her position by transferring large amounts of money from the solicitor’s
accounts to her own personal account.53
3.1.2 The test for dishonesty

All offences under the Fraud Act 2006 require that the prosecution proves dishonesty
on the part of the defendant. The Court of Appeal in R v Ghosh established a two part
test for establishing dishonesty: firstly, the Court must ask whether the defendant has
acted dishonestly by the standards of ordinary and honest people. Secondly, if this
question is answered in the affirmative, the Court then has to consider whether the
defendant must have realised that what he was doing was by those standards dishonest.
If so, he should be convicted.54
3.1.3 Sentencing in fraud cases

A person who is found guilty of fraud under sections 1 to 4 of the Fraud Act 2006 is
liable on summary conviction to imprisonment for a term not exceeding 12 months or
a fine not exceeding the statutory maximum (or to both). If a person is found guilty on
indictment, a person is liable to imprisonment for a term not exceeding ten years or a
fine.55
3.2 Conspiracy to Defraud
The offence of conspiracy to defraud has a much wider application than the provisions
of the Fraud Act 2006. For example, it covers instances of fraud where there is no
economic loss or gain involved56 or where no such loss or gain can be proved.57 As
Viscount Dilhorne explained in Scott v Metropolitan Police Commissioner,58
it is clearly the law that an agreement by two or more by dishonesty to deprive a person of
something which is his or to which he is or would be or might be entitled and an agreement
by two or more by dishonesty to injure some proprietary right of his suffices to constitute the
offence of conspiracy to defraud.59
51
R v Angela Pennock, Richard John Pennock [2014] EWCA Crim 598.
52
The conviction was upheld on appeal, see R v Pamela Jane Moss [2013] EWCA Crim
1554.
53
See R v Ruth Louise Turner [2013] EWCA Crim 1206.
54
Section 15.
55
56
R v Moses and Ansbro [1991] Crim LR 617.
57
R v Rigby and Bailey, The Times, August 23, 2006, CA.
58
[1975] AC 819, [1974] 3 All ER.
59
At para 1039.
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Therefore, there must be proof of an agreement, intent and dishonesty in order to found
a conviction. Deceit is not an essential ingredient of the offence of conspiracy to
defraud.60
According to the House of Lords, a person acts “fraudulently” when he acts in a way
which prejudices (or risks prejudicing) another’s right, knowing that he has no right to
do so.61 However, it is not necessary for the defendant to intend that any actual loss
would occur.62 As the offence is complete once the agreement is made, it is irrelevant
what happens after that point in time and whether the participants followed through
with their agreement.
A person guilty of conspiracy to defraud is liable on conviction on indictment to
imprisonment for a term not exceeding ten years, or a fine, or both.63
3.2.1 Jurisdiction
An agreement made in England and Wales to carry out a fraud abroad is not indictable
at common law as a conspiracy to defraud.64
3.3 False Accounting
False accounting is a form of fraud and occurs where a person fraudulently misstates
the company’s assets and/or liabilities in the company accounts. It can involve
falsifying (through act or omission), destroying or hiding documents.65 For example,
false accounting criminalises a deliberate failure to present a true view of a company’s
financial position. In order to be found guilty of false accounting, it must be shown that
the defendant acted dishonestly.66 The offence is to be found in section 17 of the Theft
Act 1968.
3.4 Fraudulent Trading
Fraudulent trading occurs where a company, or its directors, carries on business with
the intention of defrauding creditors or for other fraudulent purposes. Fraudulent
trading is established as a criminal offence under section 993 of the Companies Act
2006, and this provides that if any company business is carried on with intent to
defraud creditors of the company (or creditors of any other person), or for any
fraudulent purpose, every person who is knowingly a party to the carrying on of the
business in that manner commits an offence.67 The offence applies whether the
company has been, or is in the course of being, wound up.68 If found guilty, a person is
liable on conviction of indictment, to imprisonment for a term not exceeding ten years
60
Scott v Commissioner of Police of the Metropolis [1975] AC 819.
61
Welham v DPP [1961] AC 103.
62
R v Allsop (1977) Cr App R 29.
63
Section 12 (3) CJA 1987.
64
Attorney General’s Reference (No.1 of 1982) [1983] QB 751.
65
R v Shama (1990) 91 Cr App R 138.
66
R v Ghosh [1982] QB 1053.
67
Section 933(1) Companies Act 2006.
68
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or a fine (or both) and on summary conviction to imprisonment for a term not
exceeding 12 months or a fine (or both).69
The Insolvency Act 1986 also makes it an offence to carry on business with intent to
defraud creditors of the company (or creditors of any other person), or for any
fraudulent purpose in the course of the winding up of a company.70
3.5 Misrepresentation and the Financial Markets
Section 397 of the Financial Services and Markets Act 2000 criminalises the making of
misleading statements and practices. Section 397 applies where a person makes a
statement, promise or forecast which he knows to be misleading, false or deceptive in
a material particular; or dishonestly conceals any material facts whether in connection
with a statement, promise or forecast made by him or otherwise; or recklessly makes
(dishonestly or otherwise) a statement, promise or forecast which is misleading, false or
deceptive in a material particular.71
In addition, a person will only be considered guilty of an offence if he made the
statement, promise or forecast or concealed the facts for the purpose of inducing (or
were reckless as to whether it may induce) another person to either enter or offer to
enter into, or to refrain from entering or offering to enter into, a relevant agreement; or
to exercise, or refrain from exercising, any rights conferred by a relevant investment.72
Where a person engages in any course of conduct which creates a false or misleading
impression as to the financial market, or the price or value of any investments, he will
be guilty of an offence if he does so “for the purpose of creating that impression and of
thereby inducing another person to acquire, dispose of, subscribe for or underwrite
those investments or to refrain from doing so or to exercise, or refrain from exercising,
any rights conferred by those investments”.73
3.6 Confiscation Orders and Victim Compensation
3.6.1 Confiscation orders

The purpose of a confiscation order is to deprive a defendant of the benefit of his
crime. Confiscation orders may be imposed on defendants after conviction and where a
financial investigation has been undertaken. POCA outlines the procedure for the
making of confiscation orders.74 The significance of this legislation for an aggrieved
investor is that when making a confiscation order, the Crown Court may make an order
to compensate the victims, and this order has to be satisfied before the amount of the
confiscation order is paid.
In order to make a confiscation order, the Crown Court must firstly be satisfied that
the defendant was convicted of an offence, or committed for sentence, before the
69
70
Section 213(1) Insolvency Act 1986.
71
Section 397(1) Financial Services and Markets Act 2000.
72
73
74
Part 2 POCA.
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Crown Court.75 Secondly, the prosecutor must request that the Court grant such an
order, or the Court itself must believe it is appropriate for it to do so.76 A defendant will
be deemed to have benefited from his criminal conduct where he obtains property as a
result of, or in connection with, that conduct.77 Where a person obtains a pecuniary
advantage as a result of or in connection with such criminal conduct, he will be taken
by the Court to have obtained as a result of or in connection with the conduct a sum of
money equal to the value of the pecuniary advantage.78 Therefore, the recoverable
amount for the purposes of a confiscation order is an amount equal to the defendant’s
benefit from the conduct concerned. However, in the event the defendant shows that the
amount available for confiscation is less than the benefit received, the amount
recoverable is the amount available.79
Restraint orders POCA also allows for the granting of restraint orders in advance of
trial in order to prevent the defendant dealing with any realisable property.80 Restraint
orders are granted to ensure that there is no diminution in value or sale of realisable
property. Before granting a restraint order, the Court must be satisfied that a criminal
investigation has begun and that there is reasonable cause to believe that the alleged
offender has benefited from his criminal conduct.81 The Court may make such order as
it believes is appropriate for the purpose of ensuring that the restraint order is
effective.82 These orders therefore can be used to try to prevent fraudsters spending or
hiding their stolen money while waiting for trial and maintain a certain pool of funds
from which it is possible to compensate victims.
3.6.2 Victim compensation

The rationale behind the exercise of confiscation and restraint orders is set out in
section 69 of POCA. One of the central aims of this regime is to ensure that victims
can ultimately be compensated for their loss. Therefore, the powers granted under
POCA “must be exercised with a view to allowing a person other than the defendant or
a recipient of a tainted gift to retain or recover the value of any interest held by him”.83
POCA allows for victims or other owners who claim that confiscated cash, or any part
of it, belongs to them may apply to a magistrates’ court or for the cash or part to be
released to them.84
The Powers of Criminal Courts (Sentencing) Act 2000 also allows for the Court to
grant a compensation order against a defendant.85 Such an order requires the defendant
to pay compensation for any personal injury, loss or damage resulting from the offence
75
Section 6(2) POCA.
76
Section 6(3) POCA.
77
Section 76(4) POCA.
78
Section 76(5) POCA.
79
Or a nominal amount, if the available amount is nil; section 7 POCA.
80
Section 41 POCA.
81
Section 40(2) POCA.
82
Section 41(7) POCA.
83
Section 69(3)(a) POCA.
84
Section 301–303 POCA.
85
Section 130 Powers of Criminal Courts (Sentencing) Act 2000.
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committed, whether intentionally caused or otherwise.86 It is for the Court to decide the
appropriate amount of the compensation order and in what manner it should be paid.
However, there are a number of practical issues that can potentially arise when courts
are trying to decide in what manner to grant such orders. For example, it is preferable
that where there is more than one victim, that each victim receive a compensation
order, and that each victim be paid on a pro rata basis. However, this is not always
possible as, for reasons discussed above, the defendant may not have the means to fulfil
such orders. Bearing that in mind, ideally in making a compensation order the Court
will take into account the means of the defendant and try to achieve as equitable result
as possible for the victims.
3.7 Mutual Legal Assistance in Criminal Cases
As a result of the complexities of today’s financial market, it is possible for a fraud to

be planned in one jurisdiction and perpetrated in another jurisdiction. Mutual legal
assistance can play an important role in the prosecution of such offences.
Part 11 of POCA allows the UK to assist foreign jurisdictions in their investigations
and in the freezing and confiscation of assets. Orders may be made in the UK
prohibiting persons from dealing with property, or realising property, in order to give
effect to an external order.87 For these purposes, an external order is considered to be
an order which is made by an overseas court where property is found or believed to
have been obtained as a result of or in connection with criminal conduct, and is for the
recovery of specified property or a specified sum of money.88 Also, UK authorities may
launch investigations and order warrants for the purposes of external investigations.89
The Criminal Justice (International Co-operation) Act 1990 governs mutual legal
assistance in evidence gathering for criminal trials. Under this regime, the UK can
request evidence gathering “assistance from other countries through the ‘letter of
request’ system”. A “letter of request” can be obtained from a magistrate or judge once
it is shown that there is reasonable cause to suspect an offence has been committed and
either criminal proceedings have been issued or an investigation is underway.
In addition, the Financial Service and Markets Act 2000 permits the Financial
Conduct Authority to investigate and gather evidence or information for overseas
equivalent authorities upon request in the UK.
86
R v Corbett [1993] 14 Cr App R (S) 101.
87
88
89
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27. Fraud and restitution

David Hayton
FRAUD
The English Fraud Act 2006 usefully indicates that a person can be guilty of criminal
fraud in three types of situation that reflect those that lead to various civil liabilities:
(1) where the defendant makes a false representation, (2) where he fails to disclose
information, and (3) where he abuses his position.
For criminal liability subjective dishonesty is required: the accused must have been
acting dishonestly according to the standards of ordinary decent people and must
himself have realised that what he was doing was, by those standards, dishonest.1 For
civil liability objective dishonesty can suffice, so that the defendant only needs to have
been acting dishonestly according to the standards of ordinary decent people,2 though
his conduct is assessed in the light of what he actually knew at the time when he
acted.3
In the first situation4 a person is liable for fraud if he dishonestly made a false
representation and intended thereby to make a gain for himself or another or to cause
loss to another or to expose another to a risk of loss. A representation is false if it was
untrue or misleading, and the representor knew that it was, or might be, untrue or
misleading. A representation may be of fact or law or as to the state of mind of the
representor or another person. It may be regarded as made if it (or anything implying it)
is submitted in any form to any system or device designed to receive, convey or
respond to communications (with or without human intervention).
In the second situation5 a person is liable for fraud if he dishonestly failed to disclose
to another person information which he was under a legal duty to disclose, and
intended thereby to make a gain for himself or another or to cause loss to another or to
expose another to a risk of loss.
In the third situation6 a person is liable for fraud if he occupied a position in which
he was expected to safeguard, or not to act against, the financial interests of another
person and yet dishonestly abused that position, intending thereby to make a gain for
1
R v Ghosh [1982] QB 1053 (CA); R v Clowes (No 2) [1994] 2 All ER 316 (CA) 330–331.
2
Barlowe Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006]
1 WLR 1476; Starglade Properties Ltd v Nash [2010] EWCA Civ 1314, [2011] P & CR DG 17.
3
Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC) 389; Aerostar Maintenance
International Ltd v Wilson [2010] EWHC 2032 (Ch) [184].
4
Fraud Act s 2.
5
Ibid s 3.
6
Ibid s 4. In such a situation offences may also be committed under Bribery Acts in various
jurisdictions.
328
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Fraud and restitution 329
himself or another or to cause loss to another or to expose another to a risk of loss.

Abusive conduct can consist of an act or an omission.
Persons falling within the second and third situations will commonly be persons who
occupy a position in which they owe, in respect of all or only a part of their activities,
proscriptive fiduciary duties of loyalty to another, in other words the duty not (unless
authorised) to profit from their position nor to act (except against one’s own interest)
where there is a conflict of interest between self-interest and the altruistic obligation to
another. Such fiduciary duties can be owed, inter alia, by company promoters,7
directors,8 shadow directors,9 receivers,10 liquidators,11 partners,12 joint venturers,13
lawyers,14 investment managers or advisers,15 agents,16 and employees.17 It must
always be noted, however, that a close examination is required to discover what specific
parts of a defendant’s activities were, or were not, subject to proscriptive fiduciary
duties18 where civil liability involving breach of a fiduciary duty is concerned. As
Millett LJ has pointed out, “the existence of a fiduciary relationship does not mean that
every duty owed to a beneficiary is a fiduciary duty”: a duty of care is not a fiduciary
duty.19
THE EXTENSIVE RANGE OF POSSIBLE LIABILITIES

A defendant liable in the above fraudulent situations may be subject to a personal
monetary remedy or a proprietary remedy or a mixture thereof. A personal monetary
remedy may be a liability to disgorge the defendant’s gains to the claimant
(a disgorgement remedy) or to provide an amount of money to the claimant to restore
him to the position in which he would have been had the defendant not acted in an
unauthorised fashion but had duly performed his stewardship duties in respect of
property he controlled (a substitutive performance remedy) or to provide the claimant
with reparation for his losses (a compensation remedy). A proprietary remedy is a
7
Jubilee Cotton Mills Ltd v Lewis [1924] AC 958.
8
Regal (Hastings) Ltd v Gulliver [1967] 2AC 134n.
9
Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771.
10
Nugent v Nugent [1908] 1 Ch 546.
11
Tito v Waddell (No 2) [1977] 3 All ER 129 (Ch) 229–230.
12
Chan v Zachariah (1984) 154 CLR 178; United Dominions Corporation Ltd v Brian Pty
Ltd (1985) 157 CLR 1.
13
Abou Rahmah v Abacha [2005] EWHC 2662 (QB)[2006] 1 Lloyd’s Rep 484 [35]–[39]
accepted on appeal [2006] EWCA Civ 1492, [2007] 1 Lloyd’s Rep 115 [62]; contrast no
fiduciary relationship in LAC Minerals Ltd v International Corona Resources Ltd (1989) 61
DLR (4th) 14.
14
Nocton v Lord Ashburton [1914] AC 932.
15
Hodgkinson v Simms (1994)] 117 DLR (4th) 151.
16
Kelly v Cooper [1993] AC 305.
17
Caterpillar Logistic Services Ltd v Huesca de Crean [2012] EWCA Civ 156, [2012] ICR
981(manager); Brinks Ltd v Abu-Saleh (No 3) [1996] CLC 133 (security guard).
18
Bristol & West BS v Mothew [1998] Ch 1; Caterpillar Logistic Services (UK) Ltd v
Huesca de Crean [2012] EWCA Civ 156, [2012] ICR 981 [69]–[71].
19
Bristol & West BS v Mothew [1998] 1 Ch 1 (CA) 17.
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liability to restore to the claimant the claimant’s property or the traceable product of
that property if replaced from time to time for example by profitable sales and
purchases with the proceeds of sale. If the traced product is worth less than the value of
the monetary claim the claimant can resort to a charge over the property as security for
his claim.
The weakness of a personal remedy is that it depends upon the defendant being
solvent enough to satisfy the money judgment. The strength of a proprietary remedy is
that the claimant recovers his property, so that no recourse can be had to it by the
defendant’s creditors if the defendant is insolvent, and no limitation periods apply to
oust claims against persons who had accepted the role of trustee or fiduciary in respect
of the relevant property.20 Pending the hearing of a claim for a proprietary remedy a
claimant will normally be able to obtain an interim freezing order preserving the
relevant property for the claimant if his claim is successful. No interim freezing order
can be made against a defendant’s property up to the value of a personal claim unless
there is a good arguable case that there is a real risk of any judgment against the
defendant going unsatisfied by his dissipating his assets or spiriting them out of the
jurisdiction21 and, even then, the preserved assets are available to satisfy all creditors’
claims, not just the claimant’s.22
Where rescission of a transfer of property is available, for example due to a
fraudulent representation, a claimant can recover the property unless the intervention of
third party rights has made this impossible. In such eventuality compensation can be
recovered equivalent to the value of the property that ought to have been restored to the
claimant.23
PERSONAL MONETARY LIABILITY
Fraudulent Gains
Where a defendant in breach of his proscriptive fiduciary duties owed to the claimant
has made gains for himself he must disgorge all his gains to the claimant even if the
gains were not made at the expense of the claimant and if the claimant would not have
been able to acquire the gains himself.24 A proprietary liability may also exist in some
circumstances.
20
Williams v Central Bank of Nigeria [2014] UKSC 10.
21
Mareva Compania Naviera SA v International Bulk Carriers SA[1975] 2 Lloyd’s Rep 509
(CA).
22
Iraqi Ministry of Defence v Arcepey Shipping SA [1981] QB 65 (CA) 72; Re Ling (1996)
142 ALR 87, 92–93.
23
D O’Sullivan, S Elliott & R Zakrzewski, The Law of Rescission, OUP 2008, 8.07–8.08.
24
Industrial Development Consultants v Cooley [1972] 1 WLR 443.
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Fraudulent Carrying Out of Stewardship Duties in Respect of Property
Where a defendant has been fraudulent in carrying out “trustee-like stewardship

duties”25 in respect of property owned or controlled by him by virtue of his fiduciary
position (e.g. as a trustee, executor, director, company’s liquidator, company’s receiver,
partner or discretionary portfolio manager) an extensive substitutive performance
remedy can be obtained against him.26 Where he has disposed of the relevant property
in an unauthorised fraudulent manner, for example gave it to his son or sold it to buy
some company shares for himself, he will be treated as if he had duly performed his
duty in authorised fashion. His actual disposition will be ignored (or falsified). For his
accounts to be in proper order they need to have an entry showing the property he
unauthorisedly disposed of or its value. Thus, by way of performance of his obligations
he must specifically acquire for the claimant(s) the missing property or its current
fungible equivalent or, as a substitute, provide its current monetary value. Exception-
ally, to prevent him profiting from his breach, if the value of the missing property was
higher when he disposed of it he must provide that higher amount. In such fashion the
value received by the fraudster is restored to the claimant.
This claim is not like a claim for damages which is based upon asserting a wrong
that caused loss. The claim is analogous to a claim for specific performance by way of
a monetary substitutive performance. Thus the focus is simply on what is required to
restore the fund’s value to what it would have been if the fiduciary had not acted in
unauthorised fashion but had duly performed his duty in respect of the fund. Thus
considerations of causation involving issues as to foreseeability, novus actus inter-
veniens and contributory fault are irrelevant.27
Fraudulent Breaches of Fiduciary Duty: Reparation for Loss
These considerations, however, will be relevant where the fraudulent fiduciary has not
disposed in unauthorised fashion of property subject to trustee-like stewardship duties
but has acted in breach of fiduciary duty where there was a conflict of interest so as
allegedly to have caused loss for which a compensatory remedy is available. For
example he could have caused loss by failing to disclose a matter he was under a duty
to disclose or by deliberately providing misleading information.
Unfortunately, the courts have confused the distinction between substitutive perform-
ance claims and reparation for loss claims.28 The House of Lords in Target Holdings
Ltd v Redferns29 muddied the waters when dealing with a substitutive performance
claim in a fashion appropriate to a reparation claim. The claim involved a conveyancing
25
Bairstow v Queen’s Moat House plc [2001] EWCA Civ 712, [2001] 2 BCLC 531 [53]
(Robert Walker LJ).
26
For details see D Hayton, P Matthews & C Mitchell, Underhill and Hayton: Law relating
to Trusts and Trustees, 18th ed LexisNexis Butterworths 2010, art 87.
27
Re Dawson [1966] 2 NSWLR 211; Alexander v Perpetual Trustees (WA) Ltd (2004) CLR
109 [44], [104].
28
See the clear analysis of C Mitchell, ‘Compensation for Breach of Fiduciary Duty’ [2013]
CLP 1.
29
[1996] AC 421.
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fraud and was for a summary judgment for £1.5 million mortgage money that had been
held by the defendant solicitors’ firm on a bare commercial trust to pay it over in return
for receiving the required mortgage documents. The defendant paid the money over
prematurely, not receiving the required security documents till three weeks later and so
was alleged to be strictly liable for the money. The claim could have been dismissed as
misconceived on the basis that the defendant had actually performed its primary duty to
acquire the relevant conveyancing documents in return for the mortgage money, albeit
three weeks late.30 Thus there had to be a trial to see if the delay had caused loss
requiring reparation to be made to the claimant.
Instead, their Lordships in dealing with the substitutive performance claim correctly
cited31 substitutive performance cases as authority for rules of remoteness and
causation not applying, but then cited reparation cases32 for there having “to be some
causal connection between the breach of trust and the loss to the trust estate for which
compensation is recoverable, viz the fact that the loss would not have occurred but for
the breach”.33 Thus losses can only be made good if on a common sense view of
causation they were caused by the breach.34
The “incoherent”35 position is thus reached under Target that rules of remoteness and
causation are not to be applied except that compensation can only be awarded for
losses caused by a breach of trust or fiduciary duty. Judges have had to wrestle with
this where substitutive performance claims have been brought for the reconstitution of
trust funds.36
Where, however, a claim for a breach of fiduciary duty is a reparation claim for loss
(e.g. caused by non-disclosure of relevant information or by provision of deliberately
misleading information) Target is inapplicable37 and it is necessary for the claimant to
prove that the loss was caused by the breach of fiduciary duty and that the loss was not
too remote to be recoverable, a fiduciary escaping liability if he can show that the
claimant would have acted in the same way even if the fiduciary had not broken his
duty.38 Where the absence of evidence is due to the fiduciary’s breach of duty the court
can make every assumption against him and be robust in doing rough and ready justice
without justifying its award with precision.39
30
See Lord Millett, ‘Equity’s Place in the Law of Commerce’(1998) 114 LQR 214,
225–227.
31
[1996] AC 421 (HL) at 434: Caffrey v Darby (1801) 6 Ves Jun 488, Clough v Bond (1838)
3 My & Cr 490.
32
Ibid 434: Bartlett v Barclays Bank Trust Co (No 2) [1980] Ch 515, Nestle v National
Westminster Bank [1993] 1 WLR 1260.
33
Ibid 434.
34
Ibid 439, citing Canson Enterprises Ltd v Boughton [1991] 3 SCR 534 (Sup Ct of
Canada).
35
C Mitchell supra at 20, fn 28.
36
See AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58.
37
As held in Nationwide BS v Balmer Radmore (No 3) [1999] PNLR 606 (Ch) 669–670.
38
Swindle v Harrison [1997] 4 All ER 705 (CA); Amaltal Corp Ltd v Maruha Corp [2007]
3 NZLR 192 [30]; Hodgkinson v Simms [1994] 3 SCR 377 [76]; Rigg v Sheridan [2008]
NSWCA 79 [55]–[57].
39
Libertarian Investments Ltd v Hall [2013] HKCFA 94 [174].
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Third Parties Dishonestly Assisting in Breach of Trust or Fiduciary Duty
Where a third party dishonestly assists in, or instigates,40 any innocent or fraudulent41
breach of trust or fiduciary duty,42 whether or not he actually received any property
owned or controlled by a trustee or fiduciary, he is personally jointly and severally
liable43 for losses to the same extent as the trustee or fiduciary in respect of the breach
that he assisted or instigated. He need not be aware of the precise details as to the
relevant breach so long as he is aware that he is involved in some sort of wrongdoing
behaviour, so that he is accepting the risk of being called upon, whether by way of a
substitutive performance claim or a reparation for loss claim, to compensate the
claimant for losses flowing from whatever primary breach of trust or fiduciary duty he
assisted or instigated.44 Once the trustee or fiduciary has been found liable in respect of
the claimant’s loss, for the third party to be liable for his assistance it suffices merely to
show that his actions made commission of the breach easier than it would otherwise
have been.45 He cannot escape liability by saying that the claimant’s loss would have
occurred anyway because the trustee or fiduciary would have committed the breach
with someone else’s assistance if he had not assisted in the breach.
Acting dishonestly means simply not acting as an honest person would act, which is
an objective standard so that a morally obtuse person cannot escape liability.46 The
defendant’s conduct, however, is assessed in the light of what he actually knew at the
relevant time, as distinct from what he ought to have known if he had been a normal
reasonable person.47 In the case of a company defendant the requisite dishonesty can be
that of a director or person who is the company’s directing mind and will.48
40
Eaves v Hickson (1861) 30 Beav 136 (dishonest instigator who misled innocent trustees).
41
Royal Brunei Airlines Sdn Bhn v Tan [1995] 2 AC 378 (PC) rejecting liability being
restricted to dishonest or fraudulent breaches, the relevant dishonesty being that of the third
party assister or instigator. So far in Australia, dishonesty is still needed on the part of the trustee
or fiduciary: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, 230 CLR 89
[161]–[165]; Westpac Banking Corporation v The Bell Corporation [2012] WASCA 157
[1111].[2104], [2122], [2429].
42
Usually the breach will relate to property but, to preserve the integrity of fiduciary
relations, the breach need not relate to misapplications of property: Fiona Trust and Holding
Corp v Privalov [2010] EWHC 3199 (Comm) (61); Novoship (UK) Ltd v Nikitin [2014] EWCA
Civ [93]. A person may dishonestly assist a director to break his duty to avoid conflicts of
interest under s 175 Companies Act 2006 which extend to the exploitation of any property,
information or opportunity: Goldtrail Travel Ltd v Aydin [2014] EWHC 1587 (Ch).
43
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2007] WTLR 835 [1600].
44
Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1
WLR 1476 [28]; Otkritie International Investment Management Ltd v Urumov [2014] EWHC
191 (Comm) [77].
45
Casio Computer Co v Sayo [2001] EWCA Civ 661, [2001] All ER (D) 147(Apr) (15).
46
Barlow Clowes (supra); Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22,
[2007] ALJR 1107 [178]; Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89,
[2011] 3 NZLR 751.
47
Ibid.
48
Crown Dilmum v Sutton [2004] EWHC 52 (Ch).
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Where a person makes a profit for himself or his wholly owned alter ego company
from his dishonest assistance he must disgorge such profit, but it does not appear that
he is automatically jointly and severally liable with the defendant fiduciary whom he
assisted to make a profit,49 unlike the position for losses caused by the latter.
Third Parties Dishonestly or Unconscionably Dealing with Property Received by

Them Subject to a Trust or Fiduciary Duty
Where a third party receives for himself property subject to a trust, including a
constructive trust arising from a breach of fiduciary duty, he takes it subject to that trust
as a matter of priority of property interests unless he was a purchaser of the legal
interest without notice of the trust.50 If not such a purchaser, once he is aware of the
trust he holds the property and any traceable substitute (e.g. acquired by a purchase
with its proceeds of sale) under a constructive trust to restore the property to the
rightful owner and not use it for his own benefit.51 If, however, after becoming aware of
the position, he has not restored the property to its rightful owner but has retained it for
himself or disposed of it, he becomes strictly liable to a personal substitutive
performance remedy for his failure to carry out his stewardship duties as discussed
above,52 though, instead, a claimant may bring a proprietary claim to recover the
property or its traceable substitute.
The third party becomes liable once the state of his knowledge makes his actions
dishonest or unconscionable53 if he does not restore the property to its rightful owner.
Knowledge extends beyond actual knowledge to “blind-eye” knowledge54 of a person,
subjectively conscious of serious doubts as to his entitlement to deal with the relevant
property, but who wilfully shuts his eyes to the obvious or who wilfully or recklessly
fails to make the inquiries that an honest reasonable person would make.55 A person
will still be treated as having blind-eye knowledge where his own moral obtuseness
prevented his having serious doubts as to his entitlement.56
49
Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032[202]; Glandon v
Tilmunda [2008] NSWSC 218 [108]; Novoship (UK) Ltd v Nikitin [2014] EWCA Civ 908
[107-108].
50
Gray v Smith [2013] EWHC 4136 (Comm) [132]–[138]; Grimaldi v Chameleon Mining
NL (No 2) [2012] FCAFC 6 [251]; Crédit Agricicole Corporation v Papadimitriou [2015] UKPC
13.
51
Arthur v Att-Gen Turks & Caicos [2012] UKPC 30 [37]; Giumelli v Giumelli (1999) 196
CLR 101 [3]–[5].
52
Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313 [74].
53
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437.
54
Vestergaard Frandsen v Bestnet Europe Ltd [2013] UKSC 31, [2013] 1 WLR 1556 [26].
55
Transgressing ordinary standards of honest behaviour is dishonest: Starglade Properties
Ltd v Nash [2010] EWCA Civ 1314,[2011] P & CR DG 17 [31]–[32]; Otkritie International
Investment Management Ltd v Urumov [2014] EWHC 191 (Comm) [75]–[78].
56
Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1
WLR 1476; Grimaldi v Chameleon Minong N L (No 2) [2012] FCAFC 6 [267]–[268].
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Unjust Enrichment of Third Parties Who Received Property Subject to a Trust
As just seen, these third parties are liable if at fault in dishonestly or unconscionably
dealing with relevant property. Can, however, a defendant, who has been unjustly
enriched at the expense of the claimant’s equitable rights in respect of property, be
strictly liable without proof of fault under principles of unjust enrichment (if the
defence of change of position is not available to diminish or negate the enrichment)?
“No” is the current orthodox57 answer in England, Australia and Canada,58 but “Yes” in
Jersey.59 Nevertheless, due to defendant’s counsel accepting that an unjust enrichment
claim can lie against recipients of trust property, the English Court of Appeal60 has
assumed this to be right so as to hold the defendant liable on such basis, though it so
happens that there was fault on his part since he was also held liable in equity on the
conventional ground of “knowing receipt” for his unconscionable behaviour. In any
event, the beliefs or assumptions of Parliament or judges cannot make the law.61
PROPRIETARY LIABILITY
Need for a Proprietary or Fiduciary Base to Justify a Proprietary Remedy
A claimant needs to have had legal title to property or equitable rights under a trust
affecting property (including a constructive trust imposed upon a defendant in breach of
fiduciary duty) before he can seek a proprietary remedy enabling him to recover his
property or its surviving value in the traceable substituted product of that property.
In a case where legal title to a claimant’s land, money or a shareholding in a
company has been obtained by fraud and subsequently he exercises his right to rescind
the transaction, such property is held on trust for him from the moment he elected to
rescind the transaction.62 Prior to rescission the transaction is valid and so enables the
fraudster to pass on the legal title to a purchaser without notice of the claimant’s right
to rescind, which ranks as a “mere equity”, so that a purchaser with notice or a donee
receiving the property would take subject to the claimant’s right.
57
See C Mitchell, P Mitchell & S Watterson, Goff & Jones The Law of Unjust Enrichment,
8th ed Sweet & Maxwell, 8.50–8.68 favouring strict liability.
58
Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437,
466; Farah Constructions Pty v Say-Dee Pty Ltd [2007] HCA 22, 230 CLR 89 [148]–[158];
Australian Financial Services and Leasing Ltd v Hills Industries Ltd [2014] HCA 14 [1], [65],
[78] (fault based liability not part of unjust enrichment); Citadel General Assurance Co v Lloyds
Bank Canada [1997] 3 SCR 805 (liability is fault based yet regarded as part of unjust
enrichment). Also see Crédit Agricole Corporation v Papadimitriou [2015] UKPC 13.
59
Re Esteem Settlement [2002] JLR 53 [148]–[161].
60
Relfo Ltd v Varsani [2014] EWCA Civ 360.
61
National Enterprises Ltd v Racal Communications Ltd [1975] Ch 397, 406 (Russell LJ);
Baker v The Queen [1975] AC 774, 788 (Lord Diplock).
62
Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281 [122], [127].
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If legal title to chattels has been transferred pursuant to a fraud it automatically

re-vests in the transferor at the time he elects to rescind.63 Legal rights are rights in rem
that bind everyone until barred by expiry of time under a Limitation Act. A claimant
who is a beneficiary in respect of property subject to a trust has a continuing beneficial
interest in such property and any traceable products of its value: his interest binds
everyone who receives the property or its traceable products except a bona fide
purchaser for value without notice of the interest.64
Very recently, the Supreme Court65 resolved the uncertainties66 as to when receipt of
a secret commission or bribe led beyond a personal liability to account for its value to
a proprietary liability to account in specie for what was actually received and its
traceable substitutes. All unauthorised benefits, including bribes and secret commis-
sions, received by a trustee, director or an agent or other person in breach of fiduciary
duty are held on constructive trust for the trust fund beneficiaries or the company or the
principal, as the case may be. Equity does not permit such a fiduciary to rely on his
own wrong to justify retaining such benefits. He must accept that as he received the
benefits as a result of his fiduciary position he acquired them for those to whom he
owed such fiduciary obligation as if he had been duly authorised by them to receive the
benefits.
No Need for Direct Substitutions, Only Causally Related Transactional Links
A chronological sequence of successive substitutions is ideal support for tracing assets

against which a proprietary claim can succeed. However, money held on trust for C
wrongfully transferred into an account with the X Bank can be traced into a receipt by
D from an account with the Y Bank before the Y Bank had received money from the X
Bank, provided that the Y Bank account holder acted on the basis that he would be
receiving reimbursement from the X Bank account.67
Proprietary Remedies
If the claimant’s traced property has not been mixed with others’ property he will claim
ownership of the traced property unless it has lost value. He will then make a monetary
claim and have an equitable charge over the traced property as security for such claim.
Where the claimant’s property has been mixed with others’ property he will claim a
proportionate share of the traced property unless this represents a loss in value of his
input in which case he will have an equitable charge to secure part of his monetary
claim. In tracing money of the claimant mixed with the fiduciary’s money by the
fiduciary and determining what money was dissipated so as to be untraceable and what
money was spent on available assets or remains in a bank account, the claimant can
63
Car & Universal Finance Ltd v Caldwell [1965] 1QB 525 (CA).
64
Foskett v McKeown [2001] 1 AC 102, 127 (HL).
65
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45.
66
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347,
[2012] Ch 453; FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17, [2014] Ch 1.
67
Relfo Ltd v Varsani [2014] EWCA Civ 360, Federal Republic of Brazil and Sao Paulo v
Durant International Corp [2013] Jersey CA 071.
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pick and choose what he wants to claim, evidential problems caused by the wrongdoer
being resolved against him.68
LIMITATION DEFENCES
No limitation period applies to persons who had accepted office as a trustee or
fiduciary before acting in breach of duty so as to expose themselves to a personal or
proprietary remedy. Where, however, a third party becomes liable to be treated
constructively as a trustee because of a transaction with a trustee or fiduciary acting in
breach of duty he can claim the benefit of a limitation period of six years from the date
of such transaction.69 Nevertheless, if the claimant’s action is based upon the
defendant’s fraud, or facts relevant to the claimant’s right of action have been
deliberately concealed by the defendant, the six years do not begin to run until the
claimant has discovered the fraud or concealment or could with reasonable diligence
have discovered it.70
68
Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281[144]. Further see Underhill
and Hayton: Law of Trusts and Trustees cited at fn 26 art 90.
69
English Limitation Act 1980 s 21 mirrored in many common law jurisdictions; Williams v
Central Bank of Nigeria [2014] UKSC 10.
70
English Limitation Act s 32.
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28. Theory of fraud in French law: fraus omnia

corrumpit – old law, new opportunities?
Catherine Pédamon
The Latin adage fraus omnia corrumpit encapsulates what (we think) we know about
fraud – its distinctive feature lies in its effects which per se must be negated as “fraud
vitiates everything”.1 The reprehensible nature of fraud justifies the drastic remedy of
unenforceability, or even voidability, of the fraudulent contract or act, thus confirming
the moral precept that underlies law (or right) that is to discourage and condemn any
wrongdoing and provide redress.2
Despite the reprehensible nature of fraud, very few countries have defined a general
statutory theory of fraud. French and English law are no exception. In these two legal
systems, among others, the notion of fraud has not been defined and does not trigger a
single cause of action known as civil or commercial fraud.3 However, in the absence of
a statutory definition, courts have used the adage fraus omnia corrumpit in order to
enjoin parties involved in legal relationships to act honestly, but what is the legal nature
of this principle in French law? More specifically, what is the concept of fraud that this
principle supports? This is what will be discussed in this chapter.
The French Civil Code does provide for legal actions in specific and limited cases of
fraud and attaches to them a variety of effects.4 Outside these specific cases, courts
sanction fraudulent/deceitful acts using a plethora of legal doctrines, such as illicit
cause/purpose (cause illégale),5 liability in tort (responsabilité civile), abuse of rights
(abus de droit), deceit (dol or dolus malus), bad faith and mistake, in parallel or by analogy.
1
Another Latin maxim is often associated with this one – nemo auditor propriam
turpitudinem allegans (“no one can be heard to invoke his own turpitude”).
2
“(Law as) ‘via recta’ (Right, Recht, Diritto); … le droit est redresseur de torts et n’admet
que l’on puisse frustrer son semblable …” in Henri Roland and Laurent Boyer, Adages du droit
francais, Litec, 3rd Ed., 1992, p. 288.
3
R. Fentem and L. Walker, Civil Fraud – Back to Basics, Guildhall Chambers, pp. 1–16,
No 4 (Nov 2012). As cited by the authors, according to Lord MacNaghten in Reddaway v
Banham ([1896] AC 199 at 221): “[F]raud is infinite in variety. Sometimes it is audacious and
unblushing; sometimes it pays a sort of homage to virtue, and then it is modest and retiring; it
would be honesty itself if it could only afford it.”
4
These actions include cases of fraud of third parties’ rights (action paulienne) (article
1167 and article 1397 al 9 C. Civ.), fraud in inheritance (article 882 C. Civ.), in the distribution
of assets (article 1447 al 2 C. Civ.), the management of common property (article 1421 al 1) and
disguised donations (article 911 C. Civ.). See, for an extremely interesting analysis of the
Paulian action in French law by Laura Sautonie-Laguionie, La fraude paulienne, LGDJ, Vol.
500, 2008.
5
Interestingly the text that the French government hopes to pass by way of ordonnance
reforming the French law of contract removes the concept of “cause”. This text is available at
http://www.justice.gouv.fr/publication/j21_projet_ord_reforme_contrats_2015.pdf.
338
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Theory of fraud in French law 339
This variety of legal doctrines adds to the confusion that surrounds the notion of
fraud. Fraud is often understood as a fault (faute) that might trigger a claim of civil
liability; for instance where a party has committed a fraud against third party rights.6
However, whereas the remedies available in a case of liability in tort are damages,7
annulment of the fraudulent act might be more appropriate for an evasion of the law.
Fraud also differs from abuse of rights as the latter concept does not always require a
fraudulent intention, which is an element of fraud.8 In addition, fraud differs from dol
(dolus).9 Dol is, together with mistake and duress, one of the three defects that vitiate
consent, which is a condition for a contract to be validly binding, and are therefore
grounds for avoidance of the contract.10 Although dol and fraud are two different legal
concepts, they are often used interchangeably. For instance, dol is often translated as
fraud. Whereas fraud is inherently dishonest, dol is a deceit that affects the consent of
one party in order to influence him to enter into a legal relationship. The theory of
mistake (erreur) is also used in cases of fraud,11 although a mistake might have been
committed without fraud, which does not cause the contract to be voided, such as a
mistake as to the value of the item brought or sold.
By definition, fraud (fraus or fraudis in Latin) differs from bad faith (mauvaise foi)
as the latter is broadly a conduct that is disloyal with no specific intention of
defrauding someone.12 Fraud is an aggravated manifestation of bad faith in the sense
that it is underpinned by the intention of deceiving or misleading a party to cause them
to lose a benefit accruing from their rights or to circumvent the implementation of a
legal rule to achieve an illegal end.13 Sensu stricto, fraud consists in enforcing one legal
6
Plaintiffs tend to file a claim of civil liability rather than a Paulian action, as noticed by
Laura Sautonie-Laguionie, La fraude paulienne, LGDJ, Vol. 500, 2008, p. 4.
7
Article 1147 of the French Civil Code.
8
See supra n. 2, Adages du droit francais, p. 290; Ph. Malaurie, L. Aynès and Ph.
Stoffel-Munck, Les obligations, 6th Ed., LGDJ, 2013, para. 414. In German law, see Larenz, AT
para. 20 and in English law, see the definition of fraud in Derry v Peek, 14 App. Cas. 337, HL,
at 374 (1889).
9
Article 1116 of the French Civil Code defines dol as the artifices (manoeuvres) of one
party whose aim is to induce the other party to enter into a contract (on disadvantageous terms)
as it is obvious that, without those manoeuvres, the other party would not have agreed upon the
terms. It provides that dol is a ground of avoidance/nullity of the agreement if it is proven. It will
not be presumed.
10
Article 1109 of the French Civil Code provides that there is no valid consent if the
consent was given as the result of mistake, extorted by violence (duress) or the result of deceit
(dol). Dol is also referred to in articles 1150 and 1151 of the French Civil Code with respect to
the damages available for non-performance. English law does not have an overarching structure
linking the equivalent legal instruments of mistake, duress and misrepresentation, but in practice
the courts frequently treat them as parallel doctrines, which are applied by analogy.
11
A mistake about a central feature of the contract may mean that there is no contract at all
since the parties never reached an agreement or the agreement is void for impossibility.
12
See supra n. 2, Adages du droit francais, p. 290.
13
On the comparison with fraud, which Black’s Law Dictionary equates to “bad faith”,
there are two important distinctions: fraud does include bad faith but bad faith does not
necessarily include fraud and “people go to jail for fraud. They don’t go to jail for bad faith” in
Rocking Chair Plaza v Brampton, 1988 29 CPC 2d 82, Duhaime online Legal Dictionary. See
also J. Ghestin and G. Goubeaux, Traité de droit civil, Introduction générale, LGDJ, 3rd Ed.,
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rule to circumvent the enforcement of another one.14 Courts refer to this notion of fraud
by providing that fraus omnia corrumpit, so that the effects of the fraudulently applied
rule will be neutralised even though its conditions of application are met.
There is some uncertainty as to the genuine Roman origin of this adage, which may
explain its relatively late appearance in French law. It is mentioned for the first time in
decisions rendered by the Cour de Cassation (French Supreme Court for civil matters)
in 1817 and 1821 with respect to fraud committed against the rights of a third party
(fraus alterius),15 then in matters of land registration in 185816 and transfer of debt in
1874.17 Since then, the Cour de Cassation has consecrated the unenforceability, and
even the voidability, of the fraudulent act, on the ground that fraus omnia corrumpit.18
More recently, the Court of Appeal of Grenoble stated very clearly in a well-known
case that “the notion of fraud is a legal principle of general application in contractual
matters …”.19
Over time, fraud has remained a fluid concept that applies to a large variety of fields
and takes all kinds of forms.20 In the context of high profile scandals today across all
industry sectors, particularly in finance,21 fraus omnia corrumpit has never been so
important as a means of ensuring integrity in the marketplace. Some authors have
attempted to define a general theory of fraud and clarify the notion of fraud;22 others
have drawn a distinction based on the sanctions attaching to the fraudulent act, calling
for a theory of special frauds;23 and others have distinguished between the different
types of fraud based on the way the legal rule has been circumvented: either by
dodging the rule or neutralising it or misapplying it.24 This chapter highlights the
tremendous potential that the flexible principle fraus omnia corrumpit has to adapt to
the fight against evolving economic fraud.
1990, pp. 726–758. See also the definition of Fraud in article 4:107 of the Principles of
European Contract Law.
14
Ghestin and Goubeaux, ibid, p. 730.
15
Req., 3 July 1817, S. 1818.1.338; Req., 6 Feb. 1821, S. 1821.1.420.
16
Req., 8 Dec. 1858, DP 1859 I 184 with respect to the statute whose effects were
paralysed – 23 Mar. 1855 Act on land registration.
17
Req., 17 Feb. 1874, S. 1875 I 400.
18
Jean-Pierre Gridel, Le role de la Cour de Cassation française dans l’élaboration et la
consécration des principes généraux du droit privé, available at http://www.cedroma.usj.edu.lb/
pdf/dencom/gridel.pdf, p. 16.
19
Grenoble, 3 June 1988, Ste Barilla v Rivoire et Carret Lustucru et autres, Sem Jur., Ed.
E., No 15471, note B. Oppetit.
20
Tax fraud, electoral fraud, fraud in conflict of laws, criminal fraud, fraud against
consumers by professionals, electronic fraud and economic fraud such as the recent scandal of
sale of horsemeat in ready-made meals supposedly prepared with beef, and so on.
21
Manipulation of the London Interbank Offered Rate and the Foreign Exchange rate,
among the current high profile scandals.
22
José Vidal, Essai d’une théorie générale de la fraude en droit français, Thèse de doctorat,
Toulouse (1957).
23
Dani Rafic Itani, La théorie des fraudes spéciales, Thèse de doctorat, Droit privé (Paris
II) (2009).
24
Frédéric Dourmaux, La notion de fraude en droit privé francais, Thèse de doctorat, Droit
privé (Paris I) (2008).
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It uses traditional legal research methodology, analysing case law, statutory interpret-
ation and legal literature, to highlight the tension between the traditional classification
of fraud based on the distinction between fraud against third party rights and fraudulent
evasion of the law, and a unitary notion of fraud based on the legal principle of general
application, fraus omnia corrumpit. These two approaches to fraud will be explored in
the following two sections. It will conclude that fraus omnia corrumpit has great
potential as a legal instrument that the courts can avail themselves of in the battle
against fraud.
I. THE TRADITIONAL DUALIST CLASSIFICATION OF FRAUD

This traditional classification is based on the two main expressions of fraud in French
civil law: the first is the fraud against third party rights (fraude aux droits des tiers or
fraud alterius in Latin), where the fraudster infringes the rights or interests of third
parties, and the second fraudulent evasion of the law (fraude à la loi), where the
fraudulent party evades the application of a law.
1. Fraud against Third Party Rights (Fraude aux Droits des Tiers)
In a decision in 1821, the Chambre des requêtes25 provided that a party who had
intentionally wrongly described the property in a mortgage could not benefit from the
nullity that would derive from it given that “dol and fraud are an exception to all the
rules” (otherwise expressed by the adage fraus omnia corrumpit). This general
principle has since targeted three types of fraud: first, fraud against creditors’ rights
(fraude paulienne) that relies on article 1167 of the French Civil Code, second, fraud
committed in the transfer of immovable rights and, third, fraud committed in violation
of contractual provisions.
As a point of comparison, it is worth noting that the UNIDROIT Principles of
International Commercial Contracts26 and the Principles of European Contract Law27
are not overly preoccupied with third party rights.28 This concern falls within the scope
of domestic law. A majority of legal systems protects third party rights and provides for
a legal action in the event of fraud against creditors’ rights. Such statutory provisions
may be found in the Netherlands,29 Spain,30 Belgium31 and France.32 When it is not
25
A previous chamber of the Cour de Cassation that does not exist anymore since 1947.
26
Unidroit Principles of International Commercial Contracts, available at http://www.
unidroit.org/english/principles/contracts/principles2010/integralversionprinciples2010-e.pdf.
27
The Principles of European Contract Law 2002 (Parts I, II and III) available at
http://www.jus.uio.no/lm/eu.contract.principles.parts.1.to.3.2002.
28
For a general discussion on European contract law, see B. Fauvarque-Cosson and D.
Mazeaud, European Contract Law, Materials for a Common Frame of Reference, European Law
Publishers, 2008, Collection droit privé comparé et européen, Vols. 6 and 7.
29
Article 3:45 to 3:48 of the Dutch Civil Code.
30
Article 1211 of the Civil Code and article 1290 and following.
31
Article 1167 of the Belgian Civil Code.
32
Article 1167 of the French Civil Code.
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integrated in the provisions concerning contract law, this action is usually found in
those dealing with bankruptcy. This is the case in English law.33
(a) Fraud against creditors’ rights (fraude paulienne)

This fraud relies on a statutory provision, article 1167 of the French Civil Code, which
provides that “(creditors) may also, on their own behalf, sue their debtor for fraudulent
transactions infringing upon their rights”.34 This action, also called Paulian action
(from the Roman law, actio paulina), aims to render the act by which the debtor has
impaired the right of the creditors over his assets unenforceable. It covers the case
when the debtor becomes insolvent to avoid paying his creditor further to the
fraudulent transaction. In these circumstances, the creditor may bring a claim to have
the transfer of assets set aside on the basis that the transfer was entered into at an
undervalue with the intention, or the knowledge, that it would defraud the creditor.
Article 1167 of the French Civil Code remains silent as to the conditions and effects
of the Paulian action, which courts and scholarly writing have attempted to clarify.
There is an abundance of case law,35 but it is generally accepted that this action
requires that (1) the debtor commits an act that is prejudicial to the creditor’s rights
over his assets, (2) the creditor holds a certain amount and due debt, and (3) has
suffered a fraud.36 The onus is on the creditor to demonstrate first that he was a creditor
at the time the transfer of assets was made and second that the transferor was insolvent
(or became insolvent) when the transfer was made. These conditions will now be
considered.
(i) Loss suffered by the creditor A creditor may claim to have suffered a loss if the
act in question has depleted the debtor’s pool of assets. This act may be an act of
impoverishment by which the debtor gives up control over one of its assets without
consideration or without adequate consideration.37 The ‘depletion’ element is met so
long as the effect of the act is to reduce the actual chance that the creditor has of being
paid.38 It may also be an act by which the debtor denies enrichment.
33
Insolvency Act 1986, Sect. No 423–425.
34
Article 1167 al 1 of the French Civil Code – les créanciers “peuvent aussi, en leur nom
personnel, attaquer les actes faits par leur débiteur en fraude de leurs droits”.
35
See for example Req., 28 Aug. 1940, S. 1940.1.103; Civ. 1, 10 Dec. 1974, S. 1975.777;
Civ. 1, 15 Oct. 1980, Bull. Civ. I, No 257; Civ. 3, 6 Oct. 2004, Bull. Civ. III No 163; Civ. 3, 12
Oct. 2005, Bull. Civ. III No 189.
36
For a general introduction on the “fraude paulienne”, See J. Francois, Les obligations –
Régime Général, 3rd Ed, Economica, 2013, pp. 329–361. Also F. Terré, Ph. Simler and Y.
Lequette, Les obligations, 11th Ed., 2013.
37
Courts have considered a large variety of acts – see for the constitution of guarantees,
Paris, 27 Jan. 2005, JCP 2005. IV. 2032; Civ. 3, 15 Nov. 1977, Bull. Civ. III, No 385; also Com.,
23 May 2000, not pub. Bull., No 96-18055, RJDA, 2000, No 1038; Com., 1 Mar. 1994, Bull.
Civ. IV, No 81, D. 1994. Somm. 215, obs. E. Fortis, Défrenois 1994, p. 1118, obs. D. Mazeaud.
38
Com., 23 May 2000, not pub. Bull., No 96-18055, RJDA, 2000, No 1038; Com., 1 Mar.
1994, Bull. Civ. IV, No 81, D. 1994, Somm. 215, obs. E. Fortis, Défrenois 1994, p. 1118, obs. D.
Mazeaud; Civ. 3, 15 Mar. 2006, Bull. Civ. III, No 64, D. 2006. IR. 1062, JCP 2006. IV.1789 in
J. Francois, Les obligations – Régime Général, 3rd Ed., Economica, 2013, p. 332.
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In principle, this transaction must cause, or contribute to, the debtor’s insolvency,
which must be established when the creditor lodges a claim.39 More precisely, the
courts have held that the creditor must prove the “apparent” insolvency of the debtor on
the day of the act in question.40 However, the Cour de Cassation has extended the
interpretation that it gives to this condition and ruled that “[t]he paulian action is
admissible, even if the debtor is not insolvent, so long as the fraudulent act has the
effect of rendering the exercise of the creditor’s (special) right upon the alienated asset
impossible.”41 This broad scope of application has raised some controversies.42 Some
authors have criticised this ruling on the basis that the protection of creditor’s special
rights – not its general rights over the debtor’s assets – should be based on the general
theory of fraud as expressed by the principle fraus omnia corrumpit (or even on the
ground of tort liability) rather than the Paulian action.43
(ii) Certain and due debt owed to the creditor The creditor must hold a receivable
that is certain (créance certaine) at the time of the fraudulent act in question. The
receivable may not be due yet at that time so long as the creditor evidences that the
transfer was performed with the intention of defrauding a future creditor.44 Although it
is not clearly stated, it is generally recognised that the creditor’s receivable must be
certain, due and payable (créance certaine, liquide et exigible) at the time the claim is
filed.45
It is worth noting that courts have expanded the scope of application of the paulian
action by relaxing the conditions for its admissibility, for example with respect to the
types of debt owed to the creditor.
(iii) Existence of a fraud Fraud is established if the creditor proves that the debtor
carried out the transfer with the sole knowledge (seule connaissance) that it would
cause his creditor a loss or prejudice (by becoming insolvent or increasing its
insolvency).46
39
Civ. 1, 10 May 1993, not pub. Bull., No 91-13976; Civ. 1, 6 Jan. 1987, Bull. Civ. I, No
1, RTD Civ. 1988.136, obs. J. M; Civ. Mestre; Civ. 1, 31 May 1978, Bull. Civ. I, No 209.
40
For Jérome Francois, the evidence of the causal link between the act in question and the
debtor’s insolvency characterises the condition of fraud rather than the loss that the creditor has
suffered. See J. Francois, Les obligations – Régime Général, 3rd Ed., Economica, 2013, p. 335.
41
Civ. 3, 6 Oct 2004, Bull. Civ. III, No 163, D. 2004. 3098, note crit. G. Kessler, JCP 2004.
IV.3169, RTD Civ. 2005, 121, obs J. Mestre and B. Fages, Défrenois 2005/6, p. 526. Also Soc.,
19 Dec. 1974, Bull. Civ. I, No 336, D. 1975.777, note O. Simon, Défrenois 1975, p. 992, note G.
Morin. Pursuant to J. Francois supra n. 40 on p. 337, the Paulian action is here transformed into
an action in rem for recovery.
42
In her thesis, supra n. 4, L. Sautonie-Laguionie advocates the extensive interpretation that
courts have given to the Paulian action.
43
See Civ., 10 Apr. 1948, D. 1948.421, note R. Lenoan, JCP 1948. II. 4403, note E.
Becque, RTD Civ. 1948.345, obs. H. et L. Mazeaud, ibid, p. 349, obs. J. Carbonnier; also Civ. 3,
8 July 1975, Bull. Civ. III, No 249.
44
Toulouse, 19 Nov. 2007, JCP 2008. IV. 1584; Com. 16 July 1991, Bull. Civ. IV, No 267;
Civ. 1, 7 Jan. 1982, Bull. Civ. I, No 4.
45
See J. Francois, Les obligations – Régime Général, 3rd Ed., Economica, 2013, p. 346.
46
Civ. 1, 14 Feb. 1995, Bull. Civ. I, No 79, D. 1996.391, note E. Agostini.
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With respect to the relationship between the debtor and the third party, a distinction
is drawn between the acts performed gratuitously (actes à titre gratuit), which do not
require the complicity of the third party, and those entered into against consideration,
for which the complicity of the third party to the fraud must be established. The Cour
de Cassation held that “the fraud against creditors’ rights does not require necessarily
malicious intention; it derives from the sole knowledge that the debtor and his third
party have that the act in question will prejudice the creditor”.47 It is necessary to have
a fraudulent collusion between the parties to qualify the act as fraudulent.
The effect of the paulian action is to set aside the fraudulent transfer of assets so that
the creditor is reinstated to its original position. The unenforceability of the fraudulent
act is only for the benefit of the creditor who has brought the action against the
debtor.48
Although article 1167 of the Civil Code defines paulian action in broad terms, the
lack of a general theory underpinning this action has revealed the difficulties in
understanding its legal nature. Should it be considered as an application of the general
theory of fraud whose effect is the unenforceability of the fraudulent act?49 This is what
will be advocated in the second part of the chapter as it would clarify and simplify the
exercise of the creditors’ rights over the debtor’s relevant assets in a situation of fraud.
(b) Fraud in the transfer of immovable rights

In the case of land registry records, if the same immovable property has been sold
successively to two purchasers by the same owner, the first to have recorded the
purchase prevails over the other one, except if there has been fraudulent collusion
between the seller and the first registering purchaser.
In a decision in 1858,50 the Chambre des requêtes stated that “[w]hereas fraud is an
exception to all rules, if the recording (in the land registry) has resulted from the
fraudulent collusion between the seller and the purchaser, it may not have any effect.”51
On many other occasions, the Cour de Cassation has reaffirmed this solution.52 It
always requires fraudulent collusion (concert frauduleux) between the parties as the
47
Civ. 1, 29 May 1985, Bull. Civ. I, No 163, RTD Civ. 1986.601, obs. J. Mestre, Défrenois
1985, p. 385; Com., 23 Oct. 2007, No 06-21.3888, Rev. Sociétés 2008, p. 798, note B. Lecourt;
CA Paris, 3eme ch. A, 9 Sept. 2008, SARL Les Trois Sources v Ste Cry Ltd, JCP 2009, I, No
2704; Civ 1ere, 29 May 1985: Bull. Civ. I, No 163; 14 Feb. 1995, D. 1996.391, note Agostini,
13 Apr. 1988: ibid I, No 91.
48
Civ. 1, 13 July 2004, not pub. Bull., No 02-10007, Défrenois 2005/4, p. 345, obs. Ph.
Thery.
49
In this sense, G. Marty and Ph. Jestaz in J. Francois, Les obligations – Régime Général,
3rd Ed., Economica, 2013, p. 360.
50
Req. 8 Dec. 1858, DP 1859 I 184.
51
“Attendu que la fraude fait exception à toutes les regles, que si la transcription a été faite
par suite d’un concert frauduleux entre le vendeur et l’acquéreur, elle ne peut produire aucun
effet.”
52
Ph. Simler and Ph. Delebecque, Droit Civil Les Suretes-La publicité fonciere, Précis
Dalloz. This principle has been used in similar circumstance by analogy – see Civ. 3. 5 July
1995, No 169, p. 115; 8 Apr. 1992 No 12, p. 77.
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mere bad faith of the second purchaser (who has recorded first) would not be sufficient
to frustrate the rights of the first purchaser. However, courts also hold that the sole
knowledge of the prejudicial effect of the act performed is sufficient.53 This element is
also required in a case of fraud against contractual provisions, as discussed below.
(c) Fraud against contractual provisions

In a well-known case,54 the Cour de Cassation confirmed the decision of the Court of
Appeal of Grenoble, which ruled that the transfer of a blocking minority stake in a
holding company, Société Rivoire et Carret Lustucru (RCL), to another company,
Société Embranchement de la Capuche (EC), was void on the ground that the
transferring shareholders, consorts Cartier-Millon, had pursued a fraudulent purpose
when transferring their shares since they knew that the transfer violated a prior
approval clause stipulated in the bylaws of the holding company.55 The consorts
Cartier-Millon had in fact intended to sell their shares to a competitor of the holding
company, Société Barilla (Barilla), via the sale to a shell company shareholder of the
holding, thus sensu stricto not subjected to the prior approval agreement. Barilla bought
the entirety of EC’s shares two months after the questionable transfer. Both the
transferring shareholders and Barilla knew about the prior approval clause that required
the holding company’s prior consent before the transfer to a third party.56 It was also
established that Barilla had the intention of purchasing a minority interest in RCL. In
these circumstances, the consorts Cartier-Millon had aimed to circumvent the enforce-
ment of the bylaws via a transfer to a shell legal entity. The agreements between the
transferring shareholders and Barilla were therefore declared to be tainted by fraud.
The Cour de Cassation confirmed that the transfer of shares of the holding company to
EC was void on the ground of the fraudulent intention of the transferring party. The
court ordered that the transfer be deleted from the registry of RCL and ruled that the
transfer of all the shares of EC to Barilla be without effect against the holding company
for non-application of the prior approval agreement.
In this decision, the Cour de Cassation highlighted the following facts: (1) the
quasi-concomitance and interdependence of the two transfers as one could not be
conceived without the other and the financial inability of the shell EC to pay for the
shares purchased, thus showing the reliance on Barilla’s funding: and (2) Barilla’s
intention to invest in the holding company. A fraud was qualified as the two following
elements were met: (1) the complicity/collusion (connivence) between the transferring
53
Com. 28 Oct. 1952, Gaz. Pal. 5.2.41. Fraudulent collision was imputed from the fact that
the first purchaser was in possession of the immovable real estate. The second purchaser could
not ignore the existence of the first sale.
54
Com., 27 June 1989, Société Barilla v Rivoire et Carret Lustucru et autres, Bulletin Joly
Sociétés, 1 Oct. 1989, No 10, p. 815.
55
A prior approval clause (“clause d’agrément”) is a clause which subjects the transfer of
shares by a shareholder to the prior approval of the shareholders’ meeting or another corporate
body.
56
At the time of the transfer, such prior approval clauses did not apply to a transfer between
shareholders. However, since an ordinance dated 24 June 2004, these clauses do apply to such
transfer.
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party and the beneficiary to elude the application of the prior approval agreement; and
(2) the violation of the spirit of the holding’s bylaws despite the ostensible lawfulness
of the transfers, but contradicting the spirit of the holding’s bylaws.57 Share transfers
whose object would be to defraud a third party’s rights are therefore prohibited.
As such, fraude paulienne could cover this type of fraud if it was analysed as fraud
against third party rights.58 More generally, it would be easier for courts to base their
reasoning on a general principle of ‘correction’ to ensure the ‘licit’ enforcement of legal
or contractual rules. However, the distinction between fraud against third party rights
and fraudulent evasion of the law persists as will be examined now. One difference is
that fraud against third party rights requires that fraudulent collusion between the
parties be established whereas individual acts committed by one party are sufficient to
constitute an evasion of the law, but is it enough to justify this distinction?
2. Fraudulent Evasion of the Law (Fraude à la loi)
Evasion of the law (fraus legis in Latin) usually refers to a subterfuge by which the
fraudster circumvents the enforcement of the law with a fraudulent motive. Ostensibly
legitimate manoeuvers are performed in a way which is against the spirit of the law to
achieve an illegal end. The rule of law in this context refers to legal provisions from
which parties may not opt out.59
The doctrine of fraude à la loi came about in the French legal system via private
international law in the late 1870s through the cause célèbre of the Princess de
Bauffremont.60 The Belgian born princess was wife of a French officer whom she
wanted to divorce. However, she only obtained a separation decree from French courts
as, at the time, divorce was not admitted. She moved to Saxony where a separation
decree from a state in which divorce was not recognised was considered as a divorce
decree. She was then naturalised German and married Prince Bibesco, a Romanian
subject, in Berlin under German law. Mr de Bauffremont appealed to the French courts
against the (second) marriage. In 1878, the Cour de Cassation decided that the princess
took German nationality in order to obtain a divorce there and remarry, thus avoiding
the application of French law. It ruled that her foreign marriage had no effect on her
(first) husband on the ground of fraude à la loi.61
The theory of fraude à la loi has become a common doctrine that sanctions cases of
evasion and allows courts to void a contract or an act on the ground that the parties had
57
Note Paul le Cannu under Com., 27 June 1989, Bul. Joly Sociétés 1989, No 10, p. 815;
also J. Mestre, Rev. Soc., 1984, p. 80.
58
J. Carbonnier, droit Civil, Vol. 4, Les obligations, PUF, 16th Ed. (1992) under théorie
juridique, at 76, p. 154.
59
Some statutes have expressly provided that any agreement that would avoid the
enforcement of their provisions would be void per se (e.g. article 35 of DL 30 Sept. 1953 on
commercial leases).
60
Princesse de Bauffremont v Prince de Bauffremont, Civ. 18 March 1878, S. 1878.1.93
(note Labbé), D. 1878.1.201.
61
See Brook v Brook (1861) 9 HL Cas. 193 with respect to evasive marriages and Shaw v
Gould (1868) LR 3 HL 55 with respect to evasive divorces in English law.
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the intention of preventing or circumventing a mandatory legal provision from applying

to them when they entered into the legal relationship.62 Thus the citizens of one state
are not allowed to evade the rules relating to marriages by blood relatives or by persons
of the same biological sex, simply by travelling to and going through a ceremony in a
state that does permit these marriages. The same applies to divorce, taxation or
inheritance. It is often referred to in private international law as a means to protect legal
provisions of domestic law against foreign laws.
In a very recent (and unexpected) case, an English court set aside decrees of divorce
that were obtained by 180 Italian couples who were fraudulently claiming that at least
one partner was living in the UK.63 These divorces were declared void on the ground of
fraud since English courts had been “materially deceived” about their jurisdiction.
There is no such reference to fraude à la loi, but rather to deception by perjury, forgery
or otherwise.64
Two types of fraud are distinguished depending on whether the fraudulent party acts
to defraud others directly (fraude nue) or indirectly (fraude vêtue).
(a) The naked fraud (fraude nue)

Naked fraud is where the fraudster acts using open, undisguised, process to evade the
law for her benefit. This is the case of tax avoidance where the taxpayer fails to declare
all his income to tax authorities. In a leading case on 10 June 1981,65 the Conseil
d’Etat, the French Administrative Supreme Court, decided that Article L64 of the Tax
Procedure Code allows the application of sanctions to arrangements which could not
have had any motive other than to avoid or reduce the amount of (corporate) tax that is
legally owed given the situation and true activities of the taxpayer. This extensive
interpretation of the law has since been regularly confirmed. Only when a bona fide
business purpose exists, the use by a company of the most tax-efficient operating
schemes is legitimate and does not constitute a fraud. This, together with the general
principle of freedom of contract, protects legitimate tax planning.
This is also the case where a building permit was granted for a house on protected
woodland thanks to wrong information given to the Council by the applicant. The court
provided that “since the permit was obtained by fraud as stated by the lower judges, its
granting is the equivalent of its absence and subjects the defendant to the enforcement
62
See J.J. Fawcett, Evasion of law and mandatory rules in private international law,
Cambridge Law Journal, Vol. 49 No. 1 (1990), pp 44–62. Whereas English private international
law has no doctrine of evasion of the law, it still recognises that “evasion of the law is
objectionable and should be stopped whenever it involves unfairness or is against the national
interest (p.56)”. This may be achieved by mandatory rules. This is a difference from French law
which has the doctrine of fraude à la loi.
63
Rapisarda v Colladon, EWFC 35 [2014].
64
Ibid. In this case, Sir James Munby, President of the Family division, summarised his
conclusions on the law, inter alia, that “… a decree, whether nisi or absolute, will be void on the
ground of fraud if the court has been materially deceived, by perjury, forgery or otherwise, into
accepting that it has jurisdiction to entertain the petition …”.
65
CE 10 June 1981 (No 19079).
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of article L. 421-1 and L. 480-4 of the Urbanism Code for building without permit”.66
Similarly, in another decision,67 the Cour de Cassation ruled that the charterer might
not benefit from a provision in a contract with the charter party by which the latter
appointed a member of the shipping team to be captain of a French ship in violation of
French maritime labour law. The charterer had given his consent to this appointment
which constituted a fraude à la loi. It could not therefore benefit from this fraud.
(b) The “dressed-up” fraud (fraude vêtue)

The other type of fraud, the “dressed-up” fraud, is when one party acts in order to
perform another act, which itself is prohibited, diverting the second of its lawful
purpose, or uses some other disguise or concealment to achieve its end. This is the case
of a donation transformed into an act against remuneration or a mock wedding for a
change of nationality.
Pursuant to article 1130 of the French Civil Code, covenants giving assets to third
parties, which belong to a future heir, are prohibited. Article 913 of the French Civil
Code lays down the principle of hereditary reserve (réserve héréditaire), which ensures
that the deceased’s dependents or parents, if there are no descendants and no surviving
spouse, are entitled to a minimum portion of the deceased’s estate. A “reserved” heir
may request application of the hereditary reserve where a trust seeks to infringe his
reserve and the effects of a trust may be set aside if those heirs can prove that the
intended purpose for the constitution of the trust was to deprive them of their reserve.
One of a number of leading cases, which found for the plaintiffs is Caron v Odell,68
where Leslie Caron’s (the actress) father created a settlement in the US for his mistress
which comprised a French villa and American shares. As the property was in France,
French courts heard the claim and found in favour of Leslie Caron (against the father’s
mistress) with regard to her hereditary reserve.
The theory of evasion of the law is commonly used in private international law as
parties might be tempted to shop around in order to avoid the application of more
stringent mandatory provisions. Although both forum shopping and choice of law ought
not to be regarded with too much suspicion, states will ensure that certain legal
provisions are not avoided by choice of law. They will use mandatory legal provisions,
or even “overriding mandatory provisions” (as referred to in the EU Rome I Regulation
on the law applicable to contractual obligations69) to make sure that they apply to the
legal relationship.
Once again, central to the definition of fraud is the intention of the parties –
sometimes the intention will be express, on other occasions it will be for the court to
66
Crim. 17 Oct. 2000, Stojanovic Milomir (pourvoi c/ CA Versailles 18 Nov. 1999, No
00-80612).
67
Com. 23 Nov. 1966, Bull. Civ. No 450, p. 400.
68
R 1983, 282; R 1986, 66, R 1991 92.
69
Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June
2008 on the law applicable to contractual obligations (Rome I).
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decide whether a sufficient intention can be imputed from the facts. Once the intention
is proven, the evasive manoeuvre will be void and the original legal provisions will
apply to the parties. In a fairly recent case,70 the Cour de Cassation criticised the
judges of a court of appeal as they did not prove the fraudulent intent of one of the
parties. This decision illustrates the difficulties in proving a case of fraud, especially
the necessary fraudulent intention.
From the dualist classification just explained, it is possible to distinguish the two
elements of fraud – the first one, the moral element, refers to the fraudulent intention
(or knowledge), which must be established by the party lodging the claim; the second
one, the material element, relates either to the violation of contractual or legal
provisions, or any acts that would cause a creditor to suffer a loss. These two elements
are common to the unitary notion of fraud, thus promoting a general theory of fraud
rooted in the principle fraus omnia corrumpit, as will be shown now.
II. THE UNITARY NOTION OF FRAUD ROOTED IN THE

PRINCIPLE FRAUS OMNIA CORRUMPIT
The “unitary” notion of fraud underscores the artificiality and ambiguity of the
distinction between fraud against third party rights and fraudulent evasion of the law.
As will be demonstrated, these different types of fraud share common elements that
advocate a unitary definition. Once the conditions have been met, courts refer to the
principle fraus omnia corrumpit to set aside the effects of the fraud, but what is the role
that this principle plays in French law? The unitary notion of fraud will be considered
first and then the nature of the principle fraus omnia corrumpit as a general principle of
law.
1. Fraud as a General Unitary Notion
Faced with the ambiguous dual classification, courts often use both types of fraud
interchangeably as they do overlap. Indeed, in both instances, the fraudster pursues his
own (self-) interests, even if they violate the law or conflict with third party rights. For
example, in cases of fraud in a transfer of immovable rights, the fraudulent conduct
aims at circumventing the land registry recording or any rules governing the transfer of
immovable rights. Is it a fraud against third party rights or an evasion of law? In fraud
against contractual rights, it is clear that the fraud is geared towards avoiding a rule that
has been agreed upon in a contract, meaning a binding rule or, more generally
speaking, a rule of law.71 In a paulian action, although the focus is on the loss suffered
by the creditor over the debtor’s assets, the main issue raised is about the fraudulent
70
Civ. 1, 15 May 2008, Bull. Civ. I No 06-19-535.
71
This is on the basis of the binding effect of contract as asserted in article 1134 of the
French Civil Code (pacta sunt servanda). See also Kelsen, La théorie juridique de la convention,
in Archives de philosophie du droit, 1940, p. 30 ff.
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feature of the act that the debtor performed to defraud the creditor. This act aims at
avoiding the enforcement of a legal or contractual rule that is the agreement by which
the creditor has certain rights over the debtor’s assets. Similarly, evasion of the law
seeks to circumvent the lawful enforcement of the law. As this theory has been too
narrowly defined, it should be re-qualified as “fraud against any mandatory rules”.72 In
sum, both types of fraud require that a party intentionally seeks to elude the
enforcement of whatever rule is part of French law, and this is what matters.
For some authors, the distinction between the two types of fraud is purely
terminological since ‘fraudulent evasion of the law’ is traditionally applied in inter-
national private law whereas domestic law refers to ‘fraud against third party rights’.73
In any case, fraud consists of manipulating the rules of law against each other.
This position is the one that José Vidal has defended in his major doctoral work. He
states that “there is fraud whenever the subject of law succeeds to elude the
enforcement of a mandatory rule by using an efficient means, making its outcome
irreproachable on the ground of positive law”.74 He enunciates the three elements that
are required to establish a “fraud”:75 (1) a mandatory rule; (2) the intention to elude its
application; and (3) the use of efficient means to defraud a party.
1. With respect to the mandatory rule, fraud must seek to undo or avoid the
enforcement of a mandatory rule, be it legal or contractual, general or specific.
There is no limitation as to the definition of mandatory rule so long as it produces
a binding effect that the party has to respect when the conditions of enforcement
are met.
2. Fraud requires a fraudulent intention that can be defined as the intent to elude the
application of the mandatory rule or the intent to implement deceitful means in
order to achieve unlawful outcome in a licit fashion. Its definition conditions the
conception of fraud.
An objective conception of fraud derives from the violation of law per se.
Fraud is established as soon as the effects prohibited by that law have been
produced. Violation of its letter is equivalent to violation of its spirit. The
intention of the fraudster is therefore useful to highlight the fraud, but not
essential.76 This is the case of evasion of law in international private law, for
72
See supra n. 22, Vidal, Essai d’une théorie générale de la fraude en droit francais,
pp. 79–87.
73
See supra n. 13, Ghestin and Goubeaux, Traité de droit civil, Introduction générale,
p. 734.
74
See supra n. 22, Vidal, Essai d’une theorie générale de la fraude en droit francais, p. 208.
75
See supra n. 22, Vidal, Essai d’une theorie générale de la fraude en droit francais,
pp. 59–211. Grenoble, 3 June 1988, Observations B. Oppetit, 15471, p. 263; Ghestin and
Goubeaux, Traité de droit civil, Introduction générale, supra n. 13, pp. 749–753.
76
See J. Stoufflet, Fraud in Documentary Credit, Letter of Credit and Demand Guaranty,
Dickinson Law Review, Vol. 106 (2001), pp. 21–28 at 26: “In my opinion, there are strong
reasons for courts to look objectively at fraud in transactions involving documentary credits,
stand-by letters of credit and demand guaranties.”
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example. In a recent decision, the Cour de Cassation implied the fraudulent intent
from the alteration that one party made on the documents tendered to the bank.77
A subjective conception of fraud is commonly associated with a sensu stricto
definition of fraud, which requires that a fraudulent intent be proven. This ranges
from malicious intention (intention de nuire à autrui) to the sole knowledge that
the act performed will cause prejudice to a party.78 In the case of third party
involvement, the Cour de Cassation requires that fraudulent collusion between
the parties whose aim is to deprive another party from the exercise of her rights
be established.79 However, courts have understood this condition broadly and
imputed it from the sole knowledge of the prejudicial effect of the act per-
formed.80
3. The means used to elude the mandatory rule must be efficient in the sense that
they are actual and not fictive; they cover a variety of facts or acts.81 It could be
a fraud to the rights of creditors, the rights of the beneficiary of an undertaking to
enter into a contract, a preferential pact or an inalienability clause relating to
shares, a fraud against the rights of owners of a company protected by a prior
approval right … so long as the outcome reached is against the law (in its broad
sense).82
A consistent line of cases confirms that lower court judges must establish the (general)
elements that will qualify the fraud.83 “The purchase of a stake, even a majority one, in
the capital of one or several companies, also shareholders of another company, does not
qualify the fraud whose object or effect is to elude the by-laws provisions of this
company, without the elements that characterise this fraud.”84 In a following case, the
Court of Appeal of Paris confirmed this solution.85
77
Com., 19 Nov. 2013, not published.
78
See supra n. 46 and 47 – Fraud against creditors’ rights (action paulienne).
79
See supra I. (b) Fraud in the transfer of immovable rights, Req. 8 Dec. 1858, DP 1859 I
184; also see supra I. (c), Cass. Com. 27 June 1989, Bulletin Joly Sociétés, 1 Oct. 1989, No 10,
p. 815.
80
Com. 28 Oct. 1952, Gaz. Pal. 5.2.41. Fraudulent collision was imputed from the fact that
the first purchaser was in possession of the immovable real estate. The second purchaser could
not ignore the existence of the first sale.
81
This notion of fraud is particularly important in the domain of commercial law, company
law and labour law in which the number of mandatory rules is high.
82
CA Grenoble, 3 June 1988, JCO E 1989, II, No 15471, note Oppetit, and Cass. Comm.,
27 June 1989, No 88–17.6754, Dr. Sociétés 1989, No 270, Bull. Joly Sociétés 1989, p. 815; also
CA Paris, 3rd Ch. A, 26 June 2001, SA LMO v SA SIIHP, RTD Com. 2001, No 4, p. 910, obs.
Champaud and Danet; also CA Paris, 3rd Ch. B, 6 Nov. 2008, SARL Central Ambulances v
SARL Ambulances Auxerroises, RJDA, 2009, No 109, RTD Com. 2009, p. 162, obs. Champaud
and Danet.
83
See supra, Société Barilla v Rivoire et Carret-Lustucru. Also Montpellier 17 Dec. 1992,
Bujon et autres v. SA Journal Le Midi Libre et autre, Bull. Joly 1993.649, note Couret; Com. 13
Dec. 1994, Bull. Joly 1995.152, note Le Cannu.
84
Com. 13 Dec. 1994, Bull. Joly 1995.152, note Le Cannu.
85
Paris 26 June 2001, SA LMO v SA SIIHP et al., RTDC 2001.910, obs. Cl. Champaud
and Danet.
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This broad definition of fraud does not only clarify the theory of fraud but also
simplifies its conditions of admissibility. It removes unnecessary obstacles to access
and enforce the rules of law. Once the fraud is established, the principle fraus omnia
corrumpit allows the setting aside of the unlawful outcome reached through ingenious,
but lawful, subterfuges. It thus preserves the good operation of public order. It is a
corrective mechanism that fights against the illegality of fraud, but what is its nature?
2. Fraus Omnia Corrumpit as a General Principle of Law
Although French law does not have a general statutory principle of fraud, it does offer
a plethora of legal doctrines, such as illicit cause, abuse of right and civil liability, to
target fraudulent acts. Despite, or in addition to, these doctrines, French courts have
reiterated the originality, and relevance, of the adage fraus omnia corrumpit in specific
sets of circumstances, and have recognised it as a general principle of law (principe
général de droit).
In the Barilla case already discussed, the Court of Appeal of Grenoble clearly states
that “the notion of fraud is a legal principle of general application in contractual
matters and is not foreign to company law”.86 Interestingly, it does not list all the
different applications of the notion of fraud,87 but rather tries to unify all these
expressions under one general principle.88 In a decision of the appeal court of Dijon as
early as 1885, it was ruled that
fraud vitiates all the acts that it inspires and for which it is the only cause, the only motive,
fraus omnia corrumpit; that it is a rule of public and superior order that, to be respected and
enforced, did not need to be enacted in a formal and precise positive act, as it is enshrined in
the general principles of law, … .89
Vidal saw in the adage fraus omnia corrumpit, not only a simple maxim of morality,
but also the expression of an actual general principle of law of positive value to which
various cases could be attached.90 The Cour de Cassation has confirmed this interpret-
ation by referring to fraus omnia corrumpit as the legal ground of its decisions.91
86
Court of Appeal Grenoble, 3 June 1988, see supra, Société Barilla v Rivoire et
Carret-Lustucru.
87
For example, in company law, articles 104 and 146 of 24 July 1966 relating to the
agreements entered into between the company and one of its managers.
88
Grenoble, 14 Aug. 1869, D. 1870.2.151, which states that “… it is here the unescapable
application of the general principles of law which, to reject fraud, are an exception to all
rules …”; Dijon, 24 July 1885, D. 1886.2.217: “given that fraud vitiates all the acts that it
inspires and for which it is the only cause, the only reason, fraus omnia corrumpit, that is a rule
of general public order that has to be respected and enforced.”
89
Dijon, 24 July 1885, D. 1886.2.217.
90
See supra n. 22, Vidal, Essai d’une théorie générale de la fraude en droit francais,
pp. 386–387.
91
See, among other cases, Com. 6 July 1981, Bull. Civ. IV, No 303, p. 241.
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In a recent case, the Paris Court of Appeal rejected the ostensibly valid legal
arguments made by the defendants on the ground of a fraud.92 It highlighted the
ingenuity of the fraud, but also its offensiveness, as it was aimed at transferring
the control of a company to a competitor against the clear intent of the partners in the
target company. Despite the formal regularity of the acts of transfer, these acts were
tainted by fraud and therefore set aside on the ground of fraus omnia corrumpit. The
Paris Court of Appeal thus re-asserted the flexibility and topicality of the principle.
This principle has also been qualified as an “autonomous corrective principle”,93
whose strength lies in its corrective/sanctioning power. This is the same effect that is
attached to the paulian action, which has made it a success. As such, this principle
ensures the protection of public order thanks to the originality of its sanction. As an
“exception to all rules”, it sets aside the rule that should have applied and reinstates the
affected party to the original position she was in.
Is this principle universally recognised? Most legal systems acknowledge this prin-
ciple, but still provide specific legal provisions relating to fraud (or its effects) without,
however, referring to a general theory of fraud per se. For instance, under the heading
“cause”, article 1344 of the Italian Civil Code states that “the cause is illicit when the
contract is a means of avoiding the application of a mandatory rule”.94 Article 280 of the
Portuguese Civil Code has a similar reference in a section dealing with the object of
contract.95 The German and Dutch codes prohibit any exercise of a right whose purpose
is harming the other party.96 More generally, the correction of fraudulent conduct falls
under the mechanism of fairness and good faith (Treu und Glauben) in German law.97 As
stated by Lenaerts, “the principle fraus omnia corrumpit is considered a specific
application of the principle of good faith in its limitative function”.98
92
Paris, 6 Nov. 2008, Société Central Ambulances v Société Ambulances Auxerroises, RG
No 07-18097.
93
See supra n. 13, Ghestin and Goubeaux, Traité de droit civil, Introduction générale,
p. 752. See also A. Lenaerts, The Role of the Principle Fraus Omnia Corrumpit in the European
Union: A Possible Evolution Towards a General Principle of Law?, Yearbook of European Law,
Vol. 32, No 1 (2013), pp. 460–498 at 467, who uses the same expression.
94
Article 1344 of the Italian Civil Code: “Si reputa altresì illecita la causa quando il
contratto costituisce il mezzo per eludere l’applicazione di una norma imperativa.” The interest
of this definition lies in the statutory qualification of an illicit cause in the event it eludes the
application of mandatory norms. Article 1131 of the French Civil Code defines an illicit cause
when it is prohibited by law and when it is against morality or public order.
95
Article 280 of the Portuguese Civil Code: “1 – É nulo o negócio jurídico cujo objecto
seja física ou legamente impossível, contrário à lei ou indeterminável. 2 – É nulo o negócio
contrário à ordem pública, ou ofensivo dos bons costumes.”
96
Article 226 of the German Civil Code: “The exercise of a right is not permitted if its only
purpose consists in causing damage to another.” See also Article of the Dutch Civil Code.
97
Article 242 of the German Civil Code.
98
See supra n. 93, Lenaerts, The Role of the Principle Fraus Omnia Corrumpit in the
European Union, p. 468.
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By contrast, although English law recognises the rule fraus omnia corrumpit,99 it
does not have a general theory of law. It does not even distinguish in law between the
tort of deceit and fraudulent misrepresentation. As Lord Herchell in Derry v Peek100
held
[f]irst, in order to sustain an action in deceit, there must be proof of fraud and nothing short
of that will suffice. Secondly, fraud is proved when it is shown that a false representation has
been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it
be true or false.
Fraud always involves dishonesty, the motive of the person guilty of it being
immaterial.101 Although the standard of proof is the balance of probabilities, the courts
usually consider that fraud is generally a more improbable explanation for an event
than negligence. They therefore require more compelling evidence from the claimant to
prove its case. One of the principal difficulties in most fraud cases is proof of the
requisite subjective state of mind.
In sum, most courts apply the principle fraus omnia corrumpit with parsimony and
caution. Indeed, a claim of fraud must be dealt with with care and is difficult to
establish. However, a common definition of fraud based on the principle fraus omnia
corrumpit would allow the targetting of the wide ranging diversity and ingenuity of
fraud. Thanks to its flexibility, this principle is a key to the protection of the rules of
law and their lawful purposes.
CONCLUSION
Although fraud omnia corrumpit is a maxim that sounds familiar, its application is
limited to the cases where there are no specific statutory provisions and when no other
legal instruments, such as, among others, civil liability or abuse of right, that regulate
similar reprehensible acts can be implemented. However, even in highly codified legal
systems like the French legal system, this principle still finds room to apply. It gives
courts a corrective mechanism that aims to sanction any fraudulent act or conduct that
would prejudice a party or society at large. The lack of statutory definition, rather than
inhibiting the application of this recognised general principle of law, makes it
extremely flexible and able to embrace a large variety of fraudulent acts or conducts.
As demonstrated, the artificial distinction between fraud against third party rights
and evasion of the law should be abolished for the benefit of a unitary notion of fraud,
99
In HIH Casualty & General Insurance Ltd & Ors v Chase Manhattan Bank & Ors, [2003]
UKHL 6 at [15], Lord Bingham used the following words in relation to cases of civil fraud:
“… fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud
unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial
intercourse. Once fraud is proved, it vitiates judgments, contracts and all transactions what-
soever.”
100
Derry v Peek (1889) 14 App. Cas. 337 at 376.
101
Derry v Peek, Ibid; Armstrong V Strain [1952] 1K.B. 232, CA [1952] 1 All E.R. 139;
Dutton v Louth Corp (1955) 116 E.G. 128, CA.
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thus clarifying and simplifying a claim of fraud. Courts have to be well equipped to
face the ingenuity and sophistication of fraudsters and pierce the “licit veil” covering
the fraudulent act. Once the fraud is established, the moral preoccupation of law
consists of setting aside the effects of a fraudulent act as fraud “vitiates everything”.
Even if fraus omnia corrumpit is recognised as a principle of law in most legal
systems, its role has yet to be strengthened. Its potential to address sophisticated and
ever-evolving fraudulent schemes, which the legislature cannot anticipate, is tremen-
dous, provided the courts seize this opportunity.
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29. The concept of fraud in Islamic law

Siti Faridah Abdul Jabbar and
Asma Hakimah Ab Halim*
INTRODUCTION
Fraud in any form is prohibited in Islamic law. It is reprehensible and regarded as a
heinous conduct. Muslims are required to lead every aspect of their lives honestly and
truthfully at all times. The stern prohibition against fraud may be found in the Qur’an
and Sunnah of the Prophet Muhammad, which are the primary sources of Islamic law.
Accordingly, this chapter starts with a discussion on the sources of Islamic law
followed by the concept of fraud as derived from the sources. This chapter then argues
that financial crimes are prohibited in Islamic law and that financial crimes such as
insider dealing may be regarded as fraud.
SOURCES OF ISLAMIC LAW

Islamic law is based on the Shari’ah, which is an Arabic term derived from the root
word ‘shara’a’.1 Shari’ah is translated as ‘water hole’2 or ‘the way to a watering
place’.3 This definition connotes Shari’ah as the path that leads to Allah the Creator
through His Messenger the Prophet Muhammad.4 The subject matter covered by
Islamic law is comprehensive. It encompasses various aspects from the vertical relation
of man with God the Almighty called ‘ibadah5 to the horizontal relation of man to man
and man with other creatures classified as mu’amalah.6 Islamic law is a divine law
derived from the Qur’an and Sunnah, which are classified as the primary or ultimate
authoritative sources.7
* This research was supported by the Ministry of Education Malaysia’s Grant ERGS/1/
2011/SS/UKM/02/5.
1
Ibn Manzur (undated). Lisan al-Arab, vol. 4 (Dar al-Ma‘arif), p. 2238.
2
Cowan, JM (1976). Arabic–English Dictionary: The Hans Wehr Dictionary of Modern
Written Arabic, 3rd Edition (New York: Spoken Language Services), p. 466.
3
Doi, ARI (1984). Shariah: The Islamic Law (Kuala Lumpur: AS Noordeen), p. 2.
4
Ibid.
5
See the Qur’an, ch. 2:21, 258.
6
The Qur’an, ch. 25:63.
7
Al-Qaradawi, Y (2013). Introduction to the Study of Islamic Law, translated by Ismail, A
et al. (Kuala Lumpur: IBFIM), pp. 45–46.
356
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The concept of fraud in Islamic law 357
Primary Sources
The Qur’an, which was revealed within 23 years to Prophet Muhammad, is The Holy
Book that prescribes principles and rulings in various aspects. This is mentioned in the
Qur’an, which is translated thus: ‘This is the Book; in it is guidance sure, without
doubt, to those who fear God.’8
The Qur’an highlights the importance of having faith in God in whatever situation,
performing acts of worship (‘ibadah) and dealing with fellow man with just and good
manners (mu’amalah). The latter also covers justness in commercial transactions in
order to attain the blessings of God for the goodness (barakah) in life. The principal
criterion of a just mu’amalah transaction is stated in the Qur’an, which is translated as
follows: ‘O you who believe, eat not each other’s property by wrong means, but let
there be among you trade and business through mutual good-will.’9
Pertaining to mu’amalah, certain aspects of transactions are stated in detail10 in the
Qur’an and some in brief.11 The brief or general principles in the Qur’an are then
critically interpreted through other sources such as the Sunnah, which is the second
primary source of Islamic law. The Sunnah comprises the words, conducts and tacit
approvals (taqrir) of the Prophet Muhammad that are real life examples of the meaning
of the revelation from God. This is mentioned in the Qur’an, which is translated thus:
‘Nor does he say (ought) of his own desire. It is no less than inspiration sent down to
him.’12 In other words, the Sunnah is the acts or practices of the Prophet Muhammad
that form the basis for the deliberation of rulings. The Sunnah is authoritative since it
explains, elaborates, specifies and interprets the meaning of the Qur’an or abrogates the
rulings in the Qur’an which are no longer relevant.13 An example of a Sunnah is where
the Prophet Muhammad said: ‘No zakah (alms tax) is imposed on less than five awsaq
(approximately 900kg) of dates; no zakah is imposed on less than five awsaq
(approximately 200 dirhams) of silver, and no zakah is imposed on less than five
camels.’14 This Sunnah explains the amount and quantity of alms tax, which is ordained
in the Qur’an but is silent about its details.15
Secondary Sources
An ancillary source of Islamic law is the fiqh (Islamic jurisprudence), which was
developed by the Muslim jurists to deal with and interpret the Qur’an and Sunnah in
8
Ch. 2:2.
9
Ch. 4:29.
10
See for example the verse relating to faraid (division of estate after death) in the Qur’an,
ch. 4:11.
11
See for example the verse relating to zakah (alms tax) in the Qur’an, ch 9:5, 11, 18, 58,
60, 67, 71, 75, 79, 99, 103. How the zakah is to be performed is detailed out in the Sunnah of
the Prophet Muhammad.
12
Ch. 53:3–4.
13
Al-Qaradhawi (2013), pp. 45–51.
14
Hadith Bukhari, translation taken from Laldin, MA (2008). Introduction to Shariah and
Islamic Jurisprudence, 2nd Edition (Kuala Lumpur: CERT), p. 78.
15
Qur’an, Ch. 2:110.
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order to align the rulings in the two primary sources with the pragmatic needs of the
society. Fiqh includes ijma’ (juristic consensus), qiyas (analogy), masalih mursalah
(public benefit), istihsan (juristic preference) and istishab (legal presumption of
continuance of condition), which are categorised as the secondary sources of Islamic
law. These sources involve the act of ijtihad, which is the exertion of mind to reach the
solution to solve the problems in hand. In other words, ijtihad is an exercise of
individual opinion in a legislative manner. Despite the fact that ijtihad is an exercise of
personal opinion, its law-making process is not based on mere speculative thought or
ad hoc law finding. On the contrary, it is arrived at through a well-defined methodology
of legal reasoning and legal interpretation called usul fiqh.16
While ijtihad by the Prophet Muhammad is authoritative, ijtihad by the Prophet’s
companions and followers could only form the secondary source of ijma’ if all of them
unanimously agree on the matter in question. An example of ijma’ is where the
companions of the Prophet Muhammad unanimously agree on qiyas as a valid source
in deducing the rulings of fiqh.17 In the event that the companions and followers could
not come to a consensus, they may reach what is called istikhlaf (difference of opinion)
that may be referred to on a case-by-case basis. As for the secondary source of Islamic
law of qiyas, it refers to the method of analogy whereby the existing ruling issued
al’asl (the origin) is compared to the furu’ (the branch) to find the illah (effecting cause
for extending a rule by analogy) that would bring to the hukm (ruling) on a particular
issue. Putting it simply, qiyas is obtained through the legal and philosophical method of
analogy, whereby a divine law revealed for a particular situation is applied to another
where some common feature exists in both situations.18
With regard to another secondary source of Islamic law of masalih mursalah, it takes
into consideration the aspect of public interest. An example of the application of
masalih mursalah is where the temporal regulation relating to financial management is
acceptable so as to bring benefit to man and prevent harm.19 As for the secondary
source of istihsan, it refers to juristic preference where Muslim jurists favour certain
rulings over other possibilities. It is acceptable as long as the istihsan is in line with the
Shar’iah.20 An example of the use of istihsan is the adoption of istisna’ (manufactur-
ing) contract in Islamic financial transactions. Meanwhile istishab refers to ‘the
presumption in the laws of evidence that a state of affairs known to exist in the past
continues to exist until the contemporary is proved’.21 An example of istishab is the
prohibition of drinking liquor,22 where it would remain until there is a state of
emergency or the reason for the prohibition has been eliminated.23 The latter may
happen, for example, when the liquor loses its intoxicating quality such as having
changed into vinegar.24
16
Dien, MI (2004). Islamic Law (Edinburgh: Edinburgh University Press), p. 4.
17
Laldin, pp. 98–99.
18
Vogel, FE and Hayes, SL (1998). Islamic Law and Finance: Religion, Risk and Return
(The Hague: Kluwer Law International), p. 43.
19
Laldin, pp. 108–109.
20
Ibid.
21
Doi, p. 83.
22
Ibid.
23
Ibid.
24
Ibid.
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In the contemporary Muslim world, other approaches including maqasid

al-syar’iyyah (higher objective of Shari’ah) and talfiq (piecing together through
combination and fusion of juristic opinions of diverse nature) have been accepted as the
secondary sources of Islamic law as well.25 In applying maqasid al-syar’iyyah, jurists
take into consideration aspects such as the preservation of religion (al-din), the soul
(al-nafs), the lineage (al-nasl), the property (al-mal) and the intellect (al-‘aql)26 when
exerting a ruling. Meanwhile in talfiq the process is made through takhayyur (choice)
that refers to the ‘liberty of an individual Muslim to be governed by the law of any of
the four schools of Islamic jurisprudence’.27 However, the process should not depart
from the spirit of the Qur’an and Sunnah.28 For more advanced contemporary needs,
Al-Qaradhawi suggested the use of ijtihad insha’i, that is, ‘starting with the opinion in
new problems, in the light of explicit divine texts and proven maqasid al-Shar’iyyah
without being obsessed with previous opinions and nor overwhelmed by new opin-
ions.’29 An example of the use of ijtihad insha’i is the ruling issued by the Shari’ah
advisers of the Central Bank of Malaysia where takaful (Islamic insurance) benefits are
allowed to be given as hibah (gift) to the takaful participants (policyholders).30
In Islam, the validity of a rule of law hinges on the rule being derived from the
sources of Islamic law31 where the derivation is made using the ‘acceptable system of
interpretation’32 called usul fiqh. The applicability of the various sources of Islamic law
in deriving a ruling has its basis in the Sunnah of the Prophet Muhammad where the
Prophet in sending Mu’adh bin Jabal as the Qadhi (Judge and Governor) of Yemen
asked the latter before he left on what basis he would judge if he was confronted with
a problem. Mu’adh said that he would judge on the basis of the contents of the Qur’an.
The Prophet asked Mu’adh further: ‘Assuming that you do not find it in the Qur’an, on
what basis would you judge.’ Mu’adh said he would judge on the basis of the Sunnah
of the Prophet. The Prophet further asked: ‘Assuming you do not find it in both the
Qur’an and the Sunnah of the Prophet, on what basis would you judge.’ Mu’adh replied
that he would use his own individual judgement (ijtihad) and the Prophet was very
happy to hear this statement.33
25
Securities Commission (2009). Resolution of Shariah Advisory Council (Kuala Lumpur),
pp. 11–12.
26
Al-Qaradhawi (2013), p. 114 citing Al-Shatibi (undated). Al-Muwafaqat, vol.1, p. 24;
Al-Raysuni (2005). Imam Al-Shatibi’s Theory of the Higher Objectives and Intents of Islamic
Law (London: IIIT), p. 109.
27
Doi, pp. 470–471.
28
Ibid.
29
Al-Qaradhawi (2013), p. 19.
30
See for example Ismail, A (2009). Nomination and Hibah Issues in the Takaful Industry,
paper presented at the ISRA Takaful Workshop, 7 May 2009, Kuala Lumpur.
31
Nyazee, IAK (1994). Theories of Islamic Law and The Methodology of Ijtihad (Kuala
Lumpur: The Other Press), p. 7.
32
Ibid.
33
Doi, p. 71.
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CONCEPT OF FRAUD IN ISLAMIC LAW

There are various terms that denote fraud in Islamic law. Some of them are tadlis,
taghrir, ghabn’, ghubn, ghushsh, khallab, khiyanah, ihtiyal, tahayul, tadlil, iham, nasb
and khadi’a, the meanings of which vary from fraud, trickery, deception, lesion,
misrepresentation, swindling to imbalance.34 Where there is fraud, the defrauded party
may rescind the contract that he has entered into.35 The option to rescind or ratify a
contract for fraud is known as khiyar al-tadlis. Nonetheless, the following conditions
are to be fulfilled to exercise the right to rescission:
1. there is a misrepresentation of a material fact;

2. there is an intent to deceive;
3. the defrauded party relies on the misrepresentation; and
4. the defrauded party suffers an injury.36
It may be surmised from the above that mere fraud does not cause the annulment of a
contract. There are to be misrepresentation, materiality, causation and injury or damage
(dharar). Misrepresentation includes deceptive statements (taghrir qawli), deceptive
acts (taghrir fi’li) and deliberate silence relating to material information.37 Materiality
is determined using the ‘reaction of the reasonable man test’ but with some subjective
element added in circumstances where the defrauded person is a sophisticated
contracting party.38 Materiality may be adapted as well depending on whether the fraud
takes place in a face-to-face transaction or in a transaction over an impersonal market.39
Meanwhile, causation may be transaction causation or loss causation.40 As for injury or
damage, it depends on commercial standards and practice, an example of which is
having paid an inflated price.41 The right to rescind is subject to the defrauded party’s
ability to prove within a reasonable time from the time of the discovery of the fraud
that the contract was entered into owing to wilful deceit or misrepresentation by the
other party.42 The burden of proof is upon the defrauded person to show that he would
34
Rayner, SE (1991). The Theory of Contracts in Islamic Law: A Comparative Analysis with
Particular Reference to the Modern Legislation in Kuwait, Bahrain and the United Arab
Emirates, 1st Edition (London: Graham & Trotman), pp. 207–208.
35
Al-Qaradhawi, Y (2003). The Lawful and the Prohibited in Islam (London: Al-Birr
Foundation), p. 239.
36
Mansuri, MT (2006). Islamic Law of Contracts and Business Transactions (New Delhi:
Adam Publishers & Distributors), p. 146.
37
Rayner, p. 215.
38
Jabbar, SFA (2012). Insider dealing: fraud in Islam? Journal of Financial Crime 19(2)
140–148.
39
Ibid.
40
Ibid.
41
Coulson, NJ (1984). Commercial Law in the Gulf States: The Islamic Legal Tradition
(London: Graham & Trotman), pp. 70–71.
42
Ibid., p. 126.
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not have transacted had he known of the truth.43 In other words, the defrauded party is
to prove, inter alia, transaction causation to be entitled for a rescission.44
Although the doctrine of khiyar al-tadlis (right to rescission) as elucidated above is
seemingly straightforward, a further examination of the doctrine exposes that its
application is subject to different interpretations of the various Islamic schools of
jurisprudence. To the Shafi’i, a defrauded party has the right to rescission as long as
there was fraud, notwithstanding that the defrauded person did not suffer any loss or
harm (ghabn).45 To the Hanafi, however, a defrauded party is entitled to rescission only
where there was fraud that resulted in excessive loss or harm (ghabn fahish)46 or where
there were fraud and latent defect (‘aib).47 Where there was only minimal loss or harm
(ghabn yaseer), some of the Hanafi allow claims for damages only but not rescission.48
Meanwhile, to the Hanbali, the right to rescission arises only where the fraud resulted
in excessive loss or harm and the defrauded person was not an experienced buyer.49 To
the Hanbali, experienced buyers have no right to rescission although they may have
suffered from excessive loss or harm. Where there was only minimal loss or harm, the
Hanbali gives a right to rescission only if it involved a fraudulent act (taghrir fi’li).50
To the Hanbali, a fraudulent statement (taghrir qawli) that resulted in only minimal
loss or harm does not give rise to the right of rescission. As for the Maliki, the right to
rescission arises where the buyer had trusted the vendor’s disclosure of the price under
bai’ al-amanat or bai’ el-mustarsil.51 Bai’ al-amanat is a sale where the buyer trusts the
seller’s disclosure of the original purchase price, while bai’ el-mustarsil is a sale where
the buyer or seller confides to the other that he is ignorant about the price and asks to
buy or sell at market price.52 Thus, it may be deduced that the rules concerning the
right to rescission are, in fact, diverse. The rules, for example, range from the defrauded
party not having to prove causation at all to having to prove excessive loss causation.
This is somewhat similar to the various interpretations by the US courts in relation to
the application of the elements of fraud under the SEC Rule 10b-5.53
43
Rayner, p. 229.
44
Jabbar (2012).
45
Salameh, M (1994). Nathariat Al-Aqid fi El-Fiqh El-Islami min khilal Aqid El-Bay’
(Moroccan Ministry of Religious Affairs), p. 234 and Taha, G (1971). Al-Wajeez fe El-Nathariat
El-Ammah fe El-Tizam, El-Kitab El-Awal: Masadar El-Eltizam (Baghdad), p. 202 in Al-Rimawi,
L (2004). Legal Aspects of Arab Securities Regulation with Particular Reference to Disclosure as
a Tool of Investor Protection when Offering/Listing Shares in Jordan, PhD Thesis, LSE,
pp. 222–225.
46
Comair-Obeid, N (1996). The Law of Business Contracts in the Arab Middle East
(London: Kluwer Law International), p. 107; Bellefonds, Traite, I, p. 355 in Rayner, p. 204;
Al-Rimawi, p. 220.
47
Salameh, p. 234 in Al-Rimawi, fn 803, pp. 224–225.
48
Sanhuri, Masadir El-Haqq, Pt.11, pp. 143–146, 160–189 and Mahmasani, General
Theory, Pt II, p. 426 in Al-Rimawi, pp. 225–226.
49
Salameh, p. 234 in Al-Rimawi, fn 803, pp. 224–225.
50
Ibid.
51
Ibid.
52
Al-Rimawi, pp. 225–226.
53
Jabbar (2012).
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Nonetheless, what remains crystal clear is that fraud is vehemently condemned in

Islamic law. The prohibition of fraud is abundant in the Qur’an. One such example is
the prohibition of cheating in the measurement or weighing of things for sale. The
Qur’an is translated thus: ‘Woe to the defrauders. Those who, when they have to
receive by measure from men, demand full measure. And when they have to give by
measure or weight to other men, give less than due. Do they not think that they will be
resurrected [for reckoning].’54 A similar prohibition is found in another Qur’anic verse,
which is translated thus: ‘And do not eat up each other’s property by wrong means, nor
use it as bait for judges, with intent that you may eat up wrongfully and knowingly a
little of other people’s property.’55
Likewise, there are many Sunnah of the Prophet Muhammad that prohibit fraudulent
dealings. The dealings referred to in the Sunnah subsequently represent the traditional
forms of fraud in the literature of Islamic jurists.56 The fraudulent dealings include:
1. Al-Mulamisah and Al-Munabidhah sales

Selling something that one does not own or that is not apparent and not clearly
seen.
2. Al-Najash
Dishonesty and bad behaviour in transactions.
3. Talaqi Rukban
Goes out of town to meet and do trade with traders in caravans and later returns
to town to sell the trades to the people of the town.
4. Bay’ Hadir Lilbadi
A city dweller fraudulently acts as a self-imposed agent for the sale and purchase
of merchandise to the simple villagers at an exorbitant price.
Dealings (3) and (4) may lead to fraudulent practices such as buying things at a very
cheap rate and later selling them at an exorbitant price57 where the subsequent buyer
does not have the information of the market price and gets cheated by the seller.58
5. Tasriyyah
This practice is done by ‘tying the udder of she-camel or sheep to allow the
animal’s milk to accumulate in her udder so as to give false impression to the
intending buyer of a very productive milk-yield’.59
In relation to this practice the Prophet Muhammad said:
Do not tie up the udder of she-camels and sheep. If any one among you buys a
she-camel or sheep whose udder have been tied up, [he] has [the] option (of
54
Ch. 83:1–4.
55
Ch. 2:188.
56
Mansuri, p. 145.
57
Doi, p. 351.
58
Ibid.
59
Mansuri, pp. 146–147.
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annulment) after milking it; either to retain it or to return [it] along with a measure of
dates (in lieu of the milk consumed by the purchaser).60
6. Inflated price in trust sale
A seller in a trust sale sells goods at an inflated price to the buyer. A trust sale
includes tawliyyah (sale at cost), murabahah (sale at profit) and wadi‘ah (sale at
discount) where the buyer depends on the price declared by the seller. If the seller
lies hoping for more profit, the buyer has the option of revoking the contract or
claiming from the seller for a reimbursement of the undue price increase.61
7. Tadlis bi al-‘Ayb (fraud with defect)
It is an implied condition in a contract that the object of contract shall be sound.
A seller is prohibited from knowingly selling a defective object. Otherwise the
buyer has the right to return the defective product to the seller provided that the
former does not realise the defect beforehand.62
8. Ikrah (coercion)
Coercion is defined in Al-Majallah as: ‘To compel, without right, a person to do
a thing without his consent or by fear.’63 Thus, coercion has some element of
force either physical or economic which is used to suppress one party’s option to
choose whether or not to enter into a particular contract. In such a situation the
buyer has the right to rescind the contract because it is classified as a voidable
one.64
Apart from the abovementioned forms of fraud, there are other types of fraud that are
prohibited in Islam such as the sale of uncertain items (gharar), hoarding (ihtikar),
falsehood, breach of promise, disloyalty and bribery.65 In fact, fraud in any form is
prohibited in Islam.66 It is prohibited because it deprives others of their rights67 and
creates unjust enrichment where one party gains at the expense of another. Islam places
particular emphasis on just and honest dealing in mu’amalah transactions. The
avoidance of fraudulent practices is to ensure that justice can be dispensed to the
contracting parties. The importance of justice in Islam can be seen in the Qur’anic
verse that relates justice with the primary object of the creation of the universe: ‘We
created not the heavens, the earth and all between them, but for just ends.’68
60
Ibid. citing San’ani, Subul al-Salam, vol. 3, p. 26.
61
Ibid., pp. 150–151.
62
Ibid.
63
Majallah, Art. 948 in Tyser, CR et al. (2001). The Mejelle: An English Translation of
Majallah el-Ahkam-I-Adliya and A Complete Code on Islamic Civil Law (Kuala Lumpur: The
Other Press), p. 149.
64
Mansuri, p. 151.
65
Ibrahim, SS et al. (2013) Fraud: In Islamic Perspective, paper presented at the 5th
International Conference on Financial Criminology 2013, jointly organised by the Accounting
Research Institute, Ministry of Higher Education and others.
66
Al-Qaradhawi (2003), p. 239.
67
Doi, p. 351.
68
Ch. 15:85
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FINANCIAL CRIMES IN ISLAMIC LAW

Although financial crimes such as insider dealing and money laundering are not
specifically mentioned in the sources of Islamic law, it does not, however, mean that
Islam does not prohibit such malpractices. As mentioned earlier, some verses in the
Qur’an are purposely intended by God to be vague or general in character (dzanni or
mutashabihat).69 This is mentioned in a verse in the Qur’an, which is translated thus:
It is He Who has sent down to you (Muhammad) the Book (this Qur’an). In it are Verses that
are entirely clear, they are the foundations of the Book and those are the Verses of Al-Ahkam,
Al-Fara’id and Al-Hudud; and others not entirely clear … And those who are firmly grounded
in knowledge say: ‘We believe in it; the whole of it [clear and unclear Verses] are from our
Lord.’70
Some Qur’anic verses are left unclear so as to allow man to apply ijtihad and interpret
the verses71 so that they may be applied to the changing conditions of the society.
Thus, the authorities for the prohibition of financial crimes in Islam may be drawn
from a number of general principles in the Qur’an and Sunnah. The prohibition of
insider dealing,72 for example, may be derived from various Qur’anic verses and
Sunnah that command a person who occupies a position of trust (Amin) to faithfully
and honestly fulfil his obligations (amanah) and not to abuse the trust placed upon
him.73 This is similar to the position under the UK and US laws where insider dealing
is prohibited on the basis that it is tantamount to a breach of fiduciary duty. Further,
numerous Qur’anic verses and Sunnah that prohibit the taking of unfair advantage of
others and command that equality and honesty are to be observed are also authorities
for the prohibition of insider dealing. Again, this is similar to the UK and US laws that
prohibit insider dealing on the basis of fraud-on-marketplace-traders theory, the
equitable principle of fair dealing, unfair advantage theory and the parity-of-
information approach. Insider dealing would also be regarded as fraud in Islamic law.74
As discussed earlier, fraud in Islamic law includes ‘deliberate silence relating to
material information’. This means that where the information is material, fraud may
also occur by mere omission, passivity or concealment of information. Thus, insider
dealing which involves the non-disclosure of material price-sensitive information would
be regarded as fraud in Islamic law similar to the position under the US SEC Rule
69
As opposed to other verses in the Qur’an that are qat’i and muhkam, namely clear, precise
and not open to debates. See Aghnides, NP (1961). Mohammedan Theories of Finance (Lahore:
Premier Book House), pp. 112–113.
70
Ch. 3:7.
71
The interpretations of the verses are to be undertaken by the mujtahids, namely qualified
Islamic jurists and not simply by anyone. See Aghnides, pp. 114–115.
72
See further Jabbar, SFA (2010). Financial crimes: prohibition in Islam and prevention by
the Shari’a Supervisory Board of Islamic financial institutions. Journal of Financial Crime 17(3)
287–294.
73
See for example Chs. 2:283; 4:58; 8:27; 28:26.
74
Jabbar (2012).
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10b-5 and the UK Fraud Act 2006, but dissimilar to the common law fraud where
simple reticence does not amount to a legal fraud.75
Meanwhile, the prohibition of money laundering76 may be analogised from the
verses in the Qur’an and the Sunnah that prohibit the making of illicit gains from
unlawful or impermissible (haram) activities.77 Money laundering also goes against the
Islamic teaching of equitable distribution of income, resources and wealth among
mankind so that a just socio-economic order may be established for the benefit of the
society at large.78 This is in tandem with the secular laws that prohibit money
laundering on the basis that it misallocates income distribution, distorts commodity
prices and breeds social ills, crime and corruption.79 Finally, in Islamic law financial
crimes would be regarded generally as jinayah (crime) and specifically as ta’zir.80
Ta’zir is an Islamic criminal offence the exact scope of which is left opened by the
Qur’an and Sunnah for the State to determine if public interest so requires.
CONCLUSION
The sources of Islamic law are the ultimate reference for Muslims in conducting their
life in this world. The sources stipulate that honesty is of paramount importance and
that fraud is prohibited. Where there is fraud, the defrauded party has the right to
rescind the transaction that has been entered into provided that certain elements are
fulfilled. While the application of some of the elements are clear, there are those that
are subject to various interpretations by the different schools of Islamic jurisprudence.
Nonetheless, in Islamic law financial crimes such as insider dealing may be regarded as
fraud as well and at the same time may be categorised as the crime of ta’zir.
75
Ibid.
76
See further Jabbar, SFA (2011). Money laundering laws and principles of Shari’ah:
dancing to the same beat? Journal of Money Laundering Control 14(3) 198–209.
77
See for example Chs. 4:161; 7:157
78
Mannan, MA (1982). Why Is Islamic Economics Important? Seven Reasons for Believing
(Jeddah: King Abdulaziz University), p. 15; Ahmad, Z (1991). Islam, Poverty and Income
Distribution (Leicester: The Islamic Foundation), p. 13; Ahmad, M (1999). Business Ethics in
Islam (New Delhi: Kitab Bhavan), p. 131.
79
Tanzi, V (1996). Money Laundering and the International Financial System, IMF Working
Paper 96/55 (Washington DC: International Monetary Fund).
80
Another two categories of criminal offences in Islam are hudud and qisas. Hudud offences
and penalties are specifically prescribed in the Qur’an and Sunnah that cannot be annulled,
augmented or reduced by man. Qisas offences are specifically prescribed in the Qur’an and
Sunnah as well but the penalties prescribed may be transformed into other types of punishments.
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30. Computer related fraud

Jonathan Clough*
I. DIGITAL FRAUD
As with so many aspects of our lives, one of the oldest forms of crime has been
transformed by the newest of technologies. Information and Communications Tech-
nologies (‘ICTs’) are now central to the way we interact, both socially and commer-
cially. They also provide those who wish to defraud others with unprecedented access
to potential victims anywhere in the world at negligible cost. With approximately 3
billion people connected to the internet,1 the pool of potential victims is vast.
We also live in a world increasingly accustomed to conducting financial transactions
electronically. In 2012, 59 per cent of internet users in the EU bought goods and
services online.2 In the same year, 72 per cent of Canadians had engaged in online
banking,3 while in Australia there were over 5.8 billion credit/debit card transactions.4
According to the US Census Bureau, the seasonally adjusted estimated value of US
retail e-commerce sales for the fourth quarter of 2013 was US$69.2 billion.5
Although wonderfully convenient, the digital economy also creates diverse opportun-
ities for those who seek to exploit our trust. Online offenders may not only conceal
their real identities, they may assume realistic looking false identities. Electronically
stored data provides a tempting target for those who seek to access our identifying
information, while the production of false documents has never been easier. Even
face-to-face transactions are not without their risks, with transaction card information
vulnerable to being surreptitiously acquired.
The extent of digital fraud is difficult to assess for a number of reasons.6 First,
unclear terminology makes accurate recording problematic. Second, crime statistics
may record the commission of frauds but not the method of commission. Third,
* This chapter is based in part on Jonathan Clough, Principles of Cybercrime (CUP 2010)
ch 7.
1
International Telecommunication Union, ‘Statistics’ (2014) <http://www.itu.int/en/ITU-D/
Statistics/Pages/stat/default.aspx> accessed 6 August 2014.
2
Heidi Seybert, ‘Internet Use in Households and by Individuals in 2012’ (Eurostat, No
50/2012, 2012) 6.
3
Statistics Canada, ‘Individual Internet Use and E-Commerce 2012’ (Media Release, 28
October 2013) 1, 3.
4
Australian Payments Clearing Association, ‘Fraud Statistics 2013 Financial Year’ (May
2014) <http://www.apca.com.au/payment-statistics/fraud-statistics/2013-financial-year> accessed
6 August 2014.
5
US Department of Commerce, ‘Quarterly Retail E-Commerce Sales 4th Quarter 2013’
(Media Release, US Census Bureau News, 15 May 2014) <https://www.census.gov/retail/mrts/
www/data/pdf/ec_current.pdf> accessed 6 August 2014.
6
Jonathan Clough, Principles of Cybercrime (CUP 2010) 199.
366
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Computer related fraud 367
statistical compilation is complicated by the range of public and private agencies that
may respond to consumer complaints. Finally, online fraud is likely to be under-
reported. Commercial organizations, for example, may be reluctant to report for fear of
undermining consumer confidence.
Nonetheless, available statistics suggest it is a significant problem.7 In 2012 the US
Internet Crime Complaint Center received 289,874 complaints, with an adjusted dollar
loss of US$525 million.8 In the same year, losses to credit card fraud in the UK and US
were estimated at £388 million9 and US$3.4 billion10 respectively. In relation to
identity crimes, a 2012 UK survey found that 8.8 per cent of UK adults had been the
victim of identity fraud in the previous 12 months, with losses equating to £3.3 billion
across the UK population.11 Such figures should, however, be seen in context, with card
fraud losses in the UK in 2013 representing 7.4p for every £100 spent.12
There are also the costs associated with investigating and rectifying digital frauds.13
Individuals and organizations may suffer reputational damage, while some victims may
suffer a range of emotional and psychological impacts.14 Identity crime is also
connected with organized crime and terrorism.15
II. FORMS OF DIGITAL FRAUD

Set out below is a brief summary of key fraud types that may involve the use of ICTs.16
7
For a comprehensive survey and analysis, see Russell G Smith and Alice Hutchings,
‘Identity Crime and Misuse in Australia: Results of the 2013 Online Survey’ (AIC Reports:
Research and Public Policy Series 128, 2014).
8
Internet Crime Complaint Center, ‘2012 Internet Crime Report’ (2012) 4.
9
Financial Fraud Action UK, ‘Annual Review 2013’ (2013) 9.
10
‘Skimming Off the Top’, The Economist (Atlanta, 15 February 2014) <http://
www.economist.com/news/finance-and-economics/21596547-why-america-has-such-high-rate-
payment-card-fraud-skimming-top> accessed 11 August 2014.
11
National Fraud Authority, ‘Annual Fraud Indicator’ (2013) 9.
12
Financial Fraud Action UK, Cheque and Credit Clearing Company and The UK Cards
Association, ‘Scams and Computer Attacks Contribute to Increase in Fraud, as Total Card
Spending Rises’ (News Release, 14 March 2014).
13
United States Government Accountability Office, ‘Information Security: Agency
Responses to Breaches of Personally Identifiable Information Need to be More Consistent’
(Report to Congressional Requesters, No GAO-14-34, 2013) 4.
14
For a detailed discussion of the impact on victims, see United Nations Office on Drugs
and Crime, ‘Handbook on Identity-Related Crime’ (2011) 107–67.
15
Kristin M Finklea, ‘Identity Theft: Trends and Issues’ (DIANE Publishing, 2010) 19–20.
16
For a detailed discussion see Russell G Smith, ‘Identity Theft and Fraud’ in Yvonne
Jewkes and Majid Yar (eds), Handbook of Internet Crime (Willan Publishing 2010); David S
Wall, ‘Micro-Frauds: Virtual Robberies, Stings and Scams in the Information Age’ in Thomas J
Holt and Bernadette H Schell (eds), Corporate Hacking and Technology-Driven Crime: Social
Dynamics and Implications (Hershey, PA (USA): IGI Global 2010); Mark Button, Chris Lewis
and Jacki Tapley, ‘Fraud Typologies and Victims of Fraud’ (National Fraud Authority, Literature
Review 2009).
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A. Fraudulent Sales
The traditional frauds associated with buying goods unseen have been transformed by
the ability to buy goods online. According to the Internet Crime Complaint Center,
non-auction/non-delivery of merchandise was one of the top-five reported crime types
in 2011.17 Even if delivered, it may be that the goods are stolen or counterfeit; a
particular concern in relation to the online sale of pharmaceuticals.18
The increase in online payment mechanisms has been accompanied by an increase in
the misuse of credit cards and bank accounts, representing one of the most common
forms of fraud.19 Because online sales are ‘card-not-present’ transactions, security
features such as signatures and PIN and chip technology are also not present. These
represent the most common type of payment card fraud, accounting for 63 per cent of
total card losses in the UK in 2012.20
B. Fraudulent Investments
The internet may also be used to promote fraudulent investment schemes, including
high risk investments, property investments and ‘Ponzi’ schemes.21 The Australian
Crime Commission estimates that between 2007 and 2012, 2,600 Australians were the
victim of serious and organized investment fraud, with estimated total losses in excess
of AUD$113 million.22 Another form of investment fraud are the so-called pump and
dump schemes, where the internet is used to disseminate information with a view to
influencing share prices.23
C. Advance-Fee Frauds
These are amongst the most common online scams,24 and while the Nigerian email
scam is probably the most infamous example, they take a wide variety of forms. All are
based around the central concept of trying to persuade the victim to pay fees in
anticipation of receiving some service or benefit, which turns out to be non-existent.25
17
Internet Crime Complaint Center, ‘2011 Internet Crime Report’ (2011) 10.
18
See Explanatory Report, Council of Europe Convention on the counterfeiting of medical
products and similar crimes involving threats to public health (CETS No. 211), [6].
19
Erica Harrell and Lynn Langton, ‘Victims of Identity Theft, 2012’ (US Department of
Justice 2013) 1.
20
Financial Fraud Action UK (n 9) 23.
21
Jane Kerr and others, ‘Research on Sentencing Online Fraud Offences’ (Sentencing
Council 2013) 22.
22
Australian Crime Commission, ‘Serious and Organised Investment Fraud Crime’
(2012) 5.
23
Sheridan Morris, ‘The Future of Netcrime Now: Part 1 – Threats and Challenges’ (Home
Office Online Report 62/04, 2004) 17–18.
24
Penny Jorna and Alice Hutchings, ‘Australasian Consumer Fraud Taskforce: Results of
the 2012 Online Consumer Fraud Survey’ (Australian Institute of Criminology, Technical and
Background Paper No 56, 2014) 2.
25
Clough (n 6) 187.
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They include ‘get rich quick’ schemes, business opportunities, educational qualifica-
tions, inheritance scams, lottery scams, financial advice scams,26 ‘hit-man’ scams,27
‘FBI’ scams,28 online rental scams,29 ‘computer support centre’ scams30 and ‘dating’ or
‘romance’ scams.31 According to a recent Australian survey, of those who received a
fraudulent request or invitation, 22.2 per cent responded by requesting further infor-
mation, supplying personal information or suffering a financial loss.32
D. Click-Frauds
Click-frauds exploit the way in which online advertising fees are commonly based on
the number of ‘clicks’ a site receives. Website owners may therefore increase the fee
they receive by employing cheap labour, or automated software, to inflate the number
of clicks their site receives.33 False websites may also be used to attract visitors who
are then redirected to the client site, or bombarded with pop-up ads.34
E. Identity Crime
‘Identity crime’ may broadly be described as the use of a false identity in the
commission of crime.35 In some cases, technology has simply amplified opportunities
that have always existed to gain access to identity information. A discarded computer
or stolen laptop may contain a wealth of private information,36 while online searches
and social networking sites may allow offenders to easily obtain targeted information
about potential victims.37 Readily available technology is now capable of being used to
produce false identification documents.
In addition to these variants of traditional methods of identity crime, there are a
number of techniques that are a direct product of digital technology.
26
Jorna and Hutchings (n 24) 2.
27
Internet Crime Complaint Center (n 8) 12.
28
ibid 9.
29
Jane Kerr and others (n 21) 3.
30
31
ibid 16.
32
Jorna and Hutchings (n 24) 9–10. See also Stuart Ross and Russell G Smith, ‘Risk
Factors for Advance Fee Fraud Victimisation’ (Trends and Issues in Crime and Criminal Justice
No 420, 2011).
33
Wall (n 16) 72.
34
See Facebook Inc v Maxbounty Inc, 274 FRD 279 (ND Cal, 2011).
35
For a detailed discussion, see United Nations Office on Drugs and Crime (n 14).
36
Information Commissioner’s Office, ‘Unscrubbed Hard Drives Report’ (2010) <http://ico.
org.uk/news/latest_news/2012/~/media/documents/library/Data_Protection/Research_and_reports/
unscrubbed_hard_drives_report.ashx> accessed 11 August 2014.
37
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1. Phishing and pharming

‘Phishing’ is ‘the creation and use by criminals of e-mails and websites … in an
attempt to gather personal, financial and sensitive information’.38 ‘Spear phishing’
describes a phishing attack that is targeted to a particular person or group of people.39
Phishing emails may simply ask the recipient to respond directly with personal
information. More sophisticated versions may provide a link to a fake website which
replicates that of a legitimate organization such as a bank or social networking site, and
captures the personal information of the unsuspecting user. According to a report by the
Anti-Phishing Working Group, in March 2014 there were 44,212 unique phishing sites
detected, with 362 unique brands victimized and payment service being the most
targeted industry sector.40
Another technique, ‘pharming’, uses the way in which internet domain names are
resolved to direct unsuspecting users to the false website. When a particular IP address
is entered, such as a financial institution, the request is automatically directed to the
phishing website mimicking that of the financial institution.41
2. Hacking and the use of malware

The ability for organizations to store large amounts of personal information provides a
tempting target for unauthorized access to that data. According to the US Computer
Emergency Response Team (‘US-CERT’), the number of security incidents involving
personal identifiable information reported by federal agencies increased from 10,481 in
2009 to 22,156 in 2012.42 These affect a range of organizations, including all levels of
government, financial institutions, educational institutions and medical facilities.43 The
ease with which money can be transferred electronically also facilitates the unauthor-
ized acquisition of those funds, either by hackers gaining unauthorized access from
outside, or by insiders exceeding their level of authorization.
Malicious software (‘malware’) is increasingly used to acquire passwords as well as
other personal information. These often utilize phishing techniques in order to tempt
victims to unwittingly download malware. In one example, victims would receive
unsolicited emails from a financial institution advising of a problem with the victim’s
bank account or a recent financial transaction.44 The email provides a link to a website
38
Binational Working Group on Cross-Border Mass Marketing Fraud, ‘Report on Phishing:
A Report to the Minister of Public Safety and Emergency Preparedness Canada and the Attorney
General of the United States’ (2006) 4.
39
ibid 8–9.
40
Anti-Phishing Working Group, ‘Phishing Activity Trends Report: 1st Quarter 2014’
(2014) 2–7.
41
Canadian Internet Policy and Public Interest Clinic, ‘Techniques of Identity Theft’
(CIPPIC Working Paper No 2, ID Theft Series, 2007) 15.
42
United States Government Accountability Office (n 13) 4.
43
ibid 3.
44
The following summary is based on Federal Bureau of Investigation, ‘Malware Targets
Bank Accounts: “Gameover” Delivered via Phishing E-Mails’ (6 January 2012) <http://
www.fbi.gov/news/stories/2012/january/malware_010612/malware_010612> accessed 7 August
2014.
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that will purportedly help them to fix the problem, but by accessing it the victim
unknowingly downloads malware which acquires usernames and passwords.
3. Credit card skimming and ‘carding’

Credit card skimming is ‘the process by which legitimate credit card data is illicitly
captured or copied, usually by electronic means’.45 The data obtained from skimming
may be used in ‘card-not-present’ transactions, used to create replica cards46 or on-sold
for the purposes of identity crime.
The technology required to engage in this practice is small and easy to conceal.47
Typically, it may be used in the course of otherwise legitimate transactions; for
example, a restaurant, convenience store, or even a taxi.48 Alternatively they may be
concealed in the card-slot of an ATM or point of sale terminal.49 If the person is
covertly observed or a concealed camera is also installed, the PIN attached to the
account can also be obtained.
The term ‘carding’ refers broadly to the acquisition, distribution and use of credit and
debit card account information.50 So-called carding websites provide an online market-
place for the whole range of services that may be required to commit identity crime.51
The price of information available online varies depending upon its quality and level of
authentication.52 While the introduction of multi-factor identification measures, such as
PIN and Card Verification Numbers (‘CVN’) has helped reduce the value of generated
credit card numbers, they have increased the value of data taken from legitimate
cards.53
F. Spam
Unsolicited electronic mail, or ‘spam’, is a significant vehicle for the delivery of

fraudulent schemes, phishing emails and malware.54 It is also associated with other
forms of cybercrime; in particular the use of infected computers known as ‘botnets’ to
45
Model Criminal Code Officers Committee of the Standing Committee of Attorneys-
General, Model Criminal Code: Chapter 3, Credit Card Skimming Offences (Attorney General’s
Department 2006) 1.
46
See, for example, R v Flore & Anor [2014] EWCA Crim 465.
47
General (n 45) 5.
48
Adam Carey, ‘Passengers Warned about Credit Skimming Cabbies’ The Age (Melbourne,
29 March 2014) <http://www.theage.com.au/victoria/passengers-warned-about-creditcard-
skimming-cabbies-20140329-35q2w.html> accessed 7 August 2014.
49
General (n 45) 5.
50
Kimberly Kiefer Peretti, ‘Data breaches: What the Underground World of “Carding”
Reveals’ (2008) 25 Santa Clara Computer and High Technology Journal 375, 377.
51
Symantec, ‘Symantec Report on the Underground Economy July 07–June 08’ (2008) 4.
52
Peretti (n 50) 387; Symantec (n 51) 20.
53
Wall (n 16) 70.
54
Federal Trade Commission, ‘Spam Summit: The Next Generation of Threats and
Solutions’ (2007) 2–3.
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generate mass emails. For example, the ‘Bredolab’ botnet was estimated to have
infected 30,000,000 computers at its peak, generating 3 billion emails per day.55
Although recent reports suggest the volume of spam is declining, it remains a
significant problem, representing approximately 29 billion spam emails per day.56
Spammers are also increasingly making use of other forms of communication, such as
SMS/MMS and social networking sites. As it is not strictly fraud, the regulation of
spam is beyond the scope of this chapter. It is, however, a matter of international
concern, and one that is closely connected to the reduction of online fraud.57
III. LEGAL RESPONSES

The above examples clearly demonstrate the diversity of digital frauds that may be
committed. Such a complex problem requires a range of legal, educative and technical
responses.58 For example, the introduction of chip and PIN technology on Canadian
cards reportedly reduced losses from skimming from CDN$142 million in 2009 to
CDN$38.5 million in 2012.59
The focus of this chapter is on those criminal offences that may be adopted in
responding to digital frauds. These offences fall within the broader category of crimes
referred to as ‘cybercrimes’. These may in turn be classified as offences where ICTs are
the target of the criminal activity, offences where ICTs are used to facilitate the
commission of a crime, or offences where the use of ICTs is incidental but may afford
evidence of the crime.60 Digital frauds clearly illustrate both the first and second
categories, requiring legislative provisions that address both fraudulent conduct facil-
itated by ICTs, as well as the targeting of ICTs for fraudulent purposes. The three
categories of offence that will be summarized here are traditional fraud offences,
computer offences and identity crimes.61
55
Sophos, ‘Security Threat Report 2013’ (2013) 27.
56
Symantec, ‘Internet Security Threat Report 2014’ (2014)14.
57
All Party Parliamentary Internet Group, ‘“Spam”: Report of an Inquiry by the All Party
Internet Group’ (2003); Industry Canada, ‘Stopping Spam: Creating a Stronger, Safer Internet’
(Report of the Task Force on Spam 2005); Task Force on Spam, ‘Report of the OECD Task
Force on Spam: Anti-Spam Toolkit of Recommended Policies and Measures’ (Organisation for
Economic Co-operation and Development 2006).
58
See generally The President’s Identity Theft Task Force, ‘Combating Identity Theft: A
Strategic Plan’ (2007); Canadian Internet Policy and Public Interest Clinic, ‘Policy Approaches
to Identity Theft’ (CIPPIC Working Paper No 6, ID Theft Series, 2007); Organisation for
Economic Co-operation and Development, ‘Scoping Paper on Online Identity Theft’ (Ministerial
Background Report DSTI/CP(2007)3/FINAL, 2008); United Nations Office on Drugs and Crime
(n 14).
59
‘Skimming Off the Top’ (n 10).
60
Gregor Urbas and Kim-Kwang Raymond Choo, ‘Resource Materials on Technology-
Enabled Crime’ (Australian Institute of Criminology, Technical and Background Paper No 28,
2008) 5.
61
Although beyond the scope of this chapter, like all cybercrimes the prosecution of digital
frauds is improved by measures aimed at facilitating digital investigations and prosecutions more
broadly.
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A. Traditional Fraud Offences
Although assuming new forms, many of the scams outlined above are simply
traditional frauds and may be prosecuted under general fraud offences.62 However, the
application of provisions that evolved in the context of tangible goods to intangible data
can present challenges. For example, courts and legislatures have grappled with
questions such as whether the receipt of electronic funds may constitute an ‘obtaining’
for the purposes of theft,63 whether electronically transferred funds ‘belonged to
another’,64 and whether a computer can be deceived65 or can consent.66 Similarly,
traditional forgery offences do not apply to the falsification of electronic data such as a
website.67
It is therefore important to ensure that existing statutes are adapted to so that they are
capable of application in the digital context. For example, article 8 of the Council of
Europe Convention on Cybercrime68 requires Parties to enact provisions aimed at
frauds committed through the input or alteration of data.69 Similarly, in the context of
forgery, article 7 requires Parties to create an offence that applies to the creation or
alteration of stored data, which may be relied upon in the course of legal transactions.70
B. Computer Offences
As the above examples illustrate, many digital frauds involve unauthorized access to or
modification of data. Such conduct falls within the first category of cybercrimes: those
offences where ICTs are the target of the offence. There is an increasing recognition of
the importance of such offences, quite independently of issues relating to fraud.71 As
ICTs are increasingly seen as part of the critical infrastructure, their protection becomes
a matter of national security as much as criminal justice.72 Given the central role that
data plays in modern financial transactions, offences relating to the misuse of data are
also an essential component in providing effective enforcement against global fraud.
62
See generally Criminal Code (Cth), pt 7.3; Criminal Code (Can), pt X; Fraud Act 2006
(UK); 18 USC § 1343. For an example of a successful prosecution for conspiracy to defraud in
relation to credit card skimming, see &&&DPP v Camara, Georges, Donka & Anania [2014]
VCC 504.
63
See R v Thompson [1984] 3 All ER 565, 570.
64
See R v Preddy [1996] AC 815; Parsons v The Queen (1999) 195 CLR 619.
65
See The Law Commission, ‘Fraud’ (LAW COM No 276, 2002) 21.
66
See Kennison v Daire (1986) 160 CLR 129.
67
General, ‘Identity Crime’ (Final Report, 2008) 15.
68
Convention on Cybercrime, opened for signature 23 November 2001, ETS No 185
(entered into force 1 July 2004) (‘Convention on Cybercrime’).
69
Explanatory Report, Convention on Cybercrime, [86].
70
ibid [83].
71
See United Nations Office on Drugs and Crime, ‘Comprehensive Study on Cybercrime’
(Report, 2013).
72
See, for example, Organisation for Economic Co-operation and Development, ‘OECD
Guidelines for the Security of Information Systems and Networks: Towards a Culture of
Security’ (2002).
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Such offences are typically found in specific computer misuse provisions.73 These
generally encompass a range of interactions with data, described in the Convention on
Cybercrime as offences against the ‘confidentiality, integrity and availability of
computer data and systems’.74 Commonly referred to as ‘hacking’, in broad terms these
offences seek to address unauthorized access to computer systems,75 illegal interception
of computer data76 and unauthorized interference with computer data or computer
systems.77 Article 6 of the Convention on Cybercrime – ‘Misuse of devices’ – addresses
the black market in passwords and other information, which may facilitate computer
misuse.78
C. Identity Theft
Although the misuse of identifying information is a major factor in the commission of

digital frauds, there is a lack of clear terminology with the terms ‘identity crime’,
‘identity fraud’ and ‘identity theft’ often being used interchangeably.79 A useful
taxonomy is as follows:80
1. Identity Crime refers to offences where the defendant uses a false identity to
perpetrate the crime.
2. Identity Fraud is where a false identity is used to gain money, goods, benefits or
services.
3. Identity Theft is the assumption of a pre-existing identity.81
Both ‘identity crime’ and ‘identity fraud’ are examples of existing offences that are
facilitated by the use of false identities. While traditional criminal offences may be
used to prosecute the principal offence, there is arguably a need to create a specific
offence of ‘identity theft’, which is aimed at punishing ‘the preliminary steps of
collecting, possessing and trafficking identity information’.82
73
See, for example, Criminal Code Act 1995 (Cth), pt 10.7; Criminal Code (Can),
s 430(1.1); Computer Misuse Act 1990 (UK); 18 USC § 1030.
74
Convention on Cybercrime (n 68) ch II s 1 title I.
75
ibid art 2.
76
ibid art 3.
77
ibid arts 4 and 5.
78
Explanatory Report, Convention on Cybercrime, [71].
79
United Nations Office on Drugs and Crime (n 14) 25–9; Finklea (n 15) 3.
80
Australasian Centre for Policing Research and the Australian Transaction Reports and
Analysis Centre, ‘Standardisation of Definitions of Identity Crime Terms: A Step Towards
Consistency’ (Report Series No 145.3, 2006) 9–10.
81
See also United Nations Economic and Social Council, Commission on Crime Prevention
and Criminal Justice, ‘Results of the Second Meeting of the Intergovernmental Expert Group to
Prepare a Study on Fraud and the Crime Misuse and Falsification of Identity’ (E/CN.15/2007/8,
2 April 2007) [14].
82
General (n 67) 12.
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There is still some debate over whether such offences are necessary and/or
desirable,83 and uptake internationally has been relatively limited.84 However, a number
of jurisdictions have enacted specific identity theft provisions including Australia,85
Canada,86 the UK87 and the US.88 Rather than a detailed critique, the following
provides a general overview of some of the key features of identity theft provisions.
First, such offences are typically based around a central concept of ‘identity
document’ or ‘identity information’. The process of identification has been described as
‘the association of data with a particular human being’.89 In practical terms this may
involve something known to the person, such as a PIN, something in their possession,
such as a driver’s licence, or a physical characteristic such as a fingerprint.90 An
offender must therefore acquire or fabricate identifying information in order to commit
identity theft.91
While some jurisdictions define ‘identity document’ by reference to a list of
documents,92 others extend to ‘identity information’ more broadly; for example, ‘any
information – including biological or physiological information – of a type that is
commonly used alone or in combination with other information to identify or purport
to identify an individual’.93
Although ‘identity theft’ is generally used to refer to those situations where an
existing identity is appropriated, it may also include the creation of a false identity
(‘identity fabrication’) or alteration of an existing identity (‘identity manipulation’).94
Because they may also be used as a vehicle for fraud, it is also desirable that the
definition incorporate identification information of legal persons such as corporations.95
Around the central concept of identity information, a range of conduct is then
criminalized, typically encompassing possession, trafficking and manufacturing. In
addition to the general challenge of establishing possession of data in digital form,96
the additional challenge in relation to identity information is the dual-use nature of
such information and the danger of criminalizing simple possession of another person’s
83
See United Nations Office on Drugs and Crime (n 14) 35.
84
See United Nations Office on Drugs and Crime (n 71) 99–100.
85
Criminal Code (Cth), pt 9.5.
86
Criminal Code (Can), ss 402.1–405.
87
Identity Documents Act 2010 (UK), ss 6–8; Fraud Act 2006 (UK), ss 6 and 7.
88
The principal US federal provisions were enacted as the Identity Theft and Assumption
Deterrence Act of 1998: see especially 18 USC §§ 1028 and 1028A.
89
Roger Clarke, ‘Human Identification in Information Systems: Management Challenges
and Public Policy Issues’ (1994) 7(4) Information Technology and People 6, 8.
90
ibid 17–18.
91
Economic and Domestic Secretariat, ‘Identity Fraud: A Study’ (2002) 17.
92
Identity Documents Act 2010 (UK), s 7(1); Criminal Code (Can), s 56.1.
93
Criminal Code (Can), s 402.1. See also Criminal Code (Cth), s 370.1 (definition of
‘identification documentation’).
94
Australasian Centre for Policing Research and the Australian Transaction Reports and
Analysis Centre, (n 80) 7.
95
General (n 67) 31. See also The President’s Identity Theft Task Force (n 58) 67.
96
Jonathan Clough, ‘Now You See it, Now You Don’t: Digital Images and the Meaning of
“Possession”’ (2010) 19 Criminal Law Forum 205.
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identity information. This challenge is typically addressed by requiring proof of a

further mental state in respect of that information, or providing for a defence such as
‘reasonable excuse’. For example, under the Australian provision the defendant must
possess the identification information intending that any person (including the defend-
ant) will use the information to commit an offence of dealing in identification
information.97
As one of the major impacts of digital technology has been to facilitate the trade in
identity information, it is important also to make provision for what may broadly be
described as ‘trafficking’ offences. These typically encompass a broad range of
conduct; for example, the relevant Canadian provision makes it an offence if a person
‘transmits, makes available, distributes, sells or offers for sale’ another person’s identity
information, or possesses such information for any of those purposes.98
Finally, there are offences that criminalize the possession and distribution of items
used in the manufacture of identity documents and information. In addition to
purpose-built items such as credit card skimmers, there are many readily available
items such as imaging software and scanners that may be used to create identification
information. Accordingly, the fault element associated with such offences is crucial in
ensuring they are not over-broad.99
IV. INTERNATIONAL COOPERATION

While some digital frauds may be entirely local, from a law enforcement perspective
perhaps the greatest challenge is that they are often multi-jurisdictional in nature.
Offenders and victims may be located anywhere there is an internet connection, and the
nature of modern communications means that electronic evidence may be dispersed
throughout the world. In addition, the modern fraud environment is not only increas-
ingly transnational, it is also more organized.100
Therefore, while local responses to fraud are important, they should also be seen as
part of broader efforts to address the globalization of fraud. An important component of
such efforts is the harmonization of laws, both to eliminate or at least reduce the
incidence of ‘safe havens’, and to facilitate effective cooperation between law enforce-
ment agencies (‘LEAs’).
The transnational nature of modern fraud requires LEAs to cooperate not just with
their foreign counterparts, but also with public and private institutions such as
regulators, ISPs and financial institutions. It is therefore necessary to provide an
97
Criminal Code (Cth), s 372.2; Criminal Code (Can), ss 56.1(1) and 402.2(1); Identity
Documents Act 2010 (UK), ss 4(2) and 6(1). Also relevant may be the offence of possessing any
article for use in the course of or in connection with any fraud under Fraud Act 2006 (UK), s 6.
See also 18 USC § 1028(a).
98
Criminal Code (Can), s 402.2(2). See also Criminal Code (Can), s 56.1; Criminal Code
(Cth), ss 370.1 (definition of ‘deal’), 372.1 and 372.1A.
99
Criminal Code (Cth), s 372.3; Identity Cards Act 2006 (UK), ss 5(1) and 6(1); 18 USC
§1028(a)(5).
100
Russell Smith, ‘Transnational Cybercrime and Fraud’ in Philip Reichel and Jay Albanese
(eds), Handbook of Transnational Crime and Justice (2nd edn, Sage Publishing 2014) ch 7.
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appropriate legal framework to facilitate such cooperation, including provision for

mutual legal assistance and extradition. For example, the Convention on Cybercrime
provides the most comprehensive binding international agreement in relation to
cybercrime, although it does not address identity crime specifically. For those offences
that fall within its terms, the United Nations Convention against Transnational
Organized Crime may also provide an appropriate framework for international
cooperation.101 Other national, regional and international instruments may also be
relevant.102 The aim is to ensure that a country’s laws are not only capable of
addressing domestic fraud, but also of allowing for effective cooperation in responding
to transnational fraud.
101
United Nations Convention against Transnational Organized Crime, opened for signature
15 November 2000, 2225 UNTS 209 (entered into force 29 September 2003).
102
United Nations Office on Drugs and Crime (n 14) 263–301.
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Barry Rider - 9781783475780

PART VI
CORRUPTION
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Barry Rider - 9781783475780

31. The legal mechanisms to control bribery and

corruption
Nicholas Ryder
INTRODUCTION
Bribery and corruption have received a great deal of coverage since the introduction
and implementation of the Bribery Act 2010 and the extension of the remit of the
Serious Fraud Office.1 Bribery has been defined as ‘giving or receiving [of] something
of value to influence a transaction’.2 It has also been argued that it can include ‘money
… other pecuniary advantages … [and] non-pecuniary benefits’.3 It has been suggested
that bribery can be divided into two categories – direct and indirect4 – the latter of
which is normally conducted through an agent and arises where the respective parties
agree to meet in an attempt to gain a competitive advantage. The agent is paid a
commission from the additional revenue generated by the resultant work or trade.5
Denning, citing Latymer, stated that bribery was regarded as ‘a princely kind of
thieving’,6 yet despite these simple definitions, it is still a very difficult term to define.7
This is clearly illustrated by the wide range of statutory definitions offered by the
Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and
the Prevention of Corruption Act 1916. This uncertainty was clarified by the Bribery
Act 2010. The chapter begins by outlining criminalisation of bribery by virtue of the
Bribery Act 2010. It then identifies the United Kingdom’s8 bribery policy, which is
administered by the Ministry of Justice and enforced by the SFO in conjunction with
the Financial Conduct Authority.9
1
Hereinafter ‘SFO’.
2
Serious Fraud Office ‘Bribery and corruption’, n/d, available from http://www.sfo.gov.uk/
bribery–corruption/bribery–corruption.aspx, accessed 10 August 2014.
3
Sanyal, R. and Samantha, S. ‘Trends in international bribe-giving: do anti-bribery laws
matter?’ (2011) Journal of International Trade Law and Policy, 10(2), 151–164, 153.
4
Beale, K. and Esposito, P. ‘Emergent international attitudes towards bribery, corruption
and money laundering’ (2009) Arbitration, 75(3), 360–373, 362.
5
Ibid.
6
Denning, A. ‘Independence and impartiality of the judges’ (1954) South African Law
Journal, 71, 345.
7
The Law Commission, Reforming Bribery (The Law Commission: London, 2008).
8
Hereinafter ‘UK’.
9
Hereinafter ‘FCA’.
381
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THE EXTENT OF BRIBERY

Bribery poses a significant threat to the UK. It has been suggested that it can
undermine market integrity and business confidence and adversely affect society.10 Any
attempt to accurately measure the extent of bribery and corruption is methodologically
flawed. It has been estimated that $1tn is paid in bribes on a worldwide basis each
year.11 This is also backed up by the World Bank.12 Furthermore, it has also been
suggested that ‘$1tn in bribes are paid each year out of a world economy of $30tn – 3
per cent of the world’s economy’.13 The introduction of the Bribery Act 2010 could be
regarded as one of ‘the single most important developments’ in combating white collar
crime in the UK.14 Its introduction also has some observers arguing that it ‘provides the
UK with some of the most draconian and far-reaching anti-corruption legislation in the
world’.15
THE CRIMINALISATION OF BRIBERY

Prior to the Bribery Act 2010, the criminal offence of bribery was contained in the
Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Acts 1906 and
the Prevention of Corruption Act 1916. These legislative measures were unsatisfac-
tory,16 and required urgent amendments to ensure that the UK’s legislation complied
with international requirements to tackle bribery.17 It is therefore unsurprising that this
body of legislation was often described as ‘inconsistent, anachronistic and
inadequate’.18 It has been suggested that the motivation to reform the law of bribery
10
Pope, T. and Webb, T. ‘Legislative Comment – the Bribery Act 2010’ (2010) Journal of
International Banking Law and Regulation, 25(10), 480–483, 480.
11
Ibid.
12
William, C. ‘Trillion dollar bribery’ (2011) New Law Journal, 161(7447), 25–26, 25.
13
Sanyal and Samantha above, n 3 at 151.
14
Benstead, J. ‘Biting the bullet’ (2010) New Law Journal, 160(7434), 1291–1292, 1291.
15
Aaronberg, D. and Higgins, N. ‘Legislative Comment – The Bribery Act 2010: all bark
and no bite …?’ (2010) Archbold Review, 5, 6–9, 6. However, it must be noted that other
jurisdictions have introduced stringent legislation to tackle bribery and corruption, such as the
Foreign Corrupt Practices Act 1977. For a more detailed discussion see Rossbacher, H. and
Young, R. ‘The Foreign Corrupt Practices Act within the American response to domestic
corruption’ (1997) Journal of Money Laundering Control, 1(2), 125–137 and Maurer, V.
‘Uncharted boundaries of the US Foreign Corrupt Practices Act’ (2013) Journal of Financial
Crime, 20(4), 355–364. However, it is important to note that since its introduction, several
commentators have suggested that the Bribery Act 2010 is more effective than its US
counterpart. See for example the interesting discussion by Breslin, B., Ezickson, D. and Kocoras,
J. ‘The Bribery Act 2010: raising the bar above the US Foreign Corrupt Practices Act’ (2010)
Company Lawyer, 31(11), 362–369 and Cropp, N. ‘The Bribery Act 2010: Part 4: a comparison
with the Foreign Corrupt Practices Act: nuance v nous’ (2011) Criminal Law Review, 2,
122–141.
16
Editorial ‘The Bribery Act 2010’ (2010) Criminal Law Review, 6, 439–440, 439.
17
Ibid.
18
Aaronberg and Higgins above, n 15 at 6.
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The legal mechanisms to control bribery and corruption 383
was ignited by the recommendation of the Committee on Standards in Public Life.19

This was followed by the publication of a series of proposals by the Law Commission
in 1998.20 Other bribery related statutory measures included the Anti-terrorism, Crime
and Security Act 200121 and the Criminal Justice and Immigration Act 2008.22
However, it wasn’t until the implementation of the Bribery Act on 1 July 2011 that the
four current bribery offences were introduced.
It is a criminal offence if a person promises or gives a financial or other advantage to
another person and the recipient intends the advantage ‘to induce a person to perform
improperly a relevant function or activity, or to reward a person for the improper
performance of such a function or activity’.23 This is commonly referred to as case 1 in
the Bribery Act 2010. Also, a person is guilty of an offence if a person ‘promises or
gives a financial or other advantage to another person’, and that the person ‘knows or
believes that the acceptance of the advantage would itself constitute the improper
performance of a relevant function or activity’.24 Furthermore, case 2 in the Bribery Act
2010 criminalises conduct where a person ‘R’ commits an offence if the following
circumstances apply. Case 3 is where R requests, agrees to receive or accepts a
financial or other advantage intending that, in consequence, a relevant function or
activity should be performed improperly (whether by R or another person).25 Case 4 is
where R requests, agrees to receive or accepts a financial or other advantage, and the
request, agreement or acceptance itself constitutes the improper performance by R of a
relevant function or activity.26 Furthermore, case 5 is where R requests, agrees to
receive or accepts a financial or other advantage as a reward for the improper
performance of a relevant function or activity.27 Finally, case 6 is where, in anticipation
of or in consequence of R requesting, agreeing to receive or accepting a financial or
other advantage, a relevant function or activity is performed improperly by R, or by
another person at R’s request or with R’s assent or acquiescence.28 Therefore, a person
commits an offence if they wish, consent to, or accept an advantage with the specific
purpose that a relevant function or activity will be performed improperly either by
himself or by another person, or as a reward for such a performance.29 The mere
19
Committee on Standards in Public Life, First Report: ‘Standards in Public Life’ (Cm
2850–1, 1995) 43.
20
Law Commission, Legislating the Criminal Code: Corruption No. 248 (Law Commission
1998). For an interesting commentary on these proposals see Sullivan, G. ‘Proscribing
corruption – some comments on the Law Commission’s report’ (1998) Criminal Law Review,
August, 547–555.
21
Anti-terrorism, Crime and Security Act 2001, ss. 108–110. For an interesting discussion
of this legislation see Black-Branch, J. ‘Powers of detention of suspected international terrorists
under the United Kingdom Anti-terrorism, Crime and Security Act 2001: dismantling the
cornerstones of a civil society’ (2002) European Law Review, 27, 19–32.
22
Criminal Justice and Immigration Act 2008, s. 59.
23
Bribery Act 2010, s. 1(2).
24
25
26
27
28
29
Bribery Act 2010, s. 2.
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request, agreement or acceptance of a benefit constitutes improper performance and it

does not matter whether the advantage is received directly or through a third party nor
whether the benefit is to those same parties or another.30 This applies to instances
where the improper performance has either been done or is yet to be done by the
person or someone acting under his instruction or acquiescence. Furthermore, a person
commits an offence of bribing a foreign public official if they intend to influence the
official in their capacity as a foreign public official.31 Additionally, the accused may
‘intend to obtain or retain business, or an advantage in the conduct of business’.32
Therefore, a person is guilty of the offence if they seek to manipulate or induce the
official in the performance of their role as a public official with the intention of
obtaining or retaining business or a business advantage.33
Importantly, the Bribery Act 2010 introduces a new form of corporate criminal
liability,34 and now provides that a commercial entity is guilty of an offence if a person
associated with the organisation bribes another, intending to obtain or retain business or
a business advantage for that organisation.35 However, in order for the commercial
entity to be culpable, the organisation must be specified as a ‘relevant commercial
organisation’.36 For the purpose of this criminal offence, an ‘associated person’ is an
individual who ‘performs services for or on behalf of the organisation,37 with the
person being, for example, the organisation’s agent, subsidiary or employee’.38 The
extent of this criminal offence is wide, and it seeks to include a wide range of people
who may be committing bribery on behalf of a third party. However, to be an
‘associated person’, the accused ‘must be performing services for the organisation in
question and must also intend to obtain or retain business or an advantage in the
30
Bribery Act 2010, s. 2(4–6)
31
32
33
34
Bribery Act 2010, s. 7. For an excellent general discussion of corporate criminal liability
see Stessens, G. ‘Corporate criminal liability: a comparative perspective’ (1994) International
and Comparative Law Quarterly, 43(3), 493–520; Jefferson, M. ‘Corporate criminal liability: the
problem of sanctions’ (2001) Journal of Criminal Law, 65(3), 235–261; Clarkson, C. ‘Kicking
corporate bodies and damning their souls’ (1996) Modern Law Review, 59(1996), 557; and
Ambasta, K. ‘A leap of reasoning, but for special cases: an analysis of the ‘expiry’ of the
directing mind and will test in attribution of corporate liability’ (2012) Company Lawyer, 33(8),
227.
35
36
This is defined as either ‘a body which is incorporated under the law of any part of the
United Kingdom and which carries on a business (whether there or elsewhere), any other body
corporate (wherever incorporated) which carries on a business, or part of a business, in any part
of the United Kingdom, a partnership which is formed under the law of any part of the United
Kingdom and which carries on a business (whether there or elsewhere), or any other partnership
(wherever formed) which carries on a business, or part of a business, in any part of the United
Kingdom’. See Bribery Act 2010, s. 7(5).
37
38
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conduct of business for that organisation’.39 The introduction of the corporate criminal
liability provision is innovative and represents a new approach towards the law of
bribery.40 It is interesting to note that there is no requirement to prove that the activity
was committed in the UK or elsewhere. Indeed, there is no need to even show a close
connection to the UK as is needed for the other bribery offences under the Bribery Act
2010.41 It is a defence to the corporate criminal liability provision if the entity is able
to determine it had adequate procedures designed to prevent persons associated with
the commercial organisation from bribing another person.42 The Ministry of Justice has
stated that liability will be determined on a balance of probabilities.43 The Ministry of
Justice has published six general principles of adequate procedures which include
proportionality, top-level commitment to anti-bribery measures, risk assessment, due
diligence, communication, and monitoring and review.44 If the commercial entity is
able to demonstrate that they have adequate procedures, then no offence has been
committed. This is a complete defence. Additionally, the Bribery Act 2010 provides a
general defence for those charged under it with breaching the Acts provisions. Section
13 of the Act provides that it is a defence for a person charged with a relevant bribery
offence to prove that the person’s conduct was necessary for ‘the proper exercise of any
function of an intelligence service, or the proper exercise of any function of the armed
forces when engaged on active service’.45 The purpose of the section 13 defence is to
permit the intelligence services, or the armed forces, to undertake legitimate functions
which may ‘require the use of a financial or other advantage to accomplish the relevant
function’.46 It has therefore been introduced to allow for operational necessities. To rely
on the defence, the defendant needs to prove, on the balance of probabilities, that their
conduct was necessary.
POLICY BACKGROUND
The UK’s bribery strategy is based on the international legislative measures introduced
by the United Nations,47 the European Union48 and the Organisation for Economic
Co-operation and Development (OECD).49 In 1994, the OECD accepted a recom-
mendation that required member states to ‘take effective measures to deter, prevent and
combat the bribery of foreign public officials in connection with international business
39
Ministry of Justice, Bribery Act 2010, Circular 2011/05 (Ministry of Justice 2011)
para. 23.
40
Pope and Webb above, n 10 at 482.
41
Ministry of Justice above, n 39 at para. 22.
42
43
Ministry of Justice above, n 39 at para. 15.
44
Ibid.
45
46
The Government’s Explanatory Notes to s. 13 Bribery Act 2010.
47
Hereinafter ‘UN’.
48
Hereinafter ‘EU’.
49
Hereinafter ‘OECD’.
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transactions’.50 This was strengthened by the OECD Convention on Combating Bribery

of Foreign Public Officials in International Business Transactions.51 Additionally, the
EU introduced its first bribery measure in its Convention of the European Union on the
Fight against Corruption involving officials of the European Communities or officials
of member states.52 In 1997, it approved a Convention on the Fight against Corruption
Involving Officials of the European Communities or Officials of Member States.53
Furthermore, the UN introduced its Convention against Corruption in 2003. The OECD
Convention was signed by the UK in 1997.54 The UK’s initial response to these
conventions was the passing of the Anti-terrorism, Crime and Security Act 2001. This
was only ever meant to be a transient and temporary instrument until more comprehen-
sive corruption legislation could be introduced.55 The UK’s reform of its bribery laws
began with the publication of a Law Commission Report in 1998.56 The Law
Commission recommended that ‘the common law offence of bribery and the statutory
offences of corruption should be replaced by a modern statute’.57 The government
responded by publishing a Corruption Bill, which was rejected and resulted in a revised
version being published in 2005.58 This was followed by another consultation exercise
50
Sheikh, S. ‘The Bribery Act 2010: commercial organisations beware!’ (2011) Inter-
national Company and Commercial Law Review, 22(1), 1–16, 3. See Organisation for Economic
Co-operation and Development ‘OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions’, n/d, available from http://www.oecd.org/daf/
anti-bribery/ConvCombatBribery_ENG.pdf, accessed 11 August 2014. For an excellent discus-
sion of the implementation of this Convention in the UK see Organisation for Economic
Co-operation and Development ‘Steps taken to implement and enforce the OECD Convention on
Combating Bribery of Foreign Public Officials in International Business Transaction’, 14 March
2014, available from http://www.oecd.org/daf/anti-bribery/anti-briberyconvention/United
Kingdom_StepsTaken_March2014.pdf, accessed 11 August 2013.
51
See Sacerdoti, G. ‘The 1997 OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions’ (1999) International Business Law Journal, 1,
3–18.
52
Sheikh above, n 52 at 3. See Council Act of 26 May 1997 drawing up, on the basis of
Art.K.3(2)(c) of the TEU, the convention on the fight against corruption involving officials of the
European Communities or officials of EU member States (1997) OJ C195/1. This has also been
referred to as the EU Anti-Corruption Convention. See Van den Wyngaert, C. and Stessens, G.
‘The international non bis in idem principle: resolving some of the unanswered questions’ (1999)
International and Comparative Law Quarterly, 48(4), 779-804, at 793.
53
Convention on the Fight against Corruption Involving Officials of the European Com-
munities or Officials of Member States, drawn up in Brussels, 26 May 1997, 37 ILM 12; OJ
1997 C 195.
54
OECD Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions 1997, available from http://www.oecd.org/dataoecd/4/18/38028044.pdf,
55
Raphael, M., Blackstone’s Guide to the Bribery Act 2010 (Oxford University Press:
Oxford, 2010) at 116.
56
Law Commission above, n 7.
57
Sheikh above, n 52 at 4.
58
Home Office, Reform of the Prevention of Corruption Acts and SFO Powers in Cases of
Bribery against Foreign Officials (Home Office: London, 2005).
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in 2007,59 which led to the publication of its 2008 Report.60 The Report was followed
by the publication of a White Paper that resulted in the enactment of the Bribery Act
2010.61 The introduction of the Bribery Act 2010 has received a mixture of responses
from commentators. For example, some suggest that the provisions ‘go too far and fear
[that] the new “gold standard” legislation poses a threat to UK competitiveness’.62
Other concerns relate to the increased prosecutorial powers under the Act and the
compliance costs which firms in the UK are expected to meet.63 Conversely, it has also
been described as a ‘major piece of legislation, of immense practical importance to the
conduct of business, whether in the public or private sphere’.64 In many respects it is
still too early to determine who is correct; although it should go without saying that the
Bribery Act 2010 is significantly better than the UK’s previous legislation.
LAW ENFORCEMENT AND REGULATORY AGENCIES

The Bribery Act 2010 is enforced by the SFO and the FCA, the latter of which replaced
the Financial Services Authority65 in 2013. In addition to these agencies, the City of
London Police investigates allegations of bribery and corruption.66 As part of its efforts
to reduce this type of financial crime, the SFO has placed ‘huge emphasis on raising
awareness, education, persuasion, and ultimately prevention’.67 The FSA was given a
statutory objective to reduce financial crime under the Financial Services and Markets
Act 2000.68 Clearly, bribery falls within the definition of financial crime under this
statutory objective, with bribery also being relevant to its secondary statutory objective
of maintaining market confidence.69 Bribery affects the latter statutory aim because it
59
Law Commission, Reforming Bribery: A Consultation (Law Commission: London,
2007).
60
Law Commission, Reforming Bribery (Law Commission: London, 2008).
61
The Ministry of Justice, Bribery: Draft Legislation (The Stationery Office: London,
2009).
62
Pope and Webb above, n 10 at 480.
63
Ibid.
64
Editorial ‘The Bribery Act 2010’ (2010) Criminal Law Review, 6, 439–440, 439.
65
Hereinafter ‘FSA’. The transfer of functions from the FSA to the FCA were concluded by
the enactment of the Financial Services Act 2012. For a brief comment on this process see
Kokkinis, A. ‘The Financial Services Act 2012: the recent overhaul of the UK’s financial
regulatory structure’ (2013) International Company and Commercial Law Review, 24(9),
325–328.
66
Duthie, T. and Lawler, D. ‘Legislative Comment – The United Kingdom Bribery Bill’
(2010) Construction Law Journal, 26(2), 146–152, 147.
67
Monteity, C. ‘The Bribery Act 2010: Part 3: enforcement’ (2011) Criminal Law Review,
2, 111–121, 114.
68
Financial Service and Markets Act 2000, s. 6(3). For a more detailed commentary on this
statutory objective see Ryder, N. ‘The financial services authority and money laundering – a
game of cat and mouse’ (2008) Cambridge Law Journal, 67(3), 635–653.
69
For a more detailed discussion of the definition of financial crime see Harrison, K. and
N. Ryder, The Law Relating to Financial Crime in the United Kingdom (Ashgate: Farnham, UK,
2013) at 11–13.
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can adversely affect the City of London’s reputation.70 The FSA identified the threat
posed by bribery and stated that ‘there is a risk that firms could come under pressure to
pay bribes, especially if they are operating in jurisdictions where paying bribes is
widely expected. In addition, financial services firms may launder the proceeds of
corruption or be used to transmit bribes.’71 However, it is essential to note that the
transition from the FSA to the FCA resulted in a significant amendment to the statutory
objectives. Whereas the FSA had four uniform statutory objectives,72 the FCA has been
allocated a single wider objective to ‘ensure that markets function well’.73 This is
supported by three operational objectives: consumer protection, the integrity objective
and competition.74 Of particular relevance to this chapter is the integrity objective
which includes ‘protecting and enhancing the integrity of the UK financial system’75
and that the financial system must not be ‘used for a purpose connected with financial
crime’.76
The FCA does not enforce the provisions of the Bribery Act 2010, with its role only
applying where ‘authorised firms fail adequately to address corruption and bribery risk,
including where these risks arise in relation to third parties acting on behalf of the
firm’. The regulator argues that it ‘does not need to obtain evidence of corrupt conduct
to take regulatory action against a firm’.77 Therefore, authorised firms are bound to
comply with the FCA’s anti-bribery policies processes to prevent bribery and corruption
and to make sure that they conduct their business with integrity. These measures are
contained in the FCA Hand Book.78 Of particular relevance to this chapter is Systems
and Controls, or the SYSC part of the Hand Book and Principle 1 of its Principles for
Businesses. Rule 3.2.6R states that firms are required to ‘establish and maintain
effective systems and controls … for countering the risk that the firm might be used to
further financial crime’.79 This means that firms have the responsibility to assess the
70
Financial Services Authority, Anti-bribery and Corruption in Commercial Insurance
Broking: Reducing the Risk of Illicit Payments or Inducements to Third Parties (Financial
Services Authority: London, 2010) at 6.
71
Financial Services Authority, Financial Risk Outlook 2008 (Financial Services Authority:
London, 2008) at 35.
72
For a more detailed discussion of the statutory objectives of the FSA see Ryder, N. ‘Two
plus two equals financial education – the Financial Services Authority and consumer education’
(2001) The Law Teacher, 35(2), 216–232.
73
HM Treasury, ‘A new approach to financial regulation: transferring consumer credit
regulation to the Financial Conduct Authority’, 16 January 2014, available from https://www.
gov.uk/government/consultations/a-new-approach-to-financial-regulation-transferring-consumer-
credit-regulation-to-the-financial-conduct-authority, accessed 13 August 2014.
74
Financial Services Act 2012 s. 1B(3).
75
Financial Services Act 2012 s. 1D(1).
76
Financial Services Act 2012 s. 1D(2)(b).
77
Financial Services Authority ‘One-minute guide – anti-bribery and corruption in commer-
cial insurance broking’, n/d, available from http://www.fsa.gov.uk/smallfirms/resources/one_
minute_guides/insurance_intermed/anti_bribery.shtml, accessed 10 August 2014.
78
For a more detailed discussion see Financial Services Authority, Financial Crime: A
Guide for Firms (Financial Services Authority: London, 2011) at 43–49.
79
Financial Services Authority ‘SYSC Senior Management Arrangements, Systems and
Controls’ in The Full Handbook (Financial Services Authority, 2011) at Rule SYSC 3.2.6R.
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risks of becoming involved in, or facilitating, bribery and corruption and are obliged to
take all reasonable steps in preventing such risks from crystallising. Authorised firms,
therefore, have an additional, regulatory, obligation. This makes them responsible for
putting in place and maintaining relevant policies and processes which can be utilised
in preventing corruption and bribery and thus allows them to conduct their businesses
with integrity.80 Rule 6.1.1R states that ‘a firm must establish, implement and maintain
adequate policies and procedures sufficient to ensure compliance of the firm including
its managers, employees and appointed representatives with its obligations under the
regulatory system and for countering the risk that the firm might be used to further
financial crime’.81
ENFORCEMENT
A person found guilty of any of the offences contained in sections 1, 2 and 6 of the
Bribery Act 2010 is liable to a maximum custodial sentence of ten years’ imprisonment
and/or an unlimited fine. For the offence found in section 7, the maximum penalty is an
unlimited fine.82 If a person is convicted under the Bribery Act 2010, the maximum
sentence that can be imposed by the court is a ten-year custodial sentence. As outlined
at the start of this chapter, the SFO is the lead enforcement agency for criminal
offences created by the Bribery Act 2010. It is fair to note that the SFO have attracted
a great deal of criticism for its record of fraud related prosecutions.83 At the time of
writing this chapter, there have been very few bribery related prosecutions instigated
under the Bribery Act 2010. It is interesting to note that none of the bribery convictions
under the Bribery Act 2010 have been brought by the SFO. The first person to be
convicted under the Bribery Act was Munir Yakub Patel, who pleaded guilty for
accepting a £500 bribe not to register penalty points on the courts traffic offences
database.84 The second conviction under the Bribery Act 2010 was Mawia Mushtaq,
who after failing to pass a driving test for a private hire taxi licence, attempted to bribe
the licensing officer in Oldham Council.85 The third person to be convicted under the
Bribery Act 2010 was Yang Li, who sought to bribe a professor at the University of
Bath with £5,000 for increasing his grade for a failed written piece of work. In this
case, the accused was found guilty and sentenced to 12 months imprisonment.86 The
Bribery Act 2010 has resulted in a small number of criminal prosecutions since it
80
Financial Services Authority above, n 77.
81
Financial Services Authority above, n 79 at 6.1.1R.
82
83
See for example Ryder, N., The Financial Crisis and White Collar Crime: the Perfect
Storm? (Edward Elgar: Cheltenham, UK and Northampton, MA, 2014) at 207–209.
84
R v Patel (Munir Yakub) [2012] EWCA Crim 1243.
85
See Newman, C. and Macaulay, M. ‘Placebos or panaceas: Anglo-New Zealand experi-
ences of legislative approaches to combatting bribery’ (2013) Journal of Criminal Law, 77(6),
482–496, at 490.
86
See BBC News ‘University of Bath student jailed over tutor bribe bid’, 23 April 2013,
available from http://www.bbc.co.uk/news/uk-england-somerset-22269573, accessed 13 August
2014.
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received Royal Assent. In May 2014 the Sentencing Council published its ‘definitive
guideline on fraud, bribery and money laundering offences’.87 It is hoped that the
guidance from the Sentencing Council will be able to provide more clarity on the
appropriate sentences for the criminal offences created by the Bribery Act 2010.88
The other option available is under the Financial Service and Markets Act 2000,
where the financial regulator has been given a plethora of investigative and enforcement
powers and a series of preventative measures which should ensure that it was well
placed to tackle bribery and corruption in the financial services sector. For example, the
FSA was a prosecuting authority for both money laundering and a limited number of
fraud related offences. It also had the power to impose financial sanctions where it had
established that there had been a contravention by an authorised person of any of its
requirements.89 Furthermore, the FCA has the power to ban authorised persons and
firms from undertaking any regulated activity.90 The FSA and the FCA have favoured
imposing financial sanctions on firms and individuals as opposed to instigating criminal
proceedings, as part of their ‘credible deterrence’ policy.91 This was summarised by
Peat and Mason, who stated:
The FSA’s policy of credible deterrence in enforcement cases involves bringing action not
just against firms, but also against individuals. The normal sanction imposed on a firm is a
financial penalty; the firm pays the fine and then carries on with its normal business. In
contrast a sanction imposed on an individual may have longer-lasting consequences.92
Teasdale stated that the ‘credible deterrence agenda has relied upon not only securing
meaningful convictions, judgments and regulatory decisions, but also upon clearly
advertising them; to the regulated community to dissuade similar behaviour, and to the
wider world to engender consumer and market confidence’.93 Lewis et al. stated that
the regulator, the FSA, has ‘levied large fines and, at worst, bans, on firms and relevant
87
Sentencing Council ‘Fraud, bribery and money laundering’, 23 May 2014, available from
http://sentencingcouncil.judiciary.gov.uk/about/Fraud-bribery-and-money-laundering.htm,
accessed 13 August 2014. Also see Sentencing Council, Fraud, Bribery and Money Laundering
Offences: Definitive Guideline (Sentencing Council: London, 2014) at 41–53. For a brief
comment see Scott, C. ‘Sentencing guidelines for fraud, bribery and money laundering offences’
(2014) Butterworths Journal of International Banking and Financial Law, 29(4), 267–268.
88
For an illustration of two cases that offered some light into the possible sentences that
could be imposed before the Bribery Act 2010 was implemented see R v Anderson (Malcolm
John) [2003] 2 Cr. App. R. (S.) 28 and R v Francis Hurell [2004] 2 Cr. App. R. (S.) 23.
89
Financial Services and Markets Act 2000, s. 206(1). For a general discussion see Travers
Smith Regulatory Investigations Group ‘FSA enforcement action: themes and trends’ (2011)
Compliance Officer Bulletin, June, 87, 1–35.
90
Financial Services and Markets Act 2000, s. 56.
91
Financial Services Authority ‘Delivering credible deterrence’, speech by Margaret Cole,
Director of Enforcement, FSA, Annual Financial Crime Conference, 27 April 2009, available
from http://www.fsa.gov.uk/library/communication/speeches/2009/0427_mc.shtml, accessed 8
March 2013.
92
Peat, R. and Mason, I. ‘Credible deterrence in action: the FSA brings a series of cases
against traders’ (2009) Company Lawyer, 30(9), 278–279, at 278.
93
Teasdale, S. ‘FSA to FCA: recent trends in UK financial conduct regulation’ (2011)
Journal of International Banking Law and Regulation, 26(12), 583–586, at 585.
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approved individuals who breached its rules – sometimes regardless of whether the
breach has resulted in actual harm to customers’.94 This point is clearly illustrated by
the significant increase in the use of financial sanctions by the regulator.95 For example,
in 2007 the regulatory agency imposed a total of £5.3m in financial sanctions.96 A year
later, the FSA reported that the figure had increased to £22.7m.97 In 2009 the amount
of financial sanctions increased to £35m.98 The figures for 2010 and 2011 illustrated an
increase to £89.1m99 and a decrease to £66.1m.100 However, in 2012 the FSA imposed
financial sanctions that amounted to £311.5m,101 a majority of which were associated
with the LIBOR scandal. As of April 2013, the FSA had imposed financial sanctions
totalling £143.1m.102 From then, the FCA imposed financial penalties of approximately
£250m.103 Martin Wheatley stated that between 2012 and 2013 regulatory agencies
‘handed out a record £312m in fines, more than triple the previous high number of
£89m’.104 Teasdale described these decisions as an example of ‘an increase in the
FSA’s readiness to take decisive action’.105 Additionally, the FCA has the power to
impose civil fines under the Financial Service and Markets Act 2000,106 for example, in
July 2011, when the FSA fined Willis Limited £6.895m for weaknesses in its
anti-bribery and corruption systems and controls.107 Here, the FSA concluded that the
company had failed to guarantee that it had established and recorded an adequate
94
Lewis, A., Pretorius, R. and Radmore, E. ‘Outsourcing in the financial services sector’
(2013) Compliance Officer Bulletin, May, 106, 1–34, at 3.
95
For a more detailed commentary on the approach adopted by the Financial Services
Authority towards imposing financial sanctions see Financial Services Authority, Financial
Services Firms’ Approach to UK Financial Sanctions (Financial Services Authority: London,
2009).
96
Financial Services Authority ‘FSA fines table 2007’, n/d, available from http://www.
fsa.gov.uk/about/press/facts/fines/2007 accessed 8 March 2013.
97
fsa.gov.uk/about/press/facts/fines/2008, accessed 8 March 2013.
98
99
100
101
102
Financial Conduct Authority ‘Fines table 2013’, 1 October 2013, available from
http://www.fca.org.uk/firms/being-regulated/enforcement/fines, accessed 7 October 2013.
103
Financial Conduct Authority ‘Fines table 2014’, 7 August 2014, available from http://
www.fca.org.uk/firms/being-regulated/enforcement/fines, accessed 13 August 2014.
104
Financial Conduct Authority ‘The changing face of financial crime’, 1 July 2013,
available from http://www.fca.org.uk/news/speeches/the-changing-face-of-financial-crime,
accessed 8 July 2013.
105
Teasdale above, n 93, at 584.
106
Financial Services and Markets Act 2000, s. 206(1).
107
Financial Services Authority ‘FSA fines Willis Limited 6.895m for anti-bribery and
corruption systems and controls failings’, 21 July 2011, available from http://www.fsa.gov.uk/
pages/Library/Communication/PR/2011/066.shtml, accessed 24 July 2011.
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commercial rationale to support its payments to overseas third parties; failed to ensure
that adequate due diligence was carried out on overseas third parties to evaluate the risk
involved in doing business with them and failed to adequately review its relationships
on a regular basis to confirm whether it was still necessary and appropriate for Willis
Limited to continue with the relationship.108 Furthermore, the FSA fined Aon Limited
£5.25m for ‘failing to take reasonable care to establish and maintain effective systems
and controls to counter the risks of bribery and corruption associated with making
payments to overseas firms and individuals’. Here, the FSA determined that Aon
Limited had ‘failed to properly assess the risks involved in its dealings with overseas
firms and individuals who helped it win business and failed to implement effective
controls to mitigate those risks’.109 In December 2013, the FCA fined JLT Specialty
Limited £1.8m ‘for failing to have in place appropriate checks and controls to guard
against the risk of bribery or corruption when making payments to overseas third
parties’.110 The FCA stated that:
These failings are unacceptable given JLTSL actually had the checks in place to manage risk,
but didn’t use them effectively, despite being warned by the FCA that they needed to up their
game. Businesses can be profitable but firms must ensure that they take the necessary steps to
control the risks in that business. Bribery and corruption from overseas payments is an issue
we expect all firms to do everything they can to tackle. Firms cannot be complacent about
their controls – when we take enforcement action we expect the industry to sit up and take
notice.111
Additionally, the FCA has fined Besso Limited £315,000 for failing to take reasonable
care to establish and maintain effective systems and controls for countering the threat
posed by bribery.112 The FCA stated:
Despite receiving two visits from us, and numerous industry wide warnings, Besso failed to
ensure that they had proper systems and controls in place to counter the risks of bribery and
corruption in their business activities. Firms must play their part in preserving the integrity of
the UK financial system, including taking all steps necessary to prevent financial crime.
Where we find firms failing to do so, we will take action.113
It is extremely likely that the FCA will continue to impose financial sanctions on firms
who do not have adequate anti-bribery and corruption systems as part of their
obligations under its Hand Book. As for criminal prosecutions under the Bribery Act
2010, the three successful prosecutions that have been instigated have not been brought
108
Ibid.
109
Financial Services Authority above, n 107.
110
Financial Conduct Authority ‘Firm fined £1.8 million for ‘unacceptable’ approach to
bribery and corruption risks from overseas payments’, 19 December 2013, available from
http://www.fca.org.uk/news/firm-fined-18million-for-unacceptable-approach-to-bribery-corruption-
risks-from-overseas-payments, accessed 13 August 2014.
111
Ibid.
112
Financial Conduct Authority ‘Besso Limited fined for anti-bribery and corruption
systems failings’, 19 March 2014, available from http://www.fca.org.uk/news/press-releases/
besso-limited-fined-for-antibribery-and-corruption-systems-failings, accessed 13 August 2014.
113
Ibid.
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by the SFO. Needless to say, the SFO has recently secured the successful conviction for
conspiracy to commit corruption.114
CONCLUSION
The prevention of bribery has recently gained significant political attention by virtue of
the introduction of the Bribery Act 2010. It is accepted that this legislation represented
a significant improvement on the existing offences under the Public Bodies Corrupt
Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of
Corruption Act 1916.
Interestingly, the Bribery Act 2010 requires companies to have in place adequate
procedures to prevent people associated with them from being bribed. If a commercial
entity fails to prevent an associated person from committing bribery on their behalf, it
has committed an offence.115 However, provided the commercial entity is able to
demonstrate that it has in place ‘adequate procedures to prevent persons associated with
the commercial entity from undertaking such conduct’ it will avoid prosecution.116 It is
clear that this is an extension of the anti-money laundering system used by the FCA to
incorporate bribery and corruption. Importantly, the Bribery Act 2010 extended the
remit of the SFO to prosecute allegations of bribery, which is also a welcome
development. Even so, the effectiveness of the SFO will depend on it being granted the
appropriate levels of funding by the UK government. However, since the 2010 General
Election, the SFO has had its budget cut as part of a glut of extensive austerity
measures. For example, the annual budget of the SFO in 2008/2009 was £53.2m,
£32.1m in 2013/2014 and £30.8m in 2014/2015.117 The decision to reduce the budget
of the SFO, at a time when instances of financial crime have increased and the duties of
the SFO have been expanded to incorporate the enforcement of the Bribery Act 2010,
must be questioned and criticised.
114
Serious Fraud Office ‘Four sentenced for role in Innospec corruption’, 4 August 2014,
available from http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2014/four-
sentenced-for-role-in-innospec-corruption.aspx, accessed 13 August 2014.
115
116
117
Serious Fraud Office, Serious Fraud Office Annual Report and Accounts 2011–2012
(Serious Fraud Office: London, 2012) at 7.
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32. Corruption – new strategies

Jesper Johnsøn
1. INTRODUCTION
International financial crimes has emerged as a popular research topic of late,
undoubtedly due to the increased public demand for accountability and the need to fill
state coffers following the financial crisis of 2007–08. This chapter provides an
overview of how broader research on corruption and its control can inform more
specific studies of international financial crimes, and how overarching strategies to
mitigate corruption are changing due to new theoretical developments in the field.
This chapter surveys selected policy-relevant literature. It focuses on the literature
that has mushroomed since the beginning of the global anti-corruption movement in the
mid-1990s, initially led by the World Bank and later also promoted by other
international organisations such as the United Nations, the OECD, the European
Commission, and so on.
As shown below, no grand theory exists that students of corruption can readily apply
to understand all of its facets. However, most prevailing anti-corruption strategies are
based on a principal–agent view of corrupt transactions, rooted in economic theory. An
analytical approach rooted in economics can understand micro-level corrupt trans-
actions and forms of bureaucratic corruption, but is often blind to issues regarding
political economy, informal institutions and power structures. This chapter proposes
two new perspectives for research and strategy. First, historical institutionalism is a
useful analytical approach to inform anti-corruption strategies, as it recognises that
current choices are shaped by past actions, and the salience of institutions. Second, the
role of implementation is rarely studied systematically, and perhaps therefore not
prioritised in strategies.
2. CORRUPTION – AN ELUSIVE CONCEPT, BUT DEFINITIONS

MATTER
The investigation, prevention and prosecution of corruption is profoundly influenced by
how corruption is defined.1 However, an international definition of corruption still
eludes us. This is not surprising. Corruption is a catch-all term for many individual
behavioural acts, some of which are considered illegal, others just immoral.
Some social concepts are so embedded in our own conceptions, or so broad, that
establishing one encompassing definition is not feasible. In 1905, Weber did not find it
feasible to provide a definition of one of the central concepts to his writings,
1
Mark Philp, “Defining political corruption”, Political Studies 45, no. 3 (1997): 437.
394
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Corruption – new strategies 395
capitalism, on the grounds that it could only be seen as a “complex of elements

associated in historical reality which we unite into a conceptual whole from the
standpoint of their cultural significance”.2 The social scientist must therefore perpetu-
ally investigate the nature of the concept, and recognise that good definitions are
elusive.
A standard definition of corruption has been adopted by most international organ-
isations, focusing on the misuse of public office or public power for private benefit.
The United Nations Convention against Corruption (UNCAC) does not provide a single
definition of corruption. Chapter III of the UNCAC does, however, define a series of
corrupt behaviours, such as bribery and embezzlement.3
The concept of corruption covers a variety of more clearly defined terms. Paraphras-
ing Klitgaard, we must subdivide and unpack the vast concept of corruption.4 Below,
other key corruption categories are defined:
+ Bribery: The act of dishonestly persuading someone to act in one’s favour by a

payment or other inducement. Inducements can take the form of gifts, loans, fees,
rewards or other advantages (taxes, services, donations, etc.).
+ Embezzlement/misappropriation: To steal, misdirect or misappropriate funds or
assets placed in one’s trust or under one’s control. From a legal point of view,
embezzlement need not necessarily be or involve corruption.
+ Facilitation payment: A small payment, also called a “speed” or “grease”
payment, made to secure or expedite the performance of a routine or necessary
action to which the payer has legal or other entitlement.
+ Fraud: The act of intentionally and dishonestly deceiving someone in order to
gain an unfair or illegal advantage (financial, political or otherwise).
+ Patronage, clientelism and nepotism: Patronage at its core means the support
given by a patron. In government, it refers to the practice of appointing people
directly based on personal or party considerations. Clientelism was originally
conceived as the exchange of votes of political support, but has been given a
broader definition as long-term patron–client relationships where favours are
exchanged. Clientelism may not be illegal per se. Nepotism is to grant offices or
benefits to friends and relatives, not based on merit.
+ Rent-seeking: The socially costly pursuit of rents, for example monopoly rents.
Does not necessarily have to be an act of corruption.5
The list above shows that corruption categories are many, diverse, and often not
mutually exclusive. In fact, individual acts of corruption often form part of a broader
system of weak governance. This systemic nature of corruption is important to
2
Max Weber, The Protestant Ethic and the Spirit of Capitalism (London and Boston:
Unwin Hyman, 1930), 1.
3
UNODC, “United Nations Convention against Corruption”, United Nations (2004).
4
Robert Klitgaard, “International cooperation against corruption”, Finance and Develop-
ment: A Quarterly Publication of the International Monetary Fund and the World Bank
35(1998): 4.
5
Jesper Johnsøn, Corruption and Stabilisation: Aid Agencies’ Anti-corruption Strategies in
Fragile States, PhD thesis, University of Cambridge, 2014, 21–2.
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understand to develop an effective strategy against corruption. Many of the above

categories of corruption will either be part of international financial crimes, or facilitate
such crimes. The focus is often on bribery and fraud. However, forms of patronage and
rent-seeking behaviours also need to be understood to address the causes of corruption.
If corruption is not only driven by individual greed, but to secure the advantage of
one’s community, then it becomes a question of politics: who gets what, when, and
how.6
3. PAST STRATEGIES
This section analyses the contributions of public choice theory, the literature on
rent-seeking, and the transition from neo-classical to New Institutional Economics
(NIE). These economic approaches to the study of corruption and its control have been
dominating the academic and policy space the past half century.
3.1 Public Choice Theory on Corruption
Public choice theory focuses on rules – and incentive related behaviour. The behaviour
of bureaucrats, politicians and voters is explained via principles for individual
decision-making. Homo economicus, a rationally calculating individual seeking to
maximise their own utility, is the main analytical unit, and is prone to corruption when
it is in that individual’s self-interest.
The scope and extent of corruption in a country is seen to be determined by that
country’s institutional arrangements, as well as the character of its civil servants and
politicians. Bureaucrats, whose job it is to design and execute public policies, can
attempt to use the policy process to maximise their private objectives at the expense of
serving the general public efficiently and equitably. The desire by organised interest
groups to subvert the rules and to extract benefits for themselves can also create
opportunities for corruption.7
Public choice theorists argue that bureaucratic corruption is related to the scope and
extent of government intervention in private market exchange. Effective control of
corruption, then, should be based on a modification of existing rules in order to change
incentive structures and constrain the ability of the state to intervene in private
exchange and create artificial scarcities.8 Importantly, public choice theorists view both
6
The definition of political science as the study of “who gets what, when, how?” can be
traced back to Harold Lasswell’s seminal book Politics: Who Gets What, When, How (Cleveland,
OH: Meridian, 1936).
7
James M. Buchanan, Robert D. Tollison and Gordon Tullock, Toward a Theory of the
Rent-Seeking Society (College Station, TX: Texas A&M University Press, 1980), 1–15.
8
Gordon Tullock, “The backward society: Static inefficiency, rent seeking and the rule of
law”, in The Theory of Public Choice, ed. James M. Buchanan and Robert D. Tollison (Ann
Arbor, MI: University of Michigan Press, 1984), 224–37.
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bureaucrats and politicians as corruptible. One cannot rely on a benevolent principal to

design optimal institutions and policies (as later economic approaches would do).9
The central themes of most economic analysis – rent seeking and transaction costs –
are easier applied to petty/bureaucratic than systemic/political corruption. Although
public choice theory moves beyond a narrow focus on bureaucrats and transaction
costs, it does not focus on political or societal consequences. Economic gains are the
important dimension to study. Individual incentives are the paramount driver of
corruption.
3.2 The Rent-seeking Argument of Public Choice Theory
A powerful argument on corruption developed with the rent-seeking literature, which

had its theoretical foundation in the public choice literature. This argument became
influential in the early phases of the global anti-corruption movement. Anne Krueger,
World Bank Chief Economist from 1982 to 1986, made the argument that competitive
rent-seeking for import licences entails a welfare cost in addition to the welfare cost
that would be incurred if the same level of imports were achieved through tariffs.
Government restrictions would create scarcity which in turn would create opportunities
and competition for rents.10
Rent-seeking behaviour is able to explain a number of otherwise seemingly irrational
and damaging practices within the civil service. First, the pre-occupation with large
government expenditure schemes, for example in the construction or food subsidies
sectors, is logical from a rent-seeking logic, as such schemes offer larger rents to be
extracted. Second, the common secrecy or exclusivity of such schemes is a way for
bureaucrats to ensure that rents are available.11 The end result is sub-optimal policies
and inefficiencies in public service delivery.
Campos and Bhargava recognise the importance of the rent-seeking literature,
particularly as a way to limit excessive state power (thus reducing the risk of state
capture), but add that “because of its broad focus and the absence at the time of
relevant empirical data, this research failed to recognize the importance of transparency
and accountability in inhibiting state capture.”12 Thus, although the rent-seeking
literature originating from the dominant economics literature identifies and analyses an
important aspect of corruption related to state capture, the recommended remedies of
decentralisation, deregulation and privatisation are not panaceas to stop corruption.
9
Andrei Shleifer and Robert Vishny, The Grapping Hand: Government Pathologies and
Their Cure (Cambridge, MA: Harvard University Press, 1998).
10
Anne Krueger, “The political economy of the rent-seeking society”, American Economic
Review 64, no. 3 (1974).
11
Pranab Bardhan, “Corruption and development: A review of issues”, Journal of Economic
Literature 35, no. 3 (1997): 1326.
12
J. Edgardo Campos and Vinay Bhargava, “Introduction: Tackling a social pandemic”, in
The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, ed. J. Edgardo
Campos and Sanjay Pradhan (Washington, DC: World Bank, 2007), 5.
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3.3 From Neo-classical to NIE
The early works from Rose-Ackerman and Klitgaard mark a transformation from early
economic thoughts on corruption towards the prevailing current view.13 The work was
in alignment with the public choice and rent-seeking literature, but took a different
analytical approach rooted in micro-level transactions analysis, drawing on rational
choice theory and principal–agent theory. This meant that the primary category of
corruption studied shifted from rents (which incorporated a range of corruption
categories such as bribery, facilitation payments, embezzlement, abuse of power,
conflict of interest) to mainly bribery. This was unfortunate, as bribes often only
constitute a small portion of overall rents collected.
The approach initiated by Rose-Ackerman in 1978, addressing corruption as both an
economic and political problem, became influential. Concepts such as public interest,
the structure of government and political legitimacy became part of the economic
framework of analysis. The focus and methodology remained centred, however, on the
efficiency of economic distribution and costs, and rent-seeking.14 Many political
scientists and adherents to political economy approaches therefore criticised economists
for not properly applying their concepts and tools in the analysis. For example,
although Rose-Ackerman explores themes such as legitimacy, political structure,
culture and history, her final analysis focuses on self-interest, utility maximisation and
rents: “Cultural differences and morality provide nuance and subtlety, but an economic
approach is fundamental to understanding where corrupt incentives are the greatest and
have the biggest impact.”15
Klitgaard also acknowledges the importance of the political economy of a country
for the study of corruption, but the principal–agent model is at the centre of the
analytical framework. Asymmetric information and divergent interests are seen to be at
the heart of the principal–agent problem. The basic ingredients of corruption are
presented in a stylised equation which became exceedingly popular: corruption =
monopoly + discretion – accountability.16 Anti-corruption work in the 1990s and early
2000s relied on these principles of enforcement, oversight and controls, and reduced
discretion. However, they were later found to have generated few results.17 The formula
was not complete.
The field of economics became increasingly influenced by NIE in the 1990s.
Economists studying corruption followed this trend. Interestingly, this new sub-
discipline again sought to converge with political science, similarly to public choice
13
Susan Rose-Ackerman, Corruption: A Study in Political Economy (New York: Academic
Press, 1978); Robert Klitgaard, Controlling Corruption (Berkeley, CA: University of California
Press, 1988).
14
Susan Rose-Ackerman, Corruption and Government: Causes, Consequences and Reform
(Cambridge: Cambridge University Press, 1999). 226.
15
Ibid., xi, 5–6.
16
Klitgaard, Controlling Corruption, x, 69, 71, 75.
17
Jakob Svensson, “Eight questions about corruption”, Journal of Economic Perspectives
19, no. 3 (2005): 34–6.
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theory. NIE applies an institutional viewpoint to understand human interaction, based

on the work of Coase, Williamson and North.18
NIE applies Kahneman and Tversky’s insights on human judgement and decision-
making to better simulate, for example, criminal relations, bargaining and contracting.19
The insights of NIE have mainly come to mean that anti-corruption initiatives must
become better to change the incentives facing public officials and corrupt agents.20
When criminals conduct transactions they cannot use the formal legal system and hence
no recourse to legal action is possible. This makes informal, personal, reciprocal
relationships and trust more important as a means to enforce corrupt deals than when
making legal deals.21 The popularity of NIE has meant that the singular focus on
bribery and principal–agent dilemmas from neo-classical economists has again been
broadened, and wider consequences of rent-seeking behaviour have again come in
focus.
4. NEW STRATEGIES
Before the mid-1990s, international organisations cared little about corruption control.
Most academics and experts considered corruption as a necessary part of development,
often as a way of “greasing the wheels” of business and overcoming rigid state
structures. Today, corruption is believed to have corrosive effects on societies, both on
their economies and their governance systems.
Most authors find the lack of “firmly grounded theories of corruption” and the
“shortage of analytically informed empirical inquiries” evident but frustrating.22 The
lack of agreement on the nature and cause of corruption has been attributed to
the diversity of the competing theoretical approaches. Due to the lack of unity in the
theoretical framework “reliance on one single strategy derived from the mode of
analysis employed limits the scope and potential impact of anti-corruption efforts.”23
Below, this section presents two new perspectives that anti-corruption research has
neglected and strategies have lacked. First, a historical institutionalist analytical
18
Robert Coase, “The nature of the firm”, Economica 4, no. 16 (1937). Oliver E.
Williamson, “The economics of organisation: The transaction cost approach”, American Journal
of Sociology 87, no. 3 (1981). Douglass C. North, Institutions, institutional change and
economic performance (Cambridge: Cambridge University Press, 1990).
19
Daniel Kahneman and Amos Tversky, “Prospect theory: An analysis of decision-making
under risk”, Econometrica 47, no. 2 (1979).
20
Anwar Shah, “Overview”, in Performance Accountability and Combating Corruption, ed.
Anwar Shah (Washington, DC: World Bank, 2007), 6.
21
Johann G. Lambsdorff, The Institutional Economics of Corruption and Reform: Theory,
Evidence and Reform (Cambridge: Cambridge University Press, 2007). 214–15.
22
Robert Williams, “Introduction”, in Controlling Corruption, ed. Robert Williams and Alan
Doig (Cheltenham, UK and Northampton, MA: Edward Elgar, 2000), xiii; Diana Schmidt,
“Anti-corruption: What do we know? Research on preventing corruption in the post-communist
world”, Political Studies Review 5, no. 2 (2007).
23
Mark Robinson, Corruption and Development (London and Portland, OR: F. Cass,
1998), 12.
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framework provides important insights on corrupt behaviour which current theories

cannot capture. Second, the role of implementation is often not appreciated in theory,
and perhaps therefore is not central to strategies.
Before proceeding, it should briefly be mentioned that “new” is not synonymous
with good. In the past, many strategies have been heralded as new and sometimes even
as panaceas for corruption. Unfortunately, they have often not been new strategies, but
policy prescriptions without a strong empirical or theoretical foundation. The anti-
corruption policy literature is ripe with apparent panaceas and “new” strategies that
after a few years of enthusiasm ended up disappointing thoroughly. Decentralisation
and anti-corruption agencies come to mind.24
Collective action, open data, or the use of information and communication tech-
nologies (ICT) might be next in line to disappoint. Recently, scholars have argued that
approaches to control corruption based on collective action principles can overcome the
problems of past principal–agent strategies.25 However, although it can make sense to
view corruption as a collective action problem at times (where individual pursuits of
benefits lead to a worse situation for the wider community), this does not deliver new,
improved solutions for corruption control. Others argue that open data or ICT-based
tools can deliver the breakthrough that has been lacking so far. However, more
transparency, open data or e-government do not automatically translate into less
corruption.26
4.1 A Historical Institutionalist Approach
Past strategies have either based their theoretical foundation on a view of the individual
as fundamentally corruptible, or resorted to tautological explanations based on broad
concepts such as culture. This has led to static explanations of corruption. We need an
explanatory framework that can explain how individuals can become or stay clean, or at
least cleaner. The institutionalist view that individual behaviour is profoundly influ-
enced by the surrounding formal and informal institutions offers that. For example,
Douglas North’s Nobel Prize winning work on the salience of institutions is useful for
the study of corruption. His view that institutions, formal and informal, are the “rules
of the game of a society”, the humanly devised constraints that structure political,
24
Francesca Recanatini, “Anti-corruption authorities: An effective tool to curb corruption?,”
in International Handbook on the Economics of Corruption, ed. Susan Rose-Ackerman and Tina
Søreide (Cheltenham, UK and Northampton, MA: Edward Elgar, 2011); Rema Hanna et al., The
Effectiveness of Anti-corruption Policy: What Has Worked, What Hasn’t, and What We Don’t
Know (London: EPPI-centre, social science research unit, Institute of Education, University of
London, 2011), Technical report; Christian Lessmann and Gunther Markwardt, “One size fits
all? Decentralization, corruption, and the monitoring of bureaucrats”, World Development 38, no.
4 (2010).
25
Alina Mungiu-Pippidi, “Corruption: Diagnosis and treatment”, Journal of Democracy 17,
no. 3 (2006); Anna Persson, Bo Rothstein and Jan Teorell, “Why anticorruption reforms fail –
systemic corruption as a collective action problem”, Governance: An International Journal of
Policy, Administration, and Institutions 26, no. 3 (2013).
26
Tim Davies and Silvana Fumega, “Mixed incentives: Adopting ICT innocations for
transparency, accountability, and anti-corruption”, U4 Issue 2014, no. 4 (2014).
Barry Rider - 9781783475780

economic and social interaction, has also started to influence new strategies on
corruption, such as the World Bank’s 2012 revised Governance and Anti-Corruption
Strategy.27 This institutionalist view of corruption is, however, based on NIE’s
microeconomic orientation. Khan has criticised NIE for not being able to introduce
politics into its analysis. Although NIE overcomes some problems of earlier economic
approaches it still has serious limitations dealing with weak governance environments
and politics. Its microeconomics foundation orients it towards bureaucratic corruption
and the behaviour of individual corruptors.28
A historical institutionalist approach offers an analytical framework that is holistic,
and that can go beyond past analytical optics and credibly study rent-seeking and
patronage effects on public policy and the implementation process. Rent-seeking
behaviour need not be the result of individual greed, as economic analysis would say.
Individual behaviour is not predetermined, but influenced profoundly by surrounding
institutional pressures, both positively and negatively. This also applies to incentives for
corruption.29
The concept of “critical junctures” in historical institutionalism is used to explain the
success or failure of reforms.30 This relates to path dependence.31 Corrupt institutions
and systems of rule, established as a result of certain events taking place during
formative periods of institutional formation, would according to this logic naturally be
sticky and difficult to change. Institutions are subject to path dependency in the sense
that, once an institution has started down a track, the costs of reversal are very high.
Institutional paths are self-reinforcing.
Applying this logic to corrupt institutions, one can expect a self-reinforcing pattern
where institutions induce corrupt behaviour on the part of individuals, which in turn
reinforces the problem of corruption since – as long as most other individuals are
corrupt – it makes no real sense to actively try to change the system. Institutions can be
27
Douglass C. North, The New Institutional Economics and Development, Washington
University in St. Louis working paper (1992), 5; World Bank, Strengthening Governance:
Tackling Corruption – The World Bank Group’s Updated Strategy and Implementation Plan
(Washington, DC: World Bank, 2012), 15–21.
28
Mushtaq Khan, “State failure in weak states: A critique of new institutionalist explan-
ations”, in The New Institutional Economics and Third World Development, ed. John Harris,
Janet Hunter and Colin M. Lewis (London: Routledge, 1995).
29
Ha-Joon Chang, “Breaking the mould: An Institutionalist Political Economy alternative to
the neoliberal theory of the market and the State”, United Nations Research Institute for Social
Development – Social Policy and Development Programme Paper, no. 6 (2001): 17–20.
30
Kathleen Thelen and Sven Steinmo, “Historical institutionalism in comparative politics”,
in Structuring Politics: Historical Institutionalism in Comparative Analysis, ed. Sven Steinmo,
Kathleen Thelen and Frank Longstreth (New York: Cambridge University Press, 1992); Paul
Pierson and Theda Skocpol, “Historical institutionalism in contemporary political science”, in
Political science: State of the discipline, ed. Ira Katznelson and Helen V. Milner (New York:
W.W. Norton, 2002); Peter A. Hall and Rosemary C. R. Taylor, “Political science and the three
‘new institutionalisms’” Political Studies 44, December (1996).
31
James Mahoney, “Path dependence in historical sociology,” Theory and Society 29 (2000);
Paul Pierson, Politics in Time: History, Institutions, and Social Analysis (Princeton, NJ:
Princeton University Press, 2004); North, Institutions, Institutional Change and Economic
Performance.
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seen as inclusive or extractive, which relate to rent-seeking and patronage, and wider
distributional issues in societies.32
4.2 Implementation
Research on corruption and its control has so far neglected the role of implementation
in two key areas. First, there has been little focus on the way in which corruption
distorts public policy design and its implementation. Second, analysis of anti-
corruption strategies have tended to focus on design failure, leaving the option of
implementation failure unexplored.
How does corruption distort public policy design and implementation? Corruption is
widely thought also to negatively affect government performance, but few studies
examine the effects of corruption on the public administration and the wider govern-
ance system of a country. Ferraz and Finan show how corrupt mayors have lower
re-election chances if the public receive information on their misdeeds.33 McMillan and
Zoido document how judges, politicians and the media were bribed to support the
Fujimori regime in Peru.34 These studies document the extent of corruption, or its
effects. They do not explain why corruption occurs, how corrupt politicians or
bureaucrats manage to be successful in grabbing public funds, or what policy makers
and implementers can do to safeguard key political processes from misuse.
In short, scholars and practitioners expect that corruption distorts public policy and
its implementation, but few studies explore the ways in which such distortion takes
place. As a result, two types of corruption are understudied: rent-seeking and
patronage. This leaves important knowledge gaps on how corruption shapes policy
and its implementation. The narrow focus on bureaucratic types of corruption, bribery
and fraud, means that systemic patterns of corruption are rarely explored or explained
with a view to inform future strategies to prevent corruption.
Do strategies to curb corruption fail because of weak designs or poor implementa-
tion? The focus on both strategy and practice in implementation matters as it enables
the study of anti-corruption reforms to distinguish between theory failure and
implementation failure.35 In essence, failure of policy or programmes come from either
“weak implementation, or in the case of smooth implementation, a weak theory
regarding the types of activities and outputs needed in certain circumstances to bring
32
D. Acemoglu and J. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and
Poverty (New York: Crown Publishers, 2012).
33
Claudio Ferraz and Frederico Finan, “Exposing corrupt politicians: The effects of Brazil’s
publicly released audits on electoral outcomes”, Quarterly Journal of Economics 123, no. 2
(2008).
34
J. McMillan and P. Zoido, “How to subvert democracy: Montesinos in Peru”, Journal of
Economic Perspectives 18, no. 4 (2004).
35
The concepts of theory failure and implementation failure originate from the evaluation
literature. Nicoletta Stame, “What doesn’t work? Three failures, many answers”, Evaluation 16,
no. 4 (2010): 372.
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about a desired effect”.36 Implementation failure refers to the inability of the interven-
tions to perform the intended activities. Theory failure occurs when well-implemented
activities do not produce the desired effects. Anti-corruption interventions are often
seen to fail due to flawed strategies. However, an alternative explanation is possible,
that interventions fail not because they are based on flawed reasoning, but because they
are inadequately implemented. In fact, both types of failures can be at play at different
times for different organisations. We should incorporate the possibility of implementa-
tion failure and study strategy–practice disjunctures. Strategy–practice disjunctures
may have two main forms: (a) inconsistencies between strategy propositions and
intervention designs, and (b) consistency between strategy and intervention design, but
inconsistency between intervention design and practice in implementation.37
One reason for strategy–practice disjunctures might be what has been labelled
design–reality gaps, that is, the mismatch between the expectations of the design and
the realities on the ground. However, although some failures can reasonably be
attributed to a mismatch of design to the local contexts, some organisational factors
within agencies may also matter, irrespective of the local context. Typical factors
include: (a) a mismatch between strategic proposition and the resources available for
implementation, (b) bureaucratic competition and/or culture conflicts between units,
(c) disbursement pressures and perverse organisational incentives, and (d) lack of
strong organisational centres, official policies and clear guidance on anti-corruption,
resulting in idiosyncratic decision-making.
Many reported failures of anti-corruption programmes may be more due to
implementation rather than theory failure. If this is true, then policy makers should stop
always trying to find the next generation of anti-corruption tools. As mentioned above,
the anti-corruption policy literature is ripe with apparent panaceas that after years of
enthusiasm ended up disappointing thoroughly. Instead, efforts should go into solving
the implementation challenge. Recent scholarship suggests that approaches should be
problem-driven, iterative and adaptive.38 Many problems around strategy–practice
disjunctures are already addressed in literature on public policy, public administration
and organisational management.39 Those interested in addressing the implementation
challenge should begin by building on this body of knowledge. The transnational nature
of international financial crime gives rise to multiple implementation challenges that go
36
Jos Vaessen and Frans L. Leeuw, “Interventions as theories: closing the gap between
evaluation and the disciplines”, in Mind the Gap: Perspectives on Policy Evaluation and the
Social Sciences, ed. Jos Vaessen and Frans L. Leeuw (New Brunswick: Transaction Publishers,
2010), 146.
37
Johnsøn, Corruption and Stabilisation: Aid Agencies’ Anti-corruption Strategies in Fragile
States.
38
Matt Andrews, The Limits of Institutions Reform in Development: Changing Rules for
Realistic Solutions (Cambridge: Cambridge University Press, 2013), 217.
39
Charles E. Lindblom, “The science of ‘muddling through’”, Public Administration Review
19, no. 2 (1959); Charles E. Lindblom and Edward Woodhouse, The Policymaking Process, 3rd
ed. (Englewood Cliffs, NJ: Prentice Hall, 1993); Michael D. Cohen, James G. March and Johan
P. Olsen, “A garbage can model of organizational choice”, Administrative Science Quarterly 17,
no. 1 (1972); James G. March, The Pursuit of Organizational Intelligence (London: Blackwell,
1999); B. Guy Peters, The Politics of Bureaucracy, 5th ed. (London: Routledge, 2001).
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beyond those faced within national jurisdictions and institutions. Strategies on inter-
national financial crimes need to appreciate these implementation challenges. Research-
ers and experts need to recognise the challenges, but in ex ante appraisals of strategy
design and in ex post assessments of their effectiveness.
5. CONCLUSION
Our strategic responses to corruption depend on our understanding of the phenomena,
and beliefs in what works and why. Ideally, strategies would be based on rich empirical
evidence and strong theoretical frameworks. However, neither our evidence base nor
theoretical understanding allow for that. Instead, the anti-corruption literature is a
plethora of practitioners’ individual experiences and academics’ contesting hypotheses.
Strategies against international financial crimes are needed. Most authors in this
volume would agree that these strategies are emerging, but that we do not yet know
exactly what works and why. To move forward, we need to experiment with different
approaches, credibly document the impact, and exchange knowledge. Iterative and
adaptive processes of learning are not easy of course, but there is no real alternative.
As a minimum, emerging strategies against international financial crimes should
avoid the pitfalls of the early anti-corruption movement. Much energy and resources
were spent on apparent panaceas that ended up disappointing due to misplaced
expectations. The belief that one single institution will solve a complex problem is
naive. Anti-corruption authorities are not omnipotent. Specific institutions against
international financial crimes will be dependent on the existing institutional set up at
the national or international level. Overreliance on one strategic approach is similarly
short-sighted. Past anti-corruption strategies have either merely displaced corruption
(such as decentralisation) or only attacked individual categories of corruption (such as
bribery), thereby failing to address the systemic nature of corruption. Emerging
strategies against international financial crimes should avoid an isolated focus on only
one type of crime, and appreciate the interdependencies and synergies between various
types of corruption.
Future research and strategies would benefit from adopting a historical institutionalist
lens, to understand why it is so difficult to change corrupt behaviour, and why creating
strong institutions to control corruption is paramount. Moreover, the role of
implementation should be more appreciated, both in research and actual practice. To
learn what works and why, a crucial first step is to know whether initiatives fail due to
weak designs or poor implementation. Finally, the costs of international financial
crimes are not just the direct financial costs, but also the indirect costs that occur as a
result of a distortion of public policy and its implementation.
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33. Corruption and international development

assistance
Ingrida Kerusauskaite
Corruption has been increasingly gaining attention in the sphere of international

development. The phenomenon is being linked to a wide range of other developmental
issues, including undermining democratic institutions, slowing economic development,
contributing to government instability, poverty and inequality, among others.1 For
example, the foreword to the text of the United Nations Convention against Corruption
(UNCAC) refers to the phenomenon as ‘an insidious plague that has a wide range of
corrosive effects on societies’, further stating that corruption ‘is a key element in
economic underperformance and a major obstacle to poverty alleviation and develop-
ment’.
As such, corruption has become not only an issue dealt with by justice and law
enforcement institutions, but also organisations delivering international development
assistance as well as government departments for international development. This
chapter will address the effectiveness of two approaches to tackling corruption adopted
by the aforementioned organisations: international legal and overseas development
assistance (ODA) efforts to fight corruption.
1. CORRUPTION: NATURE, EFFECTS AND RESPONSES

First of all, it is important to clearly define the phenomenon that is to be addressed and
concentrate efforts to tackle it, as the resources at the disposal of organisations working
in international development are inevitably limited and, if spread too thinly, risk failing
to achieve significant results (in turn potentially resulting in donor fatigue).
International organisations commonly refer to corruption using the Transparency
International definition of ‘abuse of entrusted power for private gain’2 or the similarly
worded World Bank or European Union (EU) definition of ‘the abuse of public office
for private gain’.3 Corruption therefore includes, among other practices, bribery (‘use of
a reward to pervert the judgment of a person in a position of trust’); nepotism
(‘bestowal of patronage by reason of ascriptive relationship rather than merit’); and
misappropriation (‘illegal appropriation of public resources for private-regarding
uses’).4
1
UN (2014 (a)).
2
Bukovansky (2006) at 181.
3
See World Bank (2014) and EU (2014) at 37.
4
Nye (1967) at 419.
405
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Such definitions, however, are problematic for several reasons. First of all, it is not
viable to restrict the understanding and focus of anti-corruption activities to those
involving the public sector, as the World Bank and the EU definitions do. A lot of
corruption which occurs within the private sphere severely impacts the general public
as well, by for example minimising the level of tax revenues collected by the
government or limiting market competition. This would apply to behaviour such as
insider dealing or price collusion. Second, ‘abuse’ is a subjective term. Instead, it would
be more appropriate to consider the issue of transparency.5 It may be more useful for
organisations working on combating corruption to adopt a definition that would stress
the importance of disclosure and transparency (which, for example, in the case of
cabinet officials’ financial support of political parties in many states already makes the
distinction between legal and illegal activities). Accordingly, a more pertinent definition
for organisations working on combating corruption would resemble ‘the unauthorised
and undisclosed use of one’s status and power for private gains’.
It is also worth keeping in mind that the currently predominant forms of measuring
corruption – whether in terms of incidences of scandals, estimates of secret funds or
various corruption indexes, such as the Corruption Perception Index (CPI) compiled by
Transparency International – are all proxies for the real situation. For example, the
number of government corruption scandals will inevitably be lower in non-democratic
countries where the state controls the press; however, bureaucrats in such countries may
also be more prone to corruption as they are aware of the lower likelihood of public
scrutiny for corruption and have relatively low checks of accountability to the
population as a whole.
The CPI, one of the most commonly cited measures of corruption, is based on
‘expert’ opinions, including from foreign business people in the countries. These,
however, are inevitably subjective, possibly biased and, most importantly, incomparable
among different countries where different business people are being interviewed.
Razafindrakoto and Roubaud compare a large sample of households’ and ‘experts’
opinions on the extent and nature of corruption, and demonstrate a mismatch between
the two groups’ estimates of the prevalence and extent of corruption in a given
country.6 The authors noted that experts may be influenced by their ideological
inclinations and extrapolate from anecdotal experiences. Therefore it becomes very
difficult to assess how much corruption has influenced a given country’s economic
development, as it is impossible to accurately verify how pervasive the issue of
corruption is in one country compared to others.
In order to direct anti-corruption efforts to programmes and focus on areas where
they could have the most significant impact, it is useful to identify the various effects of
different types and aspects of corruption.
Numerous general theories about corruption have been proposed in academic
literature, considering the effects of corruption on a state’s economy, institutions,
society, inequalities and conflicts.7 While it is difficult to identify clear causes and
5
This is discussed in detail in Prof Rider’s chapter in this handbook (Chapter 60).
6
Razafindrakoto and Roubaud (2010).
7
See for example Campos et al. (1999), Mauro (1995), Rose-Ackerman (1978), Khan and
Jomo (2000), and Gupta (1995).
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Corruption and international development assistance 407
effects of corrupt activities due to the complex nature of the phenomenon, the example
of South Korea’s development experience is interesting to consider in light of the
prevailing corruption levels.
Very few states have been able to catch up with the ‘Global North’ in terms of
development and economic growth. The ‘miracle’ growth of South Korea since the
1960s, when the state was among the poorest countries in the world, is often attributed
to its meritocratic Weberian bureaucracy and sound economic policies. For example,
Evans argues that Korea’s ‘ability to facilitate industrial transformation … has been
fundamentally rooted in coherent, competent bureaucratic organization’.8 South Korea
is being portrayed as owing its impressive economic growth records to technocrats and
austere military generals who emphasised export-oriented industrialisation; and corrup-
tion is not even evoked in many analyses of the Korean growth experience. Some
accounts, however, suggest that corruption was nevertheless rampant during Korea’s
miracle growth era, including at the highest levels – two former presidents of Korea
(Chun Doo-hwan and Roh Tae-woo) were either imprisoned or exiled for corruption
and numerous other politicians, bureaucrats, bankers, businessmen and tax collectors
have been convicted.9 It is interesting to consider the factors that enabled the rapid
development of South Korea despite the prevailing levels of corruption, in order to
establish which aspects are the most harmful to developing economies and direct the
focus of international efforts against corruption on those particular aspects, alongside
general attempts to eradicate corruption.
The proceeds of corruption is an important factor to consider in relation to
determining the effects of corruption on a country’s economic development trajectory,
especially when money used for bribery is siphoned out of developing countries.
Depriving a country of money that could otherwise be reinvested in its economy can
have serious implications on its economic performance. The government of South
Korea had realised the dangers of losing the limited amount of foreign exchange
available in the country during its industrialisation, and therefore had strict capital
controls in place (just as Germany and Sweden had during their rapid development in
the 20th century), including restricting possibilities for foreigners to purchase South
Korean companies, as well as severe penalties for taking money out of the country.
South Korea introduced penalties of a minimum sentence of ten years in prison
and a maximum sentence of death for violations of prohibitions on overseas capital
transfers.10
Of course, other factors also played a critical role in ensuring South Korea’s rapid
economic growth at the time. These included general acceptance of severely limited
personal consumption levels and low labour remuneration, as well as the political will
to enforce the aforementioned policies where required.11 This was in the context of the
unstable South Korean peace with North Korea which has been argued to have instilled
a perception of the need to develop economically in order to be able to counter possible
8
Evans (1995) at 51.
9
Kang (2002) at 177.
10
Grabel (1996) at 1772.
11
Crotty and Epstein (1996) at 144.
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threats from North Korea.12 Favourable external circumstances such as access to the US
market and financial assistance without conditionalities attached,13 as well as the nature
of the unsaturated international manufacturing market at the time of South Korea’s
industrialisation,14 also played a role in the successful development of the country.
Others have suggested that it may not be the presence, but rather the extent of
corruption that should be considered. Kang argues that the reason why corruption was
not detrimental to economic growth in Korea was because the political strength of state
agents and businesses was balanced, which meant that the business sector kept state
corruption from spinning out of control and vice versa.15 Khan suggests that as the
Korean state was resistant to societal and interest group demands, state officials and
bureaucrats had incentives to maximise payments over the long term rather than the
short term,16 which resulted in a non-detrimental ‘efficient kleptocracy’ over a long
period of time rather than ‘lump sum’ corruption, which would have damaged the
Korean economy more.
It is clearly difficult to accurately quantify and prove the effect of corruption on
states’ development. This difficulty is exacerbated by the fact that the definition of
‘development’ itself has been over time evolving and can be understood in differing
senses – from the economic aspects, namely states’ GDP growth, to measures of
people’s physical well-being, socio-political rights, capabilities, inequalities and/or
happiness.17 As demonstrated by the example of Korea, corruption on its own does not
necessarily inhibit economic growth. However, it is very likely to reduce economic
growth, as its potential implications on social relations, namely certain groups being
advantaged over others, can result in acute inequalities, social tensions and grievances,
which in turn have the potential to escalate into larger-scale conflicts.
Anti-corruption projects have therefore been gaining prominence in Western govern-
ments’ international development and international affairs considerations. Michael
groups the anti-corruption project types undertaken into four main categories: univer-
salistic, state-centric, society-centric and critical approaches to corruption.18 Michael
argues that universalistic approaches regard corruption as ‘a universal phenomenon
occurring in organisations which run according to well-defined social laws’.19 The
state-centric approaches allow more scope for the influence of individual personalities
and power struggles, therefore considering political and sociological causes of corrup-
tion. Society-centric approaches tend to consider corruption as socially constructed,
therefore emphasising the role and influence of social and cultural institutions. The
critical approach views anti-corruption efforts as futile, as having unintended conse-
quences, or even as counter-productive in combating corruption.
12
Harvie and Lee (2003) at 286.
13
See for example Painter (1999).
14
See Cline (1982) at 89.
15
Kang (2002)
16
Khan (1996)
17
This chapter considers corruption primarily in relation to states’ economies; however,
other aspects of development should be kept in mind, not least as they are often closely
intertwined, especially in relation to countries’ long-term trajectories.
18
Michael (2004) at 1068.
19
Ibid.
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A combination of these approaches can be seen in the current works of international

organisations. The universalistic approach lends itself to the development of inter-
national legal approaches to eradicating corruption as well as the ability to use
‘toolkits’, that is, pre-defined approaches to corruption that would be replicable in
different contexts.20 The former will be discussed in the following section. State-centric
approaches to corruption can lead to projects tackling corruption indirectly, for example
by means of institutional reforms to increase transparency and accountability in a
government’s operational processes. Society-centric approaches in practice suggest a
programme focus on non-state actors, and civil society and advocacy in particular. The
example of the Department for International Development’s anti-corruption work,
discussed in the third section of this chapter, illustrates the organisation’s willingness to
combine the aforementioned approaches to addressing corruption.
2. INTERNATIONAL LEGAL EFFORTS

This section will briefly review the effectiveness of addressing the issue of corruption
in developing countries by means of international treaties and international law.
There is a wide range of treaties, conventions and international organisations that
address corruption on an international level. These include the Organisation for
Economic Co-operation and Development (OECD) Anti-Bribery Convention, as well as
other treaties and conventions relating to organisations such as the European Bank for
Reconstruction and Development, the United Nations (UN), the EU and the World
Customs Organization. However, it was not until 2003 that the UNCAC was adopted by
the UN General Assembly. UNCAC is now endorsed by more than 140 state
signatories.21
International law has evolved particularly rapidly in the past 50 years, expanding its
scope from just addressing relations between states to include individuals and other
non-state actors. Such developments, it has been argued, reflect changing values and
morals globally, as well as circumstances that require the cooperation of multiple states
to be addressed (particularly those of rapid technological advances and increased global
interconnectedness).
This has impacted on the international perception of sovereignty. Sovereignty has for
a long time been considered in the sense of the right to freedom from interference of
other states in a country’s domestic affairs, and was in fact the foundational doctrine of
the international system. For example, the UN Charter, Article 2(7), states that ‘Nothing
contained in the present Charter shall authorize the UN to intervene in matters which
are essentially within the domestic jurisdiction of any state.’22 However, the develop-
ment of international humanitarian and human rights law, as well as the establishment
of super-sovereign organisations such as the UN and the EU, in addition to the rising
influence of non-traditional and non-state actors in the international arena (such as
20
See for example Klitgaard’s (1998) proposed anti-corruption ‘toolkits’.
21
The Convention focuses on prevention, criminalisation, international cooperation and asset
recovery, which will subsequently be discussed in further detail.
22
UN Charter available at http://www.un.org/en/documents/charter/index.shtml.
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large international Non-Governmental Organisations and Multi-National Corporations),

has been challenging the traditional concept of sovereignty. Sovereignty has become
more often than not referred to as the states’ obligation to provide their citizens with
basic rights and freedoms, upon which the right to freedom from interference from
other states and international organisations is contingent. Accordingly, foreign states’
interference in issues that have until recently been considered as domestic, such as
addressing corruption, has become increasingly common practice in international
affairs, international law and international development.
Issues of enforcement are central to theoretical discussions on the effectiveness and
nature of law. If we are to move away from the unit of a nation-state towards a more
international or transnational approach to law, enforcement is largely dependent on the
will of states to enforce it in other jurisdictions. However, the methods of doing so
remain problematic. Individual states would need to have both the resources and the
interest to monitor other states’ compliance with international law, especially when they
are not directly affected by particular states’ behaviour. Also, some states may be
reluctant to confront their trade partners or countries of strategic interest in other areas
in relation to what can be perceived as their domestic policies.
International and independent monitoring of state compliance with treaties and
declarations is a very costly and politically sensitive undertaking. It is not surprising
that enforcement and monitoring agencies are not strongly supported or funded by all,
including large, politically and economically powerful states, as some of the monitoring
agencies’ decisions and acts (if these were entirely independent) would not always
necessarily serve the funding states’ interests. Therefore, in the case of many treaties,
conventions and declarations, a system of self-monitoring is in place, whereby ‘states
submit reports on human rights violations taking place within their borders and the
measures they are taking to eliminate them’.23 However, trusting all states to honestly
report on the progress of the state in ensuring its citizens’ social and political rights
seems a little too optimistic.
Furthermore, the international courts do not possess an international policing system
that they could call upon to arrest criminals and surrender them to international courts
for trial. Individual states’ police forces therefore have to be relied upon. This is
problematic for two reasons: in non-democratic states, the police may not be independ-
ent or willing to challenge potentially corrupt leaders; and when the police force of
another state is brought in (which is an increasingly common phenomenon), their goals
may differ from the official statements. For example, Huggins has suggested that
countries have used their police assistance programmes in other states as a means to
establish intelligence and other social control structures in host states.24
However, despite the lack of strict enforcement and monitoring mechanisms, many
believe that states do generally observe international law, with only occasional
violations. Shaw refers to ‘a common frame of reference’ and ‘a common language’
that international law provides states in dispute or disagreement: ‘It can constitute a
23
Hill (2010) at 1162; also see Hafner-Burton and Tsutsui (2005).
24
Huggins (1998).
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mutually understandable vocabulary book and suggest possible solutions which follow
from a study of its principles.’25
It is important to attempt to establish to what extent the ‘common language’ is
merely window dressing and masking the reality of the effects of these international
laws. Some empirical studies dispute the effectiveness of the normative aspects of
international law. Although empirical studies on the effect of international treaties on
states’ practices have been suggesting varying and often incompatible results,26
interesting theoretical analyses have been put forward. For example, Vreeland observes
that the effect that the ratification of the United Nations Convention against Torture
(UNCAT) has very much depends on the domestic politics of the state in question.27
Namely, Vreeland, citing cases from Nigeria, Gabon and Ivory Coast, observed that
multi-party dictatorships (i.e. dictatorial regimes where political power is shared or to
some extent contested) are more likely to sign and ratify the Convention than one-party
dictatorships. However, at the same time, the former are also more prone to violating
their obligations under the Convention. The author explained his observations by
suggesting that multi-party dictatorships are under more pressure from domestic actors
to engage in international human rights treaties, and the government sees it as a
low-cost mechanism to improve its image and legitimacy domestically and abroad;
whereas one-party dictatorships are rather unwilling to cave into similar demands from
their citizens and national groups, fearing to set a precedent or send the message that
political dissent will be tolerated. Therefore, ratification of the UNCAT, according to
Vreeland, has little or no intended effect on state practices.
Hill suggests interesting variations in the effects that different international treaties
and regimes have on state practices.28 In particular, that the UNCAT and the
International Covenant on Civil and Political Rights (ICCPR) leads to reduced respect
for physical integrity rights, while ratification of the Convention on the Elimination of
All Forms of Discrimination against Women (CEDAW) has a positive impact on
women’s rights situations. Hill argues that the reason for the differences in the effects
may lie in the fact that women, as a subset of the population, do not generally pose a
threat to the government’s position in power, whereas political dissidents for whom the
UNCAT and the ICCPR are more relevant, may pose a threat to the stability of a
non-democratic government.29
Taking robust action towards ensuring compliance with the UNCAC can fall into
both of these categories – it can be seen as posing a threat to the government in more
severe cases of non-democratic states with high levels of corruption within the
government, and also as a tool to strengthen the position of a ruling party within a
country. For example, China has become very active in anti-corruption activities, not
only internationally, by for example playing a key role with the International Associ-
ation of Anti-Corruption Authorities (IAACA), but also domestically. In particular,
since Xi Jinping took office as the General Secretary of the Chinese Communist Party
25
Shaw (2013) at 7.
26
See for example Hill (2010).
27
Vreeland (2008).
28
Hill (2010).
29
Hill (2010) at 1172.
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in 2012, corruption cases have been brought against a significant number of both
local-level and senior party officials. However, due to the reporting structures of the
anti-corruption agencies, these could potentially be targeted against political opponents
thereby reducing the levels of contestation of political power in the country (please see
Chapter 34 of this handbook for a more in-depth analysis of corruption in China).
Nevertheless, there is scope for the government’s stricter approach to corruption to
result in a society that is increasingly less tolerant of corruption.
Shaw suggests that ‘just as incidents of murder, robbery and rape do occur within
national legal orders without destroying the system as such, so analogously assaults
upon international legal rules point up the weaknesses of the system without denigrat-
ing their validity or their necessity’.30 Shaw argues that the rare exceptions of states
violating international law are the ones that receive the most publicity, hence the
general public perception of international law being violated more often than it actually
is. Although, as stressed by the analysis of this chapter, enforcement structures, and, in
particular, individual states’ capacities and willingness to prioritise the issues of
corruption and commit resources, are crucial for international laws to yield the desired
results.
3. DFID’S ANTI-CORRUPTION WORK IN DEVELOPING

COUNTRIES
Western countries’ development agencies are increasingly involved in anti-corruption
work in developing countries. This is evidenced by an increasing number of projects
addressing corruption, the production of country corruption strategies and investment in
anti-corruption research agencies such as U4, which is funded by eight states’
governments, including the UK.31
This section will introduce the rather eclectic variety of governmental initiatives to
tackle corruption on various levels and in differing manners. For this, the author will
consider the example of the UK’s Department for International Development (DFID),
which has been investing increasingly significant resources to tackle corruption in
developing countries, as shown by Figure 33.1.
It is worth noting that this data refers to DFID’s expenditure on anti-corruption
organisations and institutions as defined by the OECD, namely, as expenditure to
support
[s]pecialised organisations, institutions and frameworks for the prevention of and combat
against corruption, bribery, money-laundering and other aspects of organised crime, with or
without law enforcement powers, e.g. anti-corruption commissions and monitoring bodies,
special investigation services, institutions and initiatives of integrity and ethics oversight,
specialised NGOs, other civil society and citizens’ organisations directly concerned with
corruption.32
30
Shaw (2013) at 6.
31
For more information see http://www.u4.no/info/about-u4/.
32
OECD (2014).
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80
70
60
50
40 Budgeted
30 Spent
20 Forecast budget
10
0
Source: ICAI report on DFID’s approach to anti-corruption and its impact on the poor.
Figure 33.1 DFID’s anti-corruption expenditure, 2007–2018 (£ millions)

These are direct approaches to combating corruption. Solely focusing on DFID’s work
with the aforementioned institutions and organisations, however, fails to capture the
breadth of projects aiming to address corruption indirectly, as well as the organisation’s
support of anti-corruption projects carried out by multilateral organisations.
One of the main methods used by DFID to address corruption indirectly is increasing
transparency and accountability. DFID attempts to do this by tackling the ‘supply’ and
‘demand’ aspects of corrupt practices. The former refers to projects designed to
increase transparency and accountability of the government in question via projects
to, for example, strengthen the country’s legal and financial systems and institutions to
reduce the opportunities for and increase the risks of engaging in corrupt practices. The
latter refers to efforts to mobilise the civil society and to increase the awareness of
citizens of their rights and entitlements to ultimately be able to demand more
transparency and accountability from their governments. This could be done by using
the media, local political representatives or other forms of citizen mobilisation.33 DFID
also attempts to incorporate anti-corruption elements into sector-specific programmes,
by tackling absenteeism in schools and hospitals, and conducting surveys and analyses
to verify that the goods obtained as part of DFID’s programmes reached the intended
beneficiaries.34
DFID has a structured approach to corruption and produces country strategy reports,
where it often considers corruption on two levels: (1) ‘the risk of taxpayers’ money in
DFID programmes being fraudulently spent or stolen’, and (2) the abuse of entrusted
power for private gain within a country and its institutions, with the negative impact
33
ICAI (2014) at 1.
34
Ibid. at 10.
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that it has on development prospects.35 Accordingly, the DFID country strategies are
split into two parts: protecting UK funds and supporting efforts to reduce corruption in
the countries.36
The case of Uganda is interesting to analyse in more detail in order to illustrate the
potential leakages within international development programmes. Transparency Inter-
national has classified Uganda as ‘highly corrupt’ every year since 1996. Transparency
International’s Global Corruption Barometer 2010 ranks Ugandan law enforcement
institutions such as the Uganda Police Force and the Judiciary among the top three
corrupt institutions in Uganda; the Barometer also noted that 67 per cent of their
respondents believe that the level of corruption in Uganda has increased in the last
three years.37 There seems to be a significant number of laws and strategies adopted by
the various institutional bodies, such as the Anti-Corruption Act of 2009, the Whistle-
blowers Protection Act of 2010, The Public Finance and Accountability Act of 2003,
the Public Procurement and Disposal of Public Acts of 2003 and five-year National
Anti-Corruption Strategies. Their implementation, however, appears to be more prob-
lematic given the results from the aforementioned surveys. DFID had planned to spend
a budget of £283 million over a three-year period from 2012 to 2015 in Uganda. In
2012, however, several major international donors, including the UK, Sweden, Norway,
Ireland and Denmark, had suspended financial aid to Uganda due to corruption charges
brought against the Office of the Prime Minister; and millions of dollars of donor
funding were found to have been embezzled.38
Direct budget support, as illustrated by the example of Uganda, is susceptible to
corruption within aid programmes. Accordingly, development agencies such as DFID
have been favouring technical assistance and capacity building programmes or working
with civil society organisations and other stakeholder groups, especially in countries
where the fiduciary risk of misdirection of funds is deemed as high.39 However, strictly
focusing on technical assistance can have limited results if other issues are not
addressed. For example, training sessions to inform officials of the detrimental effects
of corruption are unlikely to yield desired results if government officials’ salaries are
insufficient to meet their needs without the additional income from engagement in
corrupt activities. An appropriate balance needs to be struck between direct budget
support and technical assistance, most importantly, focusing efforts where they are
likely to have the most significant impact, given the limited resources that international
development organisations have at their disposal.
It is interesting to note that DFID is at times being encouraged to expand its portfolio
of projects tackling corruption. The Independent Commission on Aid Impact (ICAI)
recently reviewed DFID’s efforts to ‘reduce corruption as experienced by the poor’,
concluding that DFID has not ‘developed an approach equal to the challenge [of
35
See for example DFID’s anti-corruption strategies for Zambia (DFID 2013 (a)) and
Uganda (DFID 2013 (b)).
36
This chapter will focus on the latter.
37
Transparency International (2011) and (2014).
38
DFID (2012).
39
Another example of a country approached in such a manner is Nigeria, as discussed in the
ICAI report on DFID’s approach to anti-corruption and its impact on the poor 2014, ICAI
(2014).
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corruption], nor has it focused its efforts on the poor. While some programmes show
limited achievements, there is little evidence of impact on corruption levels or in
meeting the needs of the poor.’40 This report was picked up by the popular media,
inspiring headlines such as ‘Confirmed: Our foreign aid fuels corruption’.41 The
response from academics and practitioners, however, was a lot more nuanced, criticis-
ing the report’s methodology and its approach to corruption.42 In particular, the
potential of an external agency such as DFID, with finite resources and its own
accountability systems, to influence a culture and habitual practices in a different
environment is arguably rather limited. DFID does not, as pointed out by the report,
focus on corruption as experienced by the poor, but rather corruption in higher-level
government institutions as well as technical assistance to increase the risks and reduce
the potential rewards for individuals engaging in corrupt activities. The report illustrates
the well-wishing ambition of some stakeholders in international development to address
a multitude of issues at once and deliver results promptly, which in turn may lead to
spreading the finite resources available too thinly and severely reducing their impact.
It is noteworthy that the leakages within aid programmes do not compare to the
funds that developing countries lose out on due to tax evasion, money laundering and
embezzlement. The UN Secretary General Ban Ki-moon has stressed that corruption
deprives developing countries of more than a trillion US dollars every year through
money laundering, illegal tax evasion and embezzlement.43 A report on stolen assets
produced by ONE estimates that $3.2 trillion of assets held offshore originate in
developing countries; and if these assets were declared, they could yield yearly
revenues of $19.5 billion in taxation.44
International efforts to facilitate the recovery of stolen assets are therefore crucial in
the fight against corruption. Initiatives such as the Stolen Asset Recovery Initiative
(StAR), established by the World Bank, and the United Nations Office on Drugs and
Crime (UNODC) have contributed significantly to a joint international effort to ‘end
safe havens for corrupt funds … and to facilitate more systematic and timely return of
stolen assets’.45 As such, the StAR initiative influences policy in the sphere of the
global fight against corruption, in addition to providing capacity building, case
assistance and facilitating the collaboration of experts from different jurisdictions.
Recovery of stolen assets is not only a powerful deterrent for corrupt activities, but also
provides developing countries with more capital while reducing their dependencies on
foreign states. Acknowledging this, DFID has also supported the International Centre
for Asset Recovery at the Basel Institute for Governance, which provides strategic case
advice, technical assistance, capacity building and informs global policy discussions on
setting standards in asset recovery.46
40
Ibid. at 1.
41
Martin (2014).
42
See for example Marquette et al. (2014).
43
UN (2014 (b)).
44
ONE (2014).
45
StAR (2014).
46
For more information, see Basel Institute on Governance (2014).
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Furthermore, DFID has been incorporating activities to strengthen developing

countries’ abilities to tackle corruption from a broader criminal justice approach.47 This
includes assistance to developing country governments in conducting investigations,
prosecutions and facilitating international collaboration for asset tracing and recovery,
with the aim to reduce the possible gains and increase the risks associated with
engaging in corrupt activities. Since 2006, DFID has been funding the Proceeds of
Corruption Unit (POCU) in the Metropolitan Police, which specialises in cases
involving the allegations of laundering of illicitly gained assets in the UK, as well as
funding the City of London Police Overseas Anti-Corruption Unit (OACU), which
investigates allegations of corruption involving UK citizens, companies and financial
institutions in developing countries, and financially supporting posts within the Crown
Prosecution Services, dedicated to executing confiscation orders in relation to
developing-country cases.48 DFID’s track record to date in relation to the afore-
mentioned initiatives has been regarded as positive – with £5 million invested in six
years, more than £100 million in frozen assets are ‘currently subject to judicial
procedures with a view to confiscation’.49 Not all of the frozen assets, of course, are
likely be recovered. Nevertheless, if the assets were illicitly gained there is a chance
that they will also be used to fund illicit activities. Freezing the assets may have the
effect of disrupting criminal networks or at least make it more difficult for them to
operate. An investment of £5 million over six years, however, is almost insignificant
compared to DFID’s overall expenditure, which amounted to more than £10 billion in
the financial year 2013–2014.50
Support to such organisations needs to be significantly scaled up for more significant
results to be achieved. Investment in asset tracing and recovery, as well as other fields
where Western countries’ governments and their international development organ-
isations have a comparative advantage, must be increased, and resources directed to and
concentrated where they can make a real difference both in the long and short term.
4. CONCLUSIONS
This chapter has raised several issues relating to tackling corruption using means of
international law and ODA. One needs to be realistic about what can and cannot be
achieved using the differing methods of tackling corruption, and corruption in
developing states in particular. While international law can facilitate an exchange of
ideas and the diffusion of norms and values among different states, practical outcomes
will ultimately depend upon the will and capabilities of individual states to apply and
enforce these norms within the country, its institutions and operating procedures.
47
This is in addition to the preventative measures.
48
Gray et al. (2014) at 56.
49
Ibid. and Mason (2013) at 203.
50
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/331591/annual-
report-accounts-2013-14a.pdf, at 10. This is not the entire extent of DFID’s investment in asset
recovery, some of which comes under wider programmes, particularly relating to anti-corruption.
These, however, are on the same scale as DFID’s investment in POCU and OACU.
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Nevertheless, when coupled with government support for anti-corruption initiatives,

international legal efforts can be very useful in addressing corruption, including by
sharing best practices and instilling a culture of non-acceptance of corruption.
This chapter has also discussed a notable movement of international attempts to
address corruption through international development assistance, as illustrated by the
case of DFID. This assistance combines a variety of different approaches to anti-
corruption, presented in the first section of the chapter. This chapter also highlighted
the need for a holistic approach to anti-corruption interventions, balancing technical
assistance and budget support. In the context of the limited resources available to tackle
corruption, however, international development organisations’ efforts may need to be
concentrated more in order to ensure the success and continuity of such development
initiatives. Given the stated importance of asset recovery, there is scope for it to be one
of the areas for DFID’s and other international organisations’ increased investment.
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34. Corruption in China

Li Hong Xing, Xuebin Li and Enze Liu
1. INTRODUCTION AND BACKGROUND

Corruption by its nature is a complex and interactive political, economic, and cultural
phenomenon. Transparency International defines corruption as “the abuse of entrusted
power for private gain”.1 Corruption virtually exists in every society in this world.
However, China is unique in its ways of understanding, identifying, and combating
corruption, given the fact that China is a socialist country with a long history of
bureaucratic culture.2 The Chinese Communist Party (CCP) has put many constraints
on the bureaucracy since its foundation because of the party’s utopian idea of an
egalitarian society. But, on the other hand, the party continues to rely on the
bureaucracy to manage the centrally planned and hierarchically ordered economy.
Administrative power, and its associated privileges, essentially has turned the bureau-
cracy into a powerful social class.3
Corruption, in the sense of abuse of public office, has been a serious crime in China
for thousands of years. Since China’s economic reform in the 1980s, the issue of
combating corruption has raised increasing public concern. The ruling party CCP has
recognised that corruption undermines the credibility of its own objectives ever since
its foundation, and has launched innumerable initiatives against corruption and self-
dealing and devoted considerable resources to the problem.4 This chapter intends to
review the evolution of anti-corruption, introduce Chinese anti-corruption structure and
legislation, and discuss China’s recent anti-corruption initiatives.
Historical Review of Anti-corruption in China
“The entire Chinese history was a history of embezzlement.”5 Despite an exaggeration

of the fact, it does suggest that corruption has been a serious problem throughout
Chinese history. Meanwhile, China has also had a long history of fighting corruption.
As early as the period of the Xia, Shang and Zhou Dynasties (2000 BC), there were
already some written records of laws and regulations punishing officials committing the
1
Transparency International (2011), “Corruption in the UK: Overview and Policy Recom-
mendations”, p. 1.
2
See Ting Gong (1994), The Politics of Corruption in Contemporary China: an Analysis of
Policy Outcomes, Praeger Publishers, p. 15.
3
Ibid.
4
See Barry Rider (2013), “When Chinese Whispers Become Shouts! Editorial”, Journal of
Financial Crime, 20(2).
5
See Yanan Wang (1987), Zhongguo Guanliao Zhengzhi Yanjiu (A Study of Chinese
Bureaucratic Politics), Beijing: Chinese Social Sciences Press, p. 117.
419
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offence of bribery and corruption.6 And the crimes of economic wrongdoing of

government officials were explicitly prohibited by the laws of the Tang, Song, Yuan,
Ming and Qing Dynasties.
Punishment for corruption in Chinese history was quite harsh and usually more
severe than that for other crimes. The Book of Documents of the Xia Dynasty provides
that anti-corruption regulations were part of the basic laws created by Gao Tao, and the
punishment for corrupt officials was as severe as to “tattoo the face” at that time.7 In
the much more recent Qing Dynasty (1644–1911), the embezzlement of only less than
1 tael8 would invoke a penalty of 80 bamboo strokes, while the sum for strangulation
(the death penalty) was 40 taels.9
Although the 1911 Revolution successfully overthrew the last feudal Dynasty, the
Qing Dynasty, bureaucratic corruption continued to flourish after the Revolution
throughout the Republic (1911–1916), Warlord (1916–1927), and Nationalist (1927–
1949) periods.10 It is said that during the Civil War period, while grievous corruption
alienated the Kuo Min Tang (KMT) government from the citizens, the communists
obtained material support from tens of millions of peasants.11 The defeat of KMT
partly was attributed to the prevalent corruption in the army.
Since the People’s Republic of China was founded in 1949, substantive efforts have
been made by the CCP to eradicate corruption in the society. Between 1951 and 1952
the CCP initiated a large-scale anti-corruption campaign – the Three and Five Anti’s
Campaign. The campaign started with anti-corruption, anti-waste, and anti-bureaucracy
among government officials. It quickly targeted private enterprises with a Five Anti’s
movement against bribery, tax evasion, theft of state assets, cheating in government
contracts, and stealing of national economic intelligence. The corruption case of Liu
Qingshan and Zhang Zishan during the campaign was billed as “the first serious
criminal case of New China”.12 Liu, the party secretary of Tianjin city, and Zhang, the
administrative chief, were found guilty and executed for misappropriation of huge sums
of state funds.13
In 1978, the new leader Deng Xiaoping carried out the economic reform and
opening-up policy, which have created massive business opportunities. This, on the one
6
According to the record of “Classical Annals of Lu, Zuozhuan 14 years of Zhao Duke”
(“Zuo-Zhuan Zhao-Gong 14 Nian”); and the “Book of Documents of Xia Dynasty” (“Xia-Shu”).
7
“Book of Documents of Xia Dynasty” (“Xia-Shu”)
8
From 1600 to 1814, the tael was equal to one and half or two dollars in current terms. In
the late Qing Dynasty, the value of the tael gradually dropped to half and then one-third of its
original value.
9
See Tianquan Cheng (1983), “Zhongguo Gudai Jingji Fanzui de Sifa Zhunze” (“The
Judicial Principles for Economic Crimes in Ancient China”), Politics and Law 3, pp. 121–131.
10
Details can be found in Ting Gong (1994), The Politics of Corruption in Contemporary
China: an Analysis of Policy Outcomes, Praeger Publishers, pp. 41–46.
11
Ibid.
12
See Bing Lu, Yuxin Shi, and Yongzhao Wu (1990), Zhongguo Fanfubai Diyi Daan (The
Most Serious Case of Corruption of the New China), Beijing: China Law Press.
13
According to “News of the Communist Party of China, Corruption Case of Liu Qingshan
and Zhang Zishan”, Liu Qingshan embezzled 184 million yuan (old currency) and Zhang Zishan
embezzled 194 million yuan (old currency), exchange rate: 10,000 old Chinese yuan equals to
one new Chinese yuan.
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Corruption in China 421
hand, has stimulated China’s economic growth. On the other hand, the economic
reform has involuntarily contributed to the exploding of corruption. The central planned
economy system allows public officials to make illicit gains from selling goods and
materials from state enterprises to the market due to the price margin.
Official corruption has become more pervasive than before, both quantitatively (in
terms of the amount of money involved and the number of cases investigated and
prosecuted) and qualitatively (in terms of the types of corruption and the actors
involved).14 In response to deteriorating corruption, Deng Xiaoping pointed out, “to
curb corruption, we must enhance the construction of socialist democracy and our legal
system”.15 Therefore, the “Decisions on Severe Punishment of Serious Economic
Crimes”16 was passed in 1982, in which the penalties for accepting bribes were
extended to life imprisonment and the death penalty. Since then, a number of laws and
regulations in relation to combating corruption have been promulgated.
2. THE REGULATION OF ANTI-CORRUPTION AND ITS

PUNISHMENT
Anti-corruption Structure
China has a systematic anti-corruption structure led by the Communist Party Central
Committee for Discipline Inspection (CCDI). It consists of a variety of state agencies at
all administrative levels, ranging from a district level to the central level. The main
bodies against corruption within the government are the Committees for Discipline
Inspection (CDIs). The members of CDIs are elected by the party congresses at the
corresponding levels. The CDIs have overall responsibility for combating corruption
and ensuring integrity among the party cadres by providing education, overseeing the
exercise of power, and examining cases in violation of party discipline. The key
anti-corruption agencies include the People’s Procuratorate, the Ministry of Supervision
(MOS) and the Audit Office.
The corruption investigatory agency is the People’s Procuratorate, which is legalised
by the Constitution to conduct investigations, approve for arrest, and prosecute
corruption cases.17 Article 18 of the Chinese Criminal Procedure Law specifies that the
People’s Procuratorate is responsible for combating
crimes of embezzlement and bribery, crimes of dereliction of duty committed by State

functionaries, and crimes involving violations of a citizen’s personal rights such as illegal
14
See T. Wing Lo (1993), Corruption and Politics in Hong Kong and China, Buckingham,
UK: Open University Press, pp. 46–48.
15
Deng Xiaoping (1979), Selected Works of Deng Xiaoping, Volume 2, Beiing: People’s
Publishing House, p. 189.
16
Passed at the Twenty-Second Plenary Session of the Standing Committee, Fifth National
People’s Congress, on 3 March 1982.
17
Reports of the Course, Group 1: The Relationship of the Prosecution with the Police and
Investigative Responsibility, available at: http://www.unafei.or.jp/english/pdf/RS_No53/No53_
29RC_Group1.pdf.
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detention, extortion of confessions by torture, retaliation, frame-up and illegal search and
crimes involving infringement of a citizen’s democratic rights – committed by State
functionaries by taking advantage of their functions and powers.18
The investigatory force within the People’s Procuratorate was originally called the
Economic Crimes Procuratorial Department, and lately named as the Anti-Corruption
Bureau. The main function of the Anti-Corruption Bureau includes handling cases of
misappropriating public funds, acceptance of or offering bribes, dereliction of duty, and
embezzlement.19
The MOS, a subordinate organ to the State Council, is an assigned agency for
administrative supervision and inspection of the implementation of government
decrees, of administrative discipline, of administrative efficiency, and of law awareness
of public servants in performing public duties.20 In 2007, the National Bureau of
Corruption Prevention of China (NBCP) was created within the MOS in response to the
United Nations Convention against Corruption. The NBCP has no power to investigate
individual cases, but works to analyse the underlying reasons of corruption, to develop
preventative measures, and to guide the anti-corruption campaign in the public and
private sectors.21 The National Audit Office (NAO) inspects accounts of state-owned
enterprises and government entities, and publishes reports, including the annual
expenditures of different government agencies.22
Chinese anti-corruption agencies are required to exercise their power in line with law
and independently without being subject to interference by administrative organs,
public organisations, or individuals. However, the bureaucratic structure makes such
legal requirements less effective. The CDIs are subject to a dual leadership of the
Communist Party Committees at its corresponding level and its superior at a higher
level. Similarly, law enforcement agencies such as the People’s Procuratorate are also
subject to a leadership of a higher level superior and a local Political and Legal
Committee. In addition, law enforcement agencies’ finances are horizontally funded by
their corresponding level of the government. The effectiveness of anti-corruption
campaigns is therefore undermined by the multi-leaderships and their conflicting
interests.
Indeed, the effectiveness of Chinese anti-corruption effort is determined by the
Communist Party itself, in particular its top politician’s attitude and response. Retro-
spectively, every Communist Party leader in history acknowledged the detrimental
effects of corruption on the legitimacy of the leadership of the Communist Party and
initiated actions to combat corruption. However, the outcomes of various anti-
corruption campaigns have been inconsistent. In the past the majority of convicted
corrupt officials were at the bottom tier of the bureaucratic structure or disloyal
members. However, the situation has begun to change since Xi Jinping took power
during the Chinese top leadership transition in 2012. In contrast to his predecessors, Xi,
18
Article 18, Criminal Procedure Law of the People’s Republic of China.
19
China’s Efforts to Combat Corruption and Build a Clean Government, available at:
http://wenku.baidu.com/view/21993b4a767f5acfa1c7cd96.
20
The Ministry of Supervision, http://www.ccdi.gov.cn./
21
Ibid.
22
National Audit Office, http://www.cnao.gov.cn/main/index.htm.
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a princeling of Chinese politics, has launched an impressive and powerful attack on

corruption. The anti-corruption initiative has broadened to cover a variety of industries
such as infrastructure construction, the energy industry, land requisition, mining rights
and exploration, government procurement, the financial and insurance industry, law
enforcement, and the army, wherever grand corruption could possibly take place.
Although we cannot compare the size and status of cases scientifically over time, about
30 senior officials at the provincial and ministerial level or above have been put under
investigation for corruption since December 2013.23 The increased effectiveness of
combating corruption is also seen in an increased speed of Shuanggui (an internal
disciplinary process by the Communist Party on suspected corruption), investigation,
pressing a charge, prosecution, conviction, and sentence. Corrupt officials could be
suddenly arrested at their work place or a meeting without pre-warning or trace. The
time span from Shuanggui, announcement of arrest to dismissal from public duties,
deprivation of party membership, charge and conviction has also reduced. The trial of
corrupt officials is also increasingly transparent. The public trial of party leader Bo
Xilai is a good example to demonstrate the process of sentencing corruption.
China has a solid anti-corruption structure. Under the leadership of the top politician,
Chinese anti-corruption enforcement can be quickly turned into an effective weapon to
dig out corrupt officials. There is, however, speculation that anti-corruption action is a
useful and tactical strategy to tackle political rivals or to clear offices. This may create
further opportunities for new rounds of corruption through arranging their own allies,
appointing and promoting new officials. In addition, purposed and uncontrolled
anti-corruption campaigns may contribute to political instability.
Anti-corruption Regulations
China has a vast number of anti-corruption regulations and laws created to criminalise,
report, or punish corruption.
Article 41 of the Constitution regulates protecting whistleblowers of corruption. The
Constitution states:
Citizens have the right to make to relevant state organs complaints and charges against, or
exposures of, violation of the law or dereliction of duty by any state organ or functionary …
In case of complaints, charges or exposures made by citizens, the state organ concerned must
deal with them in a responsible manner after ascertaining the facts. No one may suppress
such complaints, charges and exposures, or retaliate against the citizens making them.
Citizens who have suffered losses through infringement of their civil rights by any state organ
or functionary have the right to compensation in accordance with the law.24
23
Kevin Yao and Ben Blanchard (08.07.2014), “Fearing Graft Probes, Chinese Officials
Shun Spotlight, Seek Retirement”, available at: http://www.reuters.com/article/2014/07/08/us-
china-corruption-idUSKBN0FD2GV20140708.
24
Article 41, Constitution of the People’s Republic of China.
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Whistleblowers protection is also noted in Chinese Criminal Law25 and Criminal

Procedure Law.26
Under Article 385 of the Criminal Law, it is illegal for an official to extort money or
property from another person or to accept another person’s money or property in return
for securing benefits.27 Article 389 stipulates that it is illegal for a person to give money
or property to a public official in return for a benefit.28
In 2006, China adopted an Anti-Money Laundering Law (AML), which is not only
seen to combat the crime of money laundering, but also to address its predicate
offences, including corruption. The Chinese AML allows China to enhance its internal
control system to increase transparency of officials’ accounts, to monitor their financial
transactions, and to identify anonymous or pseudonymous accounts and beneficial
owners of suspicious transactions. The Chinese AML and its international cooperation
in respect of proceeds recovery aims to deter corrupt officials who intend to launder
their “dirty” money into “white” money through money laundering activity, despite the
real effectiveness of the AML being questionable.
In accordance with the Constitution and state laws, the various localities and
departments have also enacted and issued their own local and departmental regulations
to combat corruption. The Administrative License Law regulates the establishment and
implementation of administrative licences, and guarantees and supervises the effective
administration of administrative organs.29 The Civil Servant Law regulates the manage-
ment of civil servants and strengthens supervision over civil servants.30 The Govern-
ment Procurement Law, Anti-Monopoly Law and Bidding Law regulate administrative
discretion and give play to the market’s fundamental role in allocation of resources so
as to effectively prevent corruption.31
The Communist Party has enacted a series of intra-party rules and regulations. The
Guidelines of the Communist Party of China for Party-member Leading Cadres to
Perform Official Duties with Integrity in 1997, revised in 2010, is regarded as the basic
intra-party rules regulating the behaviour of party-member leading cadres. It prohibits
party-member leading cadres engaging in profit-making activities and seeking illegiti-
mate gains by taking advantage of their positions and power in violation of the party
rules.32 In 2007, the CCDI created the Regulations on Strict Prohibition of Seeking
Illegitimate Gains by Misuse of Office, in view of arising rent seeking behaviour.33
25
Article 254, Criminal Law of the People’s Republic of China.
26
Article 84, Article 85, Criminal Procedure Law of the People’s Republic of China.
27
Criminal Procedure Law of the People’s Republic of China.
28
Ibid.
29
Administrative License Law of the People’s Republic of China, available at: http://www.
lawinfochina.com/display.aspx?lib=law&id=3076&CGid=.
30
Civil Servant Law of the People’s Republic of China, available at: http://www.
lawinfochina.com/display.aspx?lib=law&id=4123&CGid=.
31
The Government Procurement Law of the People’s Republic of China, available at:
http://english.gov.cn/laws/2005-10/08/content_75023.htm.
32
The Information Office of the State Council (2011), China’s Efforts to Combat Corruption
and Build a Clean Government, available at: http://www.gov.cn/english/official/2010-12/29/
content_1775353.htm.
33
Ibid.
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Regulations on the Executives of State-Owned Enterprises for Performing Management

Duties with Integrity was created to prohibit leading officials of state-owned enterprises
from seeking profit through misuse of office for either themselves or any related parties
and undermining the interests of the enterprises.34
The Regulations on Implementing the System of Registration for Gifts Received in
Domestic Social Activities by Functionaries of Party and State Organs regulates that the
functionaries of party and state organs must not accept any gifts or grants that might
influence their impartial performance of official duties.35 The Regulations on Leading
Cadres’ Report of Relevant Personal Matters requires senior public officials to honestly
report their incomes, housing and investments owned by themselves, their spouses and
children living with them, as well as the employment status of their spouses and
children. There is also an Interim Regulations on Strengthening Management of State
Functionaries Whose Spouses and Children Have Emigrated Abroad.36
Punishment
China has enacted substantive criminal and administrative laws and regulations that
punish violations of law and party rules. Chinese Criminal Law stipulates that anyone
who embezzles more than 100,000 Yuan (£9,400) will receive a determinate or life
sentence and even the death penalty should the offence be deemed serious enough.
Corrupt officials’ personal assets can be confiscated. If the proceeds of corruption are
between 50,000 Yuan (£4,700) and 100,000 Yuan (£9,400) the embezzler will receive
five years’ custodial sentence or more, even a life sentence. Corrupt officials’ assets
may be confiscated. Corrupt officials whose criminal proceeds are between 5,000 Yuan
(£470) and 50,000 Yuan (£4,700) will receive between one and ten years’ custody. If
officials’ corrupt proceeds are between 5,000 Yuan (£470) and 10,000 Yuan (£940) they
may receive a reduction in their sentence or be exempted from criminal penalty if they
demonstrate their remorse and actively refund criminal proceeds. Or they may receive
an administrative penalty imposed by their office or higher level office. Should criminal
proceeds be no more than 5,000 Yuan (£470), corrupt officials may receive up to two
years’ custody or detention, or be penalised with administrative sanctions by their own
or higher level office.37
The beginning of economic reform has seen a surge of economic crimes. Top
Communist Party officials urged that “when there is a choice to kill or not to kill,
choose to kill”.38 Mr Hu Jintao, former party leader, states: “Any crime which the law
regards as serious should certainly receive serious penalties, and any crime which is
punishable by the death penalty according to the law, should certainly receive the death
34
Ibid.
35
Ibid.
36
Ibid.
37
Criminal Law of the People’s Republic of China.
38
The Economist (03.08.2013) “The Death Penalty, Strike Less Hard: Most of the World’s
Sharp Decline in Executions Can Be Credited to China”, available at: http://www.
economist.com/news/china/21582557-most-worlds-sharp-decline-executions-can-be-credited-
china-strike-less-hard.
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penalty.”39 Offenders, including corrupt officials, who committed economic crime,

received no mercy in their sentence. Corruption, along with drugs offences, financial
crimes and offences of undermining the social order, was subject to severe and swift
punishment.
In recent years, China has begun to adopt new sentencing guidelines of “justice
tempered with mercy”. “Kill fewer, kill cautiously”40 has been pronounced. More
suspended death penalties have been applied to corruption instead of immediate
execution of the death penalty, even if the total value of the bribes is extremely large.
For example, the manager of China National Petroleum Corporation Jiang Jiemin took
a bribe worth £20 million, but he only received a death penalty suspended for two
years.41 These convicted officials can escape execution by not committing any crime in
prison during the two-year period. Their sentence will then be commuted to life
imprisonment, or 25 years if “meritorious service” is demonstrated.
In respect of administrative discipline, China has promulgated the Regulations on the
Punishment of Civil Servants in Administrative Organs, which specifies the principles,
power limit, the types of misconduct and the punishment standards, including explicit
warning, recording of demerit, recording of major demerit, demotion, dismissal from
post and discharge from office.42
With regards to corrupt officials whose offences were not serious enough to trigger a
criminal sanction, the Communist Party will deal with these cases with its own
party discipline. The Communist Party has promulgated five measures for enforcing
party discipline: explicit warning, stern warning, removal from post within the party,
probation within the party, and expulsion from the party.43
3. TYPOLOGIES AND SCALE OF CORRUPTION IN

CONTEMPORARY CHINA
Prior to and at the beginning of the economic reform, large scale corruptions were
unlikely to take place due to a strict planned economy. Cigarettes, liquor, meat,
watches, and other scarce commodities were predominantly the bribes to get admission
to schools, obtain employment, and seek favours from officials. Reported cases indicate
that corruption was committed primarily by lower level public officials and the amount
of the bribes was petty. The problem of corruption has deteriorated in recent years. The
forms of bribe have diversified and their values have immensely risen. Cash, property,
39
Amnesty International (1997) “People’s Republic of China – the Death Penalty in China:
Breaking Records, Breaking Rules Strike Hard – Yanda”, available at: http://www.refworld.org/
pdfid/45b84b772.pdf.
40
Ibid.
41
Benjamin Haas and AibingGuo (2013) “China Widen Anti-Graft Drive as Petrochina
Ousts Managers”, Bloomberg.com, available at: http://www.bloomberg.com/news/2013-08-28/
china-widens-anti-graft-drive-as-petrochina-ousts-managers-4-.html
42
The Information Office of the State Council (2011), China’s Efforts to Combat Corruption
and Build a Clean Government, available at: http://www.gov.cn/english/official/2010-12/29/
43
Ibid.
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antiques, and other highly valuable goods have replaced their previous counterparts.
More public officials have been exposed to scrutiny for their profit driven crimes. In
2007, the Procuratorate reported that recovered funds averaged more than £27,300.44
Between 2005 and 2009, over 69,200 cases of commercial bribery were investigated,
involving £1.659 billion of illicit funds in total.45 In 2013, more than 182,000 party
officials were penalised for corruption.46 Zhang Shuguang, former deputy chief
engineer of the Ministry of Railway, is reported to have stashed £1.8 billion in overseas
bank accounts.47
Corruption in China is a process of officials accumulating capital and resource
reallocation. Two types of corruption are commonly seen in contemporary China. The
first is corrupt officials proactively making direct contacts to seek bribes. They are
involved in project designing, product pricing and marketing, business operating,
evaluating, and proceeds hiding or laundering. The products they choose are various.
For example, some sell posts for cash, take bribes directly from their clients to bend
rules, extort through misusing of political power or influence, profiteer from public
resources, and carry out malpractice in public procurement. Luo Yingguo, party chief of
Maoming City, was selling government posts with specific price tags: £18,800 for a
technology post; £188,000 for a department-level post; £940,000 for a Deputy Mayor
post. Luo is reported to have received bribes of approximately £6.58 million.48
The second type of corruption relates to officials that do not directly contact their
clients, but rely on family members, relatives, or friends as middlemen to seek
payments. Corrupt officials and middlemen form a joint venture and share criminal
proceeds, although corrupt officials may not receive the majority of bribes in their
criminality. This type of corruption often takes place with higher level officials, who,
because of their higher bureaucratic positions, avoid the risks of seeking bribes directly.
Their high level of counter-investigation skills also minimises their risk, making it
difficult to track them down easily. Often money laundering is committed to disguise
the true ownership of the proceeds, given the proceeds involved are usually large. These
corrupt officials allow middlemen to create opportunities to seek illicit gains. The
former Minister of Railways Liu Zhijun built more than 7,000 kilometres of high-speed
rail with a total investment of £300 billion between 2007 and 2010. Twenty-three large
state-owned enterprises, through a middleman Ding Shumiao, who obtained more than
50
44
Ibid.
45
“China’s Efforts to Combat Corruption and Build a Clean Government: Information
Office of the State Council of the People’s Republic of China, December 2010, Beijing”,
(20.01.2011), Beijing Review.com.cn, available at: http://www.bjreview.com.cn/document/txt/
2011-01/17/content_325640_4.htm.
46
“Corruption: Less Party Time: The Communist Party’s Anti-Graft Campaign has had a
Surprising Impact, but a New Report Shows How Far There Is to Go”, (25.01.2014), The
Economist, available at: http://www.economist.com/news/china/21595029-communist-partys-
anti-graft-campaign-has-had-surprising-impact-new-report-shows-how.
47
He Huifeng (04.09.2013) “Zhang Shuguang, Former Top Rail Engineer, to Face Trial for
Graft”, South China Morning Post, available at: http://www.scmp.com/news/china/article/
1302838/zhang-shuguang-former-top-rail-engineer-face-trial-graft.
48
Fiona Tam (17.05.2012), “Ex-official Admits He Sold Top Jobs”, South China Morning
Post, available at: http://www.scmp.com/article/1001149/ex-official-admits-he-sold-top-jobs.
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projects from Liu. Ding made £200 million in profits, of which £4.9 million was paid
to Liu.49 It is common knowledge that family members of senior party officials
dominate the key industries in China. For example, former party chairman Jiang
Zemin’s son Jiang Mianheng is in charge of China Netcom Telecommunications
Limited, Shanghai Automobile Industry, Shanghai Information Network, and Shanghai
Airport Corporation.50 There are assumptions that grand corruption has been committed
in the process of privatisation.
Detected cases suggest that the above two methods of corruption are not clearly
disconnected. However, the methods of corruption are dynamic, and the criminals
constantly change their corruption methods in order to reduce the risk of being
exposed, and to maximise their proceeds.
4. INITIATIVES AGAINST CORRUPTION IN TODAY’S CHINA

President Xi Jinping, in his first public speech after taking over in 2012 as the party
chief, robustly called on the party to fight fraud and corruption. He stated that “inside
the party, there are many problems that need to be addressed, especially the problems
among party members and officials of corruption and taking bribes, being out of touch
with the people, undue emphasis on formalities and bureaucracy and other issues”.51
The campaign since it started has brought a large number of high-profile corruption
cases. Bo Xilai, former Communist party chief in Chongqing and a member of the CCP
Central Politburo, was found guilty of corruption, and was sentenced to life imprison-
ment.52 Indeed, President Xi left no one in any doubt as to how serious the new
leadership considers the situation.
On 4 December 2012, after Xi’s succession, he presided at a meeting of the Political
Bureau of the Central Committee of the CCP and issued an “eight-point code”53 upon
members’ approval. The code pertains to curbing bureaucratic practices and getting rid
of pomp and ceremony in order to rein in sumptuary and other behaviour among
officials. According to the statistics published by the CCDI in 2013, thousands of
49
Larry Lang (29.05.2014), “The 3 Types of Corruption That Plague China”, The Epoch
Times, available at: http://www.theepochtimes.com/n3/703805-the-three-types-of-corruption-
that-plague-china/
50
Feng Lin (01.07.2012) “How Jiang Zemin and Son Profited from Corruption”, The Epoch
Times, available at: http://www.theepochtimes.com/n2/china-news/how-jiang-zemin-and-son-
profited-from-corruption-258872.html.
51
English version of the full text of President Xi Jinping’s speech is available at:
http://www.bbc.co.uk/news/world-asia-china-20338586. The speech was given on 15 November
2012.
52
Jamil Anderlini (22.09.2013) “China Court Sentences Former Party Chief Bo Xilai to Life
in Jail”, Financial Times, available at: http://www.ft.com/cms/s/0/b5ff4d14-2340-11e3-ac3a-
00144feab7de.html?siteedition=uk#axzz37jmdiWKd.
53
Full text of the eight-point code can be accessed at: http://news.china.com/focus/fdpzlf/
11135258/20130123/17649773.html (in Chinese).
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cadres were punished due to violation of the eight-point code.54 It was because of this
newly issued principle against waste of public funds55 that certain types of industries in
China have started to struggle to survive. For example, the demand for expensive wines
for high-end restaurants has dramatically dropped, and some of these luxury restaurants
have even closed down. Business owners have told journalists that they have lost so
many customers from the public sector because of this anti-corruption campaign.56
The CCDI is a powerful weapon in the Communist Party and has been established to
exclusively deal with party cadres who are under corruption and malfeasance charges.
Party discipline and rules appear to have greater deterrent effects on party members,
given the secret internal disciplinary conduct of Shuanggui (at an appointed time and
place to confess their violation of party discipline) beyond legal process. Officials
subject to Shuanggui are not allowed to have legal counsel and contact with family for
a prolonged period of time. Indeed, this gives party discipline mighty power, beyond
public laws, in arresting, detaining and investigating party members.
The CCDI has also proactively intensified the inspection of key sectors and
industries throughout the country, under the direct leadership of the general secretary of
the CCDI Wang Qishan, aiming exclusively at thoroughly discovering and collecting
information, from both inside the party and the public, that relates to party officials’
misbehaviour.57 The area that the central inspection group looks into covers a range of
state organs at provincial and city level, government departments, state-owned enter-
prises, and public universities. The first round of an inspection tour initiated in May
2013 has brought much inspiring news, including the investigations of provincial level
cadres former Deputy Governor Guo Youming and former Vice-Chairman of Political
Consultative Conference Chen Baihuai of Hubei Province, and former Vice-Chairman
of Jiangxi Provincial People’s Congress Chen Anzhong.58
To keep up with modern technology, the newly released CCDI official website has
now included a channel for “online reports”. The CCDI has devoted large resources in
monitoring Internet information. In fact, the collapse of the former deputy head of the
National Development and Reform Commission Liu Tienan emerged from an online
54
According to “Jiezhi 12 YuediQuanguoChachuWeifanBaxiangguidingJingshenWentiHui-
zongbiao” (“Summary in 2013, of the Progress of Investigating Cadres Who Violated the
Eight-Point Code”), 09.01.2014, Central Government Website, available at: http://www.gov.cn/
gzdt/2014-01/09/content_2562681.htm.
55
In China, wasting public funds is mainly in three ways (in Chinese: sangongjingfei),
referring to public officials using public funds on outbound tourism, buying corporate cars and
administrative spending, and dining and entertainment.
56
“Sida Hangye bei Fanfuquan Jizhong” (“Four industries Were Punched by Anti-
Corruption Trend”), 02.12.2013, People’s Daily, available at: http://finance.people.com.cn/n/
2013/1202/c1004-23709209.html.
57
See CCDI official website, institutional framework, available at: http://www.ccdi.gov.cn/
xxgk/zzjg/201403/t20140314_20114.html (in Chinese).
58
“TuchuFaxianWenti, QianghuaZhensheZuoyong– 2013 XunshiGongzuoZongshu” (“High-
light the Identified Problems and Strengthen the Deterrent – Summary of 2013 Inspections”),
09.01.2014, Central Government Website, available at: http://www.gov.cn/gzdt/2014-01/09/
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report written by a well-known journalist.59 More impressively, former Chongqing

District Party Secretary Lei Zhengfu was sacked by the party only 63 hours after his
indecent video was uploaded online via the popular Chinese microblog Sina Weibo.60
Undoubtedly, as we have discussed before, the regulation of the protection of
whistleblowers has been published to go along with this newly developed online
reporting system.
If Bo Xilai’s case records a starting point, the very recent formal announcement of
the investigation of Xu Caihou has no doubt brought this anti-graft campaign to a high
point. On 30 June, the state media reported that the former Vice-Chairman of the
Central Military Commission and top-ranking General of the People’s Liberation Army
(PLA) was expelled from the CCP.61 In the report, Xu Caihou was held as being the
highest-ranking military leader to be investigated since China entered its period of
reform under Deng Xiaoping. Xu was seen to have close connections with former PLA
Deputy Logistic Chief officer Gu Junshan, who earlier had been charged with
corruption and embezzlement. Xu stands accused of accepting bribes, both directly and
through his families, from those who wanted his help in promotions. The emphasis is
that throughout the ages, the PLA has been largely exempt from public corruption
probes, as they stand in a position to ensure the country’s stability. This is a shift of
profound importance.
The CCP has also placed its focus on a much wider international perspective, given
the fact that a large number of corrupt officials are fleeing abroad. One piece of
terminology that was brought up years ago has recently attracted much public concern
– “luoguan”, or “naked officials” in English, describing Chinese bureaucrats whose
family members have emigrated while they are still in public positions. The party has
issued “The ordinance of the work of selecting and appointing cadres of the party and
country”, which clearly stipulates that “naked officials” will not be considered for
promotion,62 as they are seen as a high risk since their ability to escape overseas could
make them more inclined to engage in corruption.63 The government’s anti-graft
campaign is turning its focus to a group it sees as a corruption risk. A recent
investigation has revealed that more than 1,000 officials in Guangdong Province have
spouses or children living overseas.64 It further said 200 provincial employees had
asked their families to return to China, while another 866 officials had agreed to accept
59
“China Sacks Top Economic Official Liu Tienan”, 09.08.2013, BBC News, available at:
http://www.bbc.co.uk/news/world-asia-china-23628085.
60
“Officials Being Convicted since the 18th CCP National Congress”, 12.11.2013, Sina
News, available at: http://news.sina.com.cn/c/sd/2013-11-12/110828687589_2.shtml.
61
Yamei Wang (30.06.2014), “Flash: Xu Caihou Expelled from CCP for Graft Probe”,
Xinhua, available at: http://news.xinhuanet.com/english/china/2014-06/30/c_133449642.htm.
62
“The ordinance of the work of selecting and appointing cadres of the party and country”,
Chapter 5, Article 24(4), Promulgated on 15.01.2014, by Central Committee of the CCP.
63
Reporting by Paul Carsten, Editing by Ron Popeske (22.05.2014) “China Corruption Fight
Turns on Officials’ with Family Overseas”, Reuters, available at: http://www.reuters.com/article/
2014/05/22/us-china-corruption-idUSBREA4L0HW20140522.
64
“China Investigation Finds 1,000 ‘Naked Officials’ in Guangdong”, 07.06.2014, BBC
News, available at: http://www.bbc.co.uk/news/world-asia-china-27747097.
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demotions instead as punishment.65 Fang Xuan, for example, as one of the first, has
taken early retirement from his position as deputy chief of the Guangzhou city Party
Committee.66 This recent move indicates that the party discipline department has
extended its objective to the prevention of corrupt officials from moving their ill-gotten
gains abroad at a very early stage, not merely prosecution.
5. CHINA’S FUTURE
China has probably been the most dynamic economy in the world and is widely
predicted to be the dominant economy within the next ten years. As the largest
emerging market, China’s every move towards curbing economic crime will more or
less affect international business ethics and legal standards. It is true that the issue of
corruption is so dynamic. Since the “opening” of China’s economy, the system of
government and its instructions, along with the party in power (CCP), has had to adapt
to address both new risks and challenges, and this is an ongoing process. Today the
Chinese economy has become far more diversified and international, and political,
social, and economic changes have complicated, and will continue to complicate, the
situation. China, however, is not slow in realising that it cannot deal with all these
issues in isolation. Corrupt officials have become more intelligent and moved their
ill-gotten gains beyond the reach of domestic power and hidden their bribes and thefts
in foreign bank accounts or through purchase of overseas property.
Nonetheless, China itself has very recently taken an adventurous step and targeted its
own financial heart, Bank of China (BOC), one of China’s big four state-owned
commercial banks. According to a report published by China Central Television
(CCTV), China’s central bank, People’s Bank of China, has initiated an investigation
into BOC, which is suspected of helping Chinese clients circumvent foreign exchange
controls through its formal service “Youhuitong” at BOC’s Guangdong branch.67
“Youhuitong” basically helps Chinese citizens to transfer large sums of Chinese
currency overseas regardless of domestic foreign exchange regulation that only allows
individuals to convert up to $50,000 per year from Renminbi to foreign currency. There
must be a nexus between the recent crackdown of large numbers of “naked officials” in
Guangdong Province and the investigation into the financial authority BOC Guangdong
branch. China understands that the crime of corruption would not survive without
money laundering activities.
In terms of international collaboration, the UK Bribery Act 2010 and the US Foreign
Corrupt Practices Act have provided a two pronged attack, each Act having an
extensive extra-territorial jurisdiction. For example, recently, the British multinational
65
Demetri Sevastopulo (08.06.2014), “China Cracks Down on ‘Naked Officials’”, Financial
Times, available at: http://www.ft.com/cms/s/0/9d1f3a88-ef01-11e3-acad-00144feabdc0.html#
axzz37jmdiWKd.
66
Ibid.
67
Didi Kirsten Tatlow (11.07.2014), “China Central Bank Investigates Report of Money
Laundering”, The New York Times, available at: http://www.nytimes.com/2014/07/12/business/
international/chinas-central-bank-investigating-report-of-money-laundering.html?_r=0.
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healthcare company GlaxoSmithKline’s (GSK) “massive and systemic bribery” case

has been publicly exposed after a ten-month investigation conducted by Chinese police.
The police in China alleged GSK’s Chinese subsidiary bribed government officials and
doctors, and its head Mark Reilly ordered subordinates to offer the illegal payments.68
In less than two weeks after the drugmaker was accused in China, Britain’s Serious
Fraud Office stepped into and formally opened a criminal investigation into the group’s
commercial practices.69 Moreover, the US Department of Justice has also promptly
reacted and announced their investigation into GSK’s corruption allegations under the
Foreign Corrupt Practices Act.70 The willingness and efficacious actions in response to
foreign corrupt behaviour made by both the UK and the US, two major international
players, certainly deserves praise. The Chinese court has concluded a decision lately on
GSK’s bribery case, the biggest corruption scandal hitting a foreign firm in years in
China, revealing a fine of $490 million (£297 million) for the company; and its former
head of its Chinese operations, Mark Reilly, received a suspended three-year prison
sentence and is set to be deported.71
China has long been an active player in the international community in fighting
corruption. The country has put itself forward in signing up to the United Nations
Conventions against Corruption (UNCAC), which is seen as the only legally binding
universal anti-corruption instrument.72 The former president Hu Jintao even gave his
personal support to the establishment, with Chinese money and personnel, of the
International Association of Anti-Corruption Agencies (IAACA), with an aim of
promoting the effective implementation of the UNCAC.
As we previously discussed, the party has in the past years created numerous
regulations and intra-party rules; however, the question remains as to their efficiency.
China issued new anti-corruption rules in 2010 requiring government officials to report
their investments, incomes, and assets, but how many cadres have in reality followed?
The recent “naked officials” crackdown brings the vast majority of people hope, and
this has spread from the southern provinces up to the capital city Beijing, but the
consequences and the extent to which the discipline authority plans to investigate naked
officials remain unknown.
Research conducted by China’s central bank shows that between 16,000 and 18,000
officials and employees of state-owned companies left China with their funds from
the mid-1990s up until 2008; it said that government officials have stolen more than
68
Jamil Anderlini, Patti Waldmeir, Andrew Jack, George Parker, and Caroline Binham
(14.04.2014), “Police Accuse GlaxoSmithKline China Head of ‘Ordering’ Bribes”, Financial
Times, available at: http://www.ft.com/cms/s/0/fe669bfc-db23-11e3-b112-00144feabdc0.html?
siteedition=intl#axzz395ltMFl5.
69
Andrew Ward (27.05.2014), “SPO Opens Criminal Inquiry into GSK”, Financial Times,
available at: http://www.ft.com/cms/s/0/f059e6e8-e5d4-11e3-aeef-00144feabdc0.html?siteedition
=uk#axzz395ltMFl5.
70
Ibid.
71
“GlaxoSmithKline fined $490m by China for bribery”, 19.09.2014, BBC News, available
at: http://www.bbc.co.uk/news/business-29274822.
72
United Nations Office on Drugs and Crime, “UNODC’s Action against Corruption and
Economic Crime”, available at: http://www.unodc.org/unodc/en/corruption/index.html
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$120 billion (£74bn) and fled mainly to the US, Australia, and Canada.73 In compari-
son, only a very small fraction of them have been extradited back to China, mainly due
to the lack of mutual extradition treaties. Generally, there are various reasons for the
difficulty in concluding an extradition treaty. The differences in the political system and
the distrust of the Chinese legal system in ensuring justice are perhaps the prominent
reasons. For instance, the death penalty that has been abolished in many countries still
exists in China, and this certainly frustrates extradition conditions of Chinese corrupt
officials.
In recent years, China has had remarkable success in establishing cooperative
relationships with foreign countries. The principal criminal of the Yuanhua smuggling
case Lai Changxing has finally been extradited back to China over ten years after he
fled to Canada. Furthermore, according to the news from Global Times, China has now
been working closely with the US Department of Justice on seeking effective ways of
asserting asset recovery and implementing an extradition treaty, and discussing the
possible conditions of a proceeds-sharing regime.74 It is also said that China has
provided a list of over 1,000 Chinese corrupt officials that have fled to the US.75
The efforts that China’s new leadership has made both domestically and inter-
nationally have brought much applause, while the anti-corruption campaign has not yet
reached the end. The former member of the top decision-making body the Politburo
Standing Committee, Zhou Yongkang, who once headed the party’s Central Commis-
sion for Discipline Inspection and China’s Ministry of Public Security, was formally
announced as being under investigation.76 Xi has broken the long-standing custom that
serving and retired Politburo Standing Committee members are immune from prosecu-
tion, and the scope of the campaign has been expanded to cover previously less touched
sectors such as law enforcement agencies, the energy sector, and the army.
It may be wondered whether the anti-corruption effort is determined by Xi’s political
needs. The campaign is dynamic and fluctuating, and it is very likely to ease off once
Xi has won sufficient popular support to make himself powerful enough to take control
of the country. The CCP’s anti-graft campaign may be considered to have more to do
with power politics than the law, in a historical review. Rumors have been spread that
Zhou Yongkang was involved in an “anti-Xi cabal” within the party, which also
included Bo Xilai (former Chongqing party boss). Similarly, two previous Politburo
members brought down for corruption related felonies – former Beijing party secretary
Chen Xitong (who received an 16-year jail term in 1998) and former Shanghai party
secretary Chen Liangyu (who was given an 18-year jail term in 2008) – were widely
73
People’s Bank of China (15.06.2011), Woguo Fubai Fenzi xiang Jingwai Zhuanyi Zichan
ji Jiance Fangfa Yanjiu (Research on Approaches Corrupt Officials Use to Shift Their Assets
Abroad and the Supervision System)..
74
“Zhongfang yixiang Meifang Kaichu Chaoguo 1000 Waitao Tanguan Mingdan” (“China
Has Provided the US with over 1,000 Fled Corruptive Officials’ Name List), 12.5.2014, Global
Times.
75
Ibid
76
Damien Grammaticus (29.07.2014), “Zhou Yongkang: China Investigates Ex-security
Chief”, BBC News, available at: http://www.bbc.co.uk/news/world-asia-28544428.
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recognised as political foes of ex-presidents Jiang and Hu, respectively.77 Indeed, the
accomplishments of the crusade could be the by-product of internal power struggles.
Of course, it remains to be seen whether the complex apparatus of the state can
address the issues with sufficient vigour and alacrity to retain public confidence. In the
future, Chinese governments will need to look more into asset recovery, along with
convictions. Anti-money laundering regulation will be increasingly used to monitor
officials’ financial statuses. This is particularly true in relation to corrupt officials who
are laundering their ill-gotten gains to other parts of the world. There are already
rumors around the US, Canada, and the UK that the dramatic increases of their local
housing prices may be due to China’s anti-corruption campaign that stimulates corrupt
officials to move their dirty money to a relatively safer place outside Mainland China.
Moreover, China will face difficulties in tracing officials’ bribes from other juris-
dictions. As a result, promoting bilateral agreement and mutual assistance is the key.
Nonetheless, based upon the recent series of initiatives that have been taken, the public
will no doubt have been left a clear message that there will be no paradise for corrupt
officials any more in the party, and the new leadership will at all costs return a clean
government to the people.
77
David Barboza (12.04.2008), “Former Party Boss in China Gets 18 Years”, The New York
Times, available at: http://www.nytimes.com/2008/04/12/world/asia/12shanghai.html?_r=0. Chris
Bukley (6.6.2013), “Chen Xitong, Beijing Mayor During Tiananmen Protests, Dies at 82”, The
New York Times, available at: http://www.nytimes.com/2013/06/06/world/asia/chen-xitong-
mayor-during-tiananmen-protests-dies.html.
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35. Corruption and public policy in post-conflict states

Matthew Glanville
Corruption in international development is a hot topic. Newspapers fulminate about it1

and politicians legislate against it, often with little direct impact. Within developing or
post-conflict states the same level of public condemnation exists, but the practices on
the ground are often far subtler and more nuanced than public discourse and Western
media attention might allow. Unpleasant as it may seem in fragile states,2 corruption
can be a necessary tool of state building alongside traditional aid and development
programmes.
There are a series of analytical frameworks that stress different elements of
corruption depending on the local environment,3 but broadly speaking the different
definitions all coalesce around a rather simplified view of corruption as always a barrier
to state development.4 There is a related tendency in Western humanitarian policy to
assume that further international laws, conventions and commissions5 will help to
address the problems of corruption in developing or post-conflict states. As discussed in
Chapter 33 of this handbook,6 there are considerable limitations on the practical effect
of these international agreements on domestic jurisdictions, but the wider international
agreements do serve to highlight the issue of corruption. Whilst such international
effort may make a difference to the international perception of corruption issues, the
1
See for example the numerous articles on the subject in the UK Daily Mail including
‘£1billion UK aid goes to the world’s most corrupt countries: Syria and North Korea among
states that get 25 per cent more in dash to hit controversial target’, available at http://
www.dailymail.co.uk/news/article-2893033/1billion-UK-aid-goes-world-s-corrupt-countries.html
and ‘Confirmed: Our foreign aid fuels corruption – Official watchdog’s verdict on aid spending
that Cameron has defiantly ring-fenced’, available at http://www.dailymail.co.uk/news/article-
2815115/Confirmed-foreign-aid-fuels-corruption-Official-watchdog-s-verdict-aid-spending-
Cameron-defiantly-ring-fenced.html.
2
For simplicity I will use the term ‘fragile states’ to denote usually post-conflict states with
low central government capacity and high levels of corruption.
3
See for example the distinctions between ‘clan politics’ in Tajikistan, K. Collins ‘The
logic of clan politics: evidence from the Central Asian Trajectories’, World Politics 56, 2004,
224–261 and ‘prebendalism’ in P. Lewis ‘From prebendalism to predation: the political economy
of decline in Nigeria’, Journal of Modern African Studies 34, 79–103.
4
International bodies use a variety of different definitions of corruption, but here the use is
the same as used by the UK Department for International Development (DFID) and Trans-
parency International, ‘the abuse of entrusted power for private gain’. Consequently corruption is
not limited to public officials.
5
The United Nations Convention against Corruption, which was adopted by the UN
General Assembly in 2003, is the main text, but it is supported by a plethora of other treaties and
conventions supported by for example the European Bank for Reconstruction and Development,
the European Union and the World Customs Organization.
6
Ingrida Kerusauskaite ‘Corruption and international development assistance’.
435
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more practical concerns raised by various chapters in this handbook are more likely to
have an effect on corruption within fragile states. The key focus should be on
understanding the specific context of the individual country and situation. Yes,
corruption has an insidious effect on development, but the effects are far subtler and
more complex than a traditional analysis based on Western ideas of the nation state
would indicate. The overwhelming requirement for fragile states is security, and
corruption and patronage can be important tools to secure that security in the short term
and allow the breathing space for a political class to develop the wider institutions
necessary for the society to develop. International opinion that refuses to see the needs
of such societies in the societies’ own terms risk adopting a broad brush declamatory
approach that can be counter-productive rather than working with the grain of a local
society.
These issues will be addressed through an examination of the most recent high
profile post-conflict state, Afghanistan, with some additional analysis on Iraq. These
two states have attracted a significant level of academic, governmental and journalistic
coverage so are useful case studies for phenomena present in less well studied
countries. Both countries have followed a similar path with international sponsorship of
their anti-corruption institutions.7 These countries have followed similar paths, with
the removal of a governmental class and the renewal of the whole machinery of the
government alongside a reformed national army. They are also two countries that the
author has lived in and worked in for over five years. Other countries that could have
been considered are the Democratic Republic of the Congo (DRC) and South Sudan,
where many of the same issues feature but which lack the same level of international
interest so that the issues are not as heightened as they are in Iraq and Afghanistan.
Before turning to the specifics of the Afghan and Iraqi examples, it is worth saying
something about the analytical framework that most writers adopt when considering
corruption in fragile states. Western liberal democratic states have grown up in the last
fifty years to believe in a set of worthy and laudable ideas that focus on reducing
hardship. State apparatuses have grown up that ensure access to health care, function-
ing legal systems and some level of social welfare provision. Even in a starkly unequal
society like the US, people are unlikely to starve and unlikely to be arbitrarily killed
due to their religious or ethnic affiliation. In fragile states such practices are
commonplace. This very basic difference between the societies that aid practitioners
and theorists come from and the societies that they try and influence is crucial.
Western intervention may be trying to build Western-style societies in post-conflict
countries, but by definition they are not there yet. People set up informal structures or
fall back on existing structures to provide basic security. Typically, in post-conflict
scenarios central government is weak; kin, religious or ethnic groupings coalesce
around an ideology or a charismatic individual figure in exchange for security and
some level of economic support. Usually such figures build support through a
combination of their own individual charisma, a religious or tribal base and outside
support. In Afghanistan the Taliban leadership under Mullah Omar has an obvious
7
For the development of the Afghani government’s High Office of Oversight and
Corruption see http://anti-corruption.gov.af/en/page/8463. For the much longer history of the
Iraqi Board of Supreme Audit see http://www.d-raqaba-m.iq/pages_en/default_en.aspx.
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Corruption and public policy in post-conflict states 437
religious element but also a charismatic leader and significant outside support from
Pakistan.8 In Iraq, even a figure whose authority is based in theory on religious
charisma, namely Muqtada-al-Sadr,9 also draws significant support and money from an
outside agent, in his case Iran. These figures lead movements that provide security and
welfare to their people. The history of the Lebanese civil war10 and the development of
Hezbollah,11 the emergence of Hamas in the Gaza strip,12 and some of the groups
within the current Syrian civil war betray the same phenomena.
In a reinforcing process these types of groups require weapons and money to defend
themselves against similar groups that grow up in the absence of any effective state.
Thus there is increased competition for money, weapons and outside support so that
groups can sustain themselves and defend their people. Even a group as militant as
Islamic State makes sense in these basic terms. These basic processes of groups
protecting themselves are taking place at multiple different levels. For example, at the
national and strategic level we use terms like the Taliban to describe a conglomeration
of groups, villages, tribes and individuals who are all driven by the same basic quest for
security.
Once international development programmes are set up in this kind of situation, they
can become another resource stream to be manipulated to promote the wider interests
of the kin or religious group. In societies with no welfare net and no agreement that it
is even a realistic requirement of government, the government minister who accepts a
bribe to facilitate a licence will be supporting an extended network of patronage in
order to maintain his position. This patronage will be extended through the direct
transfer of wealth and also through the distribution of jobs and favours across their
networks. These networks overlap and cross over, often taking on bizarre twists that
defy traditional, Western binary anti-corruption analysis. For example, in Afghanistan
President Karzai’s brother, Ahmed Karzai, was Chairman of the Provincial Council in
Kandahar and was widely believed to be involved in the drugs trade, operating a whole
parallel government alongside the traditional government structures in Kandahar.13
Despite repeated accusations of corruption, he remained in place in Kandahar until he
was killed in 2011. Various explanations exist as to why President Karzai did not move
against his brother despite significant pressure to do so,14 but one at least is that his
8
For the rise of the Taliban see Kamal Matinuddin’s The Taleban Phenomenon, Afghanistan
1994–1997, Oxford Pakistan Paperbacks, 2000 or James Fergusson’s Taliban, London: Bantham
Press, 2010 or Peter Marsden’s The Taliban, War, Religion and the New Order in Afghanistan,
London: Zed Books Ltd, 1998.
9
For the background on Muqtada Al-Sadr see Patrick Cockburn, Muqtada Al-Sadr and the
Battle for the Future of Iraq, New York: Schribner, 2008.
10
Robert Fisk, Pity the Nation: Lebanon at War, Oxford, Oxford University Press, 1991.
11
Judith Palmer Harick, Hezbollah: The Changing Face of Terrorism, London, I.B. Tauris,
2005.
12
Jean-Pierre Filiu, Gaza: A History, London, Hurst and Company, 2014.
13
Matthew Levitt and Dennis Ross, Hamas: Politics, Charity and Terrorism in the Service of
Jihad, New Haven, Yale University Press, 2006.
14
For the common belief that Ahmed Karzai was being paid by the American Government
see Filikins, Dexter, Mark Mazzeti and James Risen ‘Brother of Afghan leader said to be paid by
C.I.A.’, The New York Times, 27 October 2009.
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brother played both an official role as Head of the Provincial Council but also an
unofficial one running local patronage networks that helped give President Karzai at
least some influence in Kandahar.
President Karzai had a profound interest in supporting the structure of the state that
he ran and indeed a very personal interest in that it kept him alive. At the same time as
making speeches about corruption he was also subverting his own regime through
supporting his brother’s corruption. What his largely American advisors could not
understand was that this was a rational response to the situation that he was in. Using
traditional patronage networks to support his powerbase through corruption allowed
him to stay in power. Kandahar is Afghanistan’s main city in the south; both official
and unofficial influence there was important to sustain Karzai as a national figure.
Using these unofficial networks and patronage was also a solution that worked with the
grain of Afghan society. According to UN estimates, Afghans paid a total of $3.9
billion in bribes over the period 2009–2013.15
The Taliban initially came to power by fighting the levying of tolls on the road
network around Kandahar. Local warlords were putting road blocks in place on the ring
road and in effect competing for the right to collect taxes. Such local tax raising is
common in post-conflict and developing economies. As weak governments develop and
seek to reclaim sovereignty over their territory they try and limit such exhibitions of
non-state military authority. For example, in Afghanistan, in response to a series of
incidents involving foreign security providers (often protecting Western development
workers), the Afghan government decided to license and then ultimately remove the
foreign security companies. The intent was that the foreign companies would be
licensed and then through a transition process ultimately move to local Afghan control.
The Iraqi government had overseen a similar process in 2010. Licences to provide
security services in Afghanistan first appeared in 2011. Payments for the licences were
made to the head of the Afghan Public Protection Force’s (APPF)16 personal bank
account. At the time, the argument was made that this was for efficiency as it would
take too long to set up the main APPF bank account and they were up against a
deadline set by presidential decree. In reality, the more likely conclusion was that the
licence money never went into the official Afghan government accounts and was
instead distributed through the patronage network of senior figures within the Ministry
of the Interior and Ministry of Defence. Nobody at the APPF was in a position to
challenge the activities of the head of the organisation.
Such situations are common in post-conflict societies. Societies with weak govern-
ments tend to favour an authoritarian approach. They also rely on a disavowal of
personal responsibility so power and responsibility becomes concentrated at the top of
an organisation. Low- or mid-level staff refusing to take any responsibility for an issue
15
Quoted by Ben Macintyre, The Times, 30 March 2010. For more recent estimates of the
prevalence of corruption in Afghanistan see the various reports by the UN Office on Drugs and
Crime who together with the Afghan government’s High Office of Oversight and Anti-
Corruption produced the 2012 report entitled Corruption in Afghanistan: Recent Patterns and
Trends.
16
The author was one of the main advisors helping the Afghan government set up the APPF
from January 2012 through to August 2013.
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can concentrate power to an absurd degree. The author has seen police salaries not paid
for up to three months because there was no head of the organisation to sign the
individual payments. The need for the signature of the senior figure in an organisation
is common in such situations and in theory is supposed to limit corruption when all it
actually does is concentrate it. Security staff, most notably on the large Kajaki Dam
project in the summer of 2013, ended up kidnapping central government officials to
speed up their salary payments.
In this situation the international community became trapped by the government it
had been instrumental in creating. Hamid Karzai became increasingly critical of
Western involvement in his country and (allegedly) more and more corrupt. Both were
necessary to sustain himself and his regime and as a consequence the international
community could do little to tackle corruption without undermining the leader of the
regime that they were largely responsible for creating. The dynamics of the situation,
and in particular the need to sustain a new elite whose only common interest was in
sustaining their own patronage networks, meant that the International Security Assist-
ance Force (ISAF)17 could do very little to tackle the president on corruption. The new
opportunities in government created new alliances and elites which overrode older
ethnic differences in order to maintain access to lucrative government posts and to
maintain their patronage networks. The same phenomena can be seen in the career of
Marshal Fahim, a Panjshiri and close ally of Massod Fahim. He became Defence
Minister following the fall of the Taliban, despite having overseen the arrest and
interrogation of President Karzai in 1994, and then went on to become President
Karzai’s running mate in the 2009 presidential elections.18
Competing military and aid priorities and shifting foci over time further exacerbate
these problems. Armies of all ages come with huge logistical tails that generate large
scale opportunities for fraud within the local economy. There was a particularly stark
example of this during the West’s campaign in Afghanistan, revealed by the publication
of a report ‘Warlords Inc.’19 by the US House of Representatives. The report focused on
corruption within the security arrangements to support ISAF’s logistical arrangements
in Afghanistan. The report disclosed that as part of a $2.16 billion contract, tens of
millions of dollars were being diverted to local warlords including the Taliban.
Logistics managers estimated that between $1.6 and $2 million was going to the
Taliban every week as, broadly speaking, local trucking companies were required to
provide their own security when transporting goods round the ring road in Afghanistan.
In the majority of areas it was much simpler to pay off the local warlord (or in some
cases police chiefs) than to take security personnel from one area into another. The US
government was in theory paying for security personnel to accompany truck move-
ments all round the country. In practice, the control of the ring road was broken up
17
For a history of ISAF and its relationship with the various separate US missions see
http://www.nato.int/cps/en/natohq/topics_69366.htm.
18
James Fergusson, op. cit. Ch. 11.
19
Warlord, Inc.: Extortion and Corruption along the U.S. Supply Chain in Afghanistan.
Report of the Majority Staff. Representative John F. Tierney, Chair Subcommittee on National
Security and Foreign Affairs Committee on Oversight and Government Reform. U.S. House of
Representatives, June 2010.
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amongst roughly seven different armed groups who were all paid to allow the trucks to
pass. Whilst combat arms of ISAF were trying to degrade the Taliban and its affiliates,
the Logistics and Combat Service Support (CSS) arms were paying the Taliban and
related forces to allow the trucks to move and therefore allowing them to build up their
forces. The report led to the issue of convoy security shifting from being a peripheral
one to be being one of ISAF’s three strategic focuses for the period 2012–2013.
Referring to all of ISAF’s activities, and not specifically to the issue of convoy security,
Lt. General Nick Carter, ISAF’s Deputy Commander, said: ‘We had a role in
contributing to corruption, and that was because of the way we spent our money,
because of the way we contracted, and because of our logistics system.’20
Such contradictory situations often happen in confused military situations where
political priorities and interests shift;21 but it should be remembered that by the time
these abuses were documented the US had already been in Afghanistan for almost ten
years. Part of the reason that these abuses took so long to be uncovered was that the US
military had shifted their focus from Afghanistan in 2003 with the invasion of Iraq. Iraq
provides an interesting parallel to the Afghanistan example, covering as it does a
similar timescale and set of issues but coming from an entirely different starting point.
IRAQI POLITICS AND CORRUPTION

Pre the fall of Saddam Hussein, Iraq was not, by international measures, a particularly
corrupt society: large scale corruption was practised at the top of society by Saddam
and his immediate family, but outside that, government corruption was treated as
treason and heavily punished.22 For corruption to become endemic, as it has in Iraq,23
it has to be practised universally. In common with pre-revolutionary Syria,24 Iraq has
developed a system of patronage and bribery for access to large areas of the economy
from the provision of basic government services to people paying for access to
government jobs.25
The Sunni revolt of 2013 that led to the rise of the Islamic state was in part about
competition for access to these lucrative government positions in Baghdad. Though
framed at the time as an anti-Maliki revolt, the issues were broader and concerned the
20
Operationalizing Counter/Anti-Corruption Study, 28 February 2014, Joint and Coalition
Operational Analysis (JCOA).
21
For an analysis of the US domestic influence on policies within Afghanistan see Lori
Maguire ‘The US Congress and the Politics of Afghanistan: an analysis of the Senate Foreign
Relations and Armed Services Committees during George W. Bush’s second term’, Cambridge
Review of International Affairs 26, no. 2 (2013), 430–452.
22
Zaid Al-Ali, The Struggle for Iraq’s Future: How Corruption, Incompetence and
Sectariansim Have Undermined Democracy, New Haven, Yale University Press, 2014.
23
Transparency International has Iraq as 170th (out of 175) (i.e. the sixth most corrupt
country in the world of those measured), see http://www.transparency.org/country#IRQ.
24
For an evocative account of corruption in government in pre-revolutionary Syria see Diana
Darke’s My House in Damascus: An inside view of the Syrian Revolution, London, Haus
Publishing Ltd 2014, 126–136.
25
Zaid Al-Ali, op. cit. Ch. 7.
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feeling on the part of the Sunni minority that they were being excluded politically and
hence economically, and being violently persecuted by Shia militias. In Sunni terms,
they were being denied access to the resources to fight back. It is noteworthy that
Maliki kept a firm grip of the defence and interior ministries. This was in part about his
own security, but it was also because they allowed significant levels of graft.
The impact of these policies was revealed when the rapid expansion of the Islamic
state in the summer of 2014 revealed huge weaknesses within the Iraqi army, including
that the Iraqi government was paying for up to 50,000 soldiers who either did not exist
or never actually turned up for work.26 Following the rapid expansion of the Islamic
state, these revelations led to a major reorganisation (including sackings) of the higher
echelons of the Iraqi military.27 Units were understrength and not as well equipped in
reality as on paper. Both of these factors also contributed to low morale even further
undermining military effectiveness.28 The problem was exacerbated by having almost
entirely Shia units operating in largely Sunni areas; this has been identified specifically
in relation to the fall of Mosul in the summer of 2014. The counter-argument could be
made that if the salaries of the Sunni tribes in Anbar had kept on being paid in 2011
and 2012, there would have been no need for the 50,000 missing soldiers to fight. Is
there a substantive difference between paying the salaries of 50,000 Shia security
personnel though government structures to try and control an overwhelmingly Sunni
area or through patronage allowing the money to go straight to Sunni tribal forces to
keep the peace in their own areas?
The success of the US-led ‘awakening’ movement in the Sunni areas of Iraq allowed
the US to withdraw from an Iraq with some degree of stability.29 The process of turning
local tribal leaders against their previous allies Al-Qaeda was based on distributing
funds to tribal leaders and their retinues. The Iraqi state was effectively undermining its
own military by subsidising an alternative force. Traditional development analysis
would suggest that this type of approach undermines the development of the state, but
it did allow three years of rough stability in the Sunni areas of Iraq (2009–2012).30
Unfortunately, the time was not used by the Maliki government to build up a nationally
based army that would have included Sunnis. The peace started to break down, as
26
Patrick Cockburn, The Jihadis Return: ISIS and the New Sunni Uprising, New York, OR
Books, 2014.
27
The Iraqi government fired 26 top leaders, 10 were forced to retire and 18 others were
moved to new positions, including the former Army Chief of Staff Babacar Zebari, Al Sumaria
News, 12 November 2014.
28
Various media accounts include references to the low morale of the Iraqi forces, including:
Martin Chulov, Fazel Hawramy and Spencer Ackerman, ‘Iraq army capitulates to Isis militants
in four cities’, The Guardian, 11 June 2014; Liz Sly and Ahmed Ramadan ‘Insurgents seize Iraqi
city of Mosul as troops flee’, The Washington Post, 10 June 2014.
29
For the background to this see the paper by Najim Al-Jabouri and Sterling Jensen ‘The
Iraqi and AQI roles in the Sunni Awakening’, available at http://cco.dodlive.mil/files/2014/02/
Prism_3-18_Al-Jabouri_Jensen.pdf.
30
See D. Green and W. Mullen’s Fallujah Redux: The Anbar Awakening and the Struggle
with Al-Qaeda, Annapolis, Naval Institution Press, 2014.
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Sunnis feared it would,31 as these payments moved from being made by the US
military to coming from the Maliki-led government. The Iraqi government started to
stall and then stopped the payments entirely. In the longer term, these types of
strategies do undermine the coherence of national armies and security strategies, but in
the short term they may well be a necessary part of ensuring sufficient stability to allow
the breathing space for longer-term state development.
We are in the ironic position where if one form of state corruption had persisted (the
payments to the Sunni tribes) then another form of state corruption (the ghost soldiers)
would never have been revealed. Corruption is not a zero-sum game; the use of
patronage that would be counted under international definitions of corruption as a form
of state policy may be a legitimate short-term policy to allow more effective state
apparatus to develop. The key issue is that these short-term policies need to be
integrated alongside broader strategies that include developing anti-corruption pro-
grammes. As the experience of paying warlords in Afghanistan shows (and the recent
US Department of Defense report quoted earlier makes clear32), emphasis must be put
on a coherent approach. In the Afghan context, different arms of the US government
were pursuing differing and sometimes contradictory aims. Allowing patronage to
support wider state building aims may be a legitimate tactic at a particular stage of
development, but it needs to be understood that it has to run in parallel with strategies
to normalise central government control or oversight.
Whilst the analysis has focused on the two extreme examples of Iraq and Afghan-
istan, it is worth pausing and putting some of these examples into a wider context.
Though the focus has been on military and security issues, many of the same basic
issues of patronage being part of the everyday functioning of politics can be seen in
more developed economies. State building strategies in post-conflict states need to
recognise that corruption can be a rational choice in fluid political situations. Policy
makers and military planners need to adopt subtler and more co-ordinated policies to
ensure that if patronage is used to contribute to security it is part of a wider strategy.
This is not to propose an open policy on corruption in post-conflict states, but merely to
encourage those involved in state building to consider the issues in a local rather than
a purely Western context.
FURTHER READING
Addison, T., Geda, A. and Le Billon, P. ‘Financial reconstruction in conflict and post-conflict economies’,
WIDER Discussion Papers/World Institute for Development Economics (UNU-WIDER), No. 2001/90.
Al-Ali, Z. The Struggle for Iraq’s Future: How Corruption, Incompetence and Sectarianism Have
Undermined Democracy, New Haven, Yale University Press, 2014.
Buchanan, J., Tollison, R. and Tullock, G. Toward a Theory of the Rent-Seeking Society, College Station,
Texas A&M University Press, 1980, 1–15.
Bräutigam, D. and Knack, S. ‘Foreign aid, institutions, and governance in Sub{Saharan Africa’, Economic
Development and Social Change 52, no. 2 (2004): 255–285.
31
J. Hendren, ‘Iraq’s Sunnis fear life without US oversight’, ABC News, 1 October 2008,
available at http://abcnews.go.com/International/story?id=5926340&page=1.
32
Operationalizing Counter/Anti-Corruption Study, op. cit.
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Cheng, C.S. and Zaum, D. (eds) Corruption and Post-Conflict Peace-Building: Selling the Peace? Cass
Series on Peacekeeping, 2012.
Cockburn, P. Muqtada Al-Sadr and the Battle for the Future of Iraq, New York, Schribner, 2008.
Cockburn, P. The Jihadis Return: ISIS and the New Sunni Uprising, New York, OR Books, 2014.
DeYoung, K. ‘U.S. indirectly paying Afghan warlords as part of security contract’, Washington Post, 22
June 2010.
Green, D. and Mullen, W. Fallujah Redux: The Anbar Awakening and the Struggle with Al-Qaeda,
Annapolis, Naval Institution Press, 2014.
Independent Joint Anti-Corruption Monitoring and Evaluation Committee Unfinished Business: The Follow
Up on Kabul Bank, Independent Joint Anti-Corruption Monitoring and Evaluation Committee, 2 October
2014.
Joint and Coalition Operational Analysis Operationalizing Counter/Anti-Corruption Study, 28 February
2014, Joint and Coalition Operational Analysis (JCOA) – a division of the Joint Staff J-7 US Pentagon.
Lambsdorff, J. The Institutional Economics of Corruption and Reform: Theory, Evidence and Reform,
Cambridge, Cambridge University Press, 2007, 214–215.
Lönnberg, Å. ‘New Money’, Finance and Development 50, no. 4, December (2013).
Philp, M. ‘Defining political corruption’, Political Studies 45, no. 3 (1997): 436–462.
Savage, K., Delesgues, L., Martin, E. and Pacha Ulfat, G. ‘Corruption perceptions and risks in humanitarian
assistance: an Afghanistan case study’, HPG Working Paper, July 2007.
Søreide, T. and Williams, A. (eds) Corruption, Grabbing and Development: Real World Challenges,
Cheltenham, UK and Northampton, MA, 2014.
Subcommittee on National Security and Foreign Affairs Committee on Oversight and Government Reform
Warlord, Inc. Extortion and Corruption Along the U.S. Supply Chain in Afghanistan. Report of the
Majority Staff. Representative John F. Tierney, Chair Subcommittee on National Security and Foreign
Affairs Committee on Oversight and Government Reform. US House of Representatives, June 2010.
Svensson, J. ‘Eight questions about corruption’, Journal of Economic Perspectives 19, no. 3 (2005): 34–36.
Williams, R. ‘Introduction’, in Controlling Corruption, ed. Williams, R. and Doig, A., Cheltenham, UK and
Northampton, MA, Edward Elgar, 2000, xiii.
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Barry Rider - 9781783475780

PART VII
THE PROCEEDS OF FINANCIAL

AND ECONOMIC CRIME
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36. The pursuit of criminal property

Richard Alexander
Over the last few decades, increasing attention has been paid not only to prosecuting
those who commit crimes but also to depriving them of the proceeds of those crimes. In
the United Kingdom, a key policy document was the Report of the Cabinet Office’s
Performance and Innovation Unit, ‘Recovering the Proceeds of Crime’, published in
June 2000. This discussed why the British Government felt that asset recovery was
important before setting out how this was to be achieved, paving the way for the
Proceeds of Crime Act 2002. Although certain forms of recovery of criminal property
were already in place in the United Kingdom, the 2002 Act both extended these forms,
including the introduction of civil proceedings, and brought all the provisions under
one piece of legislation, ending the divide that had existed up to then between drug
trafficking and all other forms of crime.1
There are clear reasons why the removal of criminal property is important, above and
beyond the mere fact that international instruments now demand it.2 One is the
commonly stated argument that since certain crimes are committed in order to make
money, if conviction will result not only in a prison sentence but also removal of the
proceeds, then the motivation will be removed. In itself, this is questionable: almost 30
years after severe measures were first introduced in the United Kingdom to remove
property linked to drug trafficking,3 the incidence of drug trafficking remains high.4
Similarly, in the United States, despite the use of both criminal and civil forfeiture
provisions to combat drug trafficking, the problem remains sufficiently severe for New
York City to maintain a specialist investigation and prosecution unit devoted solely to
this category of offence.5 It is, however, true that certain forms of acquisitive crime
both provide extravagant lifestyles for the offenders and cause considerable hardship
for the victims. Corruption and embezzlement by political leaders are particular
examples, with leaders being found in possession of assets with a value that dwarfs
their official salaries. A particularly notable example was Teodoro Obiang, Minister of
Forestry and Agriculture (and son of the President) of Equatorial Guinea, who settled a
1
The provisions relating to terrorist property, however, continued to be covered separately
in the Terrorism Act 2000, as subsequently amended.
2
For example, Recommendation 4 of the Financial Action Task Force.
3
Through the Drug Trafficking Offences Act 1986. This Act was later superseded by the
Drug Trafficking Act 1994, itself replaced in 2003 with the coming into force of the Proceeds of
Crime Act 2002.
4
In the financial year ending 2013/14, there were 30,648 separate seizures of Class A drugs
in England and Wales. Source: Home Office, ‘Seizures of drugs in England and Wales, financial
year ending 2014’, <https://www.gov.uk/government/statistics/seizures-of-drugs-in-england-and-
wales-financial-year-ending-2014> accessed 1 February 2015.
5
Office of the Specialist Narcotics Prosecutor for the City of New York.
447
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forfeiture action brought against him by the U.S. Department of Justice in October
2014. Despite an official salary of US$6,799 per month, he was able to buy a mansion
in Malibu, California, for a price of $38.5 million6 and his total assets were stated by
the Department of Justice to be over $100 million.7 Similarly, at the other end of the
scale, there are communities where a combination of severe poverty and a strong sense
of loyalty to one’s family mean that even long prison sentences are not a sufficient
deterrent. Put bluntly, if a man engages in violent robbery, kidnapping or poaching of
endangered animals and is sentenced to ten years’ imprisonment, he may regard that as
an acceptable price to pay for his parents being able to have a comfortable house, his
aunt receiving medical treatment or his cousin going to school. This is a reality in many
parts of the world. If, however, the man knows that conviction will result not just in a
prison sentence but in him and his family being stripped of what little property they
have, the deterrent may be rather greater.
Before continuing, however, one needs to define the concept of ‘criminal property’.
Property shown to be the proceeds of, at least, serious crimes is generally included in
most jurisdictions. The United States, however, at both Federal and state level, focuses
with equal vigour on the ‘instrumentality’ of a crime: property not deriving from a
crime, but rather used to commit it or even merely to facilitate it. In the United
Kingdom, in contrast, although such a concept exists, it is confined to certain specific
offences, notably drug trafficking, smuggling (whether of drugs or other contraband),
human trafficking and certain of the more serious road traffic offences.
CRIMINAL MEASURES: UNITED KINGDOM

The criminal measures to remove the proceeds of crime in the United Kingdom are
termed ‘confiscation’. They are found in Parts 2–4 of the Proceeds of Crime Act 2002,
although Parts 3 and 4 essentially replicate, for Scotland and Northern Ireland
respectively, the measures set out in Part 2 for England and Wales. (The principal
differences relate to the different court systems of the three jurisdictions.) Two key
points need to be made at the outset. Firstly, the proceeds of all crimes are covered,
regardless of how grave or minor. ‘Criminal property’ is defined as a benefit from
‘criminal conduct’, which in turn is defined simply as ‘conduct which (a) constitutes an
offence in England and Wales’.8 Just as, as a matter of law, the proceeds of trafficking
in illegal drugs, human beings or contraband tobacco and alcohol may be confiscated,
or those of a contract murder or corruption, so may be those of selling alcohol or
cigarettes to a minor. It may be that limited resources mean that greater priority is in
6
‘Equatorial Guinea dictator’s son “splurged millions of impoverished country’s money”’,
The Telegraph, 26 October 2011, <http://www.telegraph.co.uk/news/worldnews/africaandindian
ocean/equatorialguinea/8851377/Equatorial-Guinea-dictators-son-splurged-millions-of-impoverished-
countrys-money.html> accessed 2 February 2015.
7
‘Second Vice-President of Equatorial Guinea agrees to relinquish more than $30 million
of assets purchased with corruption proceeds’, Justice News, 10 October 2014, U.S. Department
of Justice, <http://www.justice.gov/opa/pr/second-vice-president-equatorial-guinea-agrees-
relinquish-more-30-million-assets-purchased> accessed 2 February 2015.
8
Proceeds of Crime Act 2002, s 76(1)(a).
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The pursuit of criminal property 449
practice given to pursuing the proceeds of the former offences than the latter, but that
could swiftly change with a change of government policy.
Secondly, confiscation, like its criminal law counterparts in other jurisdictions, is
dependent on a criminal conviction. Property may be seized prior to conviction, but
only in order to prevent the defendant from hiding it or, worse, transferring it to a
jurisdiction from which it will be difficult or even impossible to retrieve it.9 If it is to be
definitively confiscated, the defendant must first be convicted of a criminal offence.
Even the criminal lifestyle provisions, discussed below, under which the burden of
proof shifts to the defendant to show that the property is not in fact the proceeds of
crime, require a criminal conviction (or, in some cases, more than one) before they will
apply.
It should be noted that the proceeds of overseas crimes are also covered: the
definition of criminal conduct extends to conduct which ‘would constitute [an] offence
if it occurred in England and Wales’.10 The impact of this, however, is limited by the
requirement of a criminal conviction before an English court. Although the extent to
which the English criminal courts have jurisdiction over acts committed overseas has
grown in recent years, it is still relatively limited, compared to that in some other
jurisdictions.11 In terms of offences likely to give rise to proceeds, the key offences are
bribery of a foreign public official12 and involvement in child prostitution or child
pornography.13 All of these offences only cover defendants who are British citizens or
residents. Foreign nationals (not resident in the United Kingdom) who commit crimes
abroad may, however, find themselves subject to the English courts in relation to
money laundering where the proceeds are transferred to, from or within the United
Kingdom. A notable example was James Ibori, the former Governor of Delta State,
Nigeria, convicted in February 2012 of laundering £50 million derived from defrauding
Delta State government funds. The entire amount involved, however, was estimated to
have been as £157 million or even higher.14
9
To do so would, if the property were indeed derived from a criminal offence, constitute
the money laundering offence of transfer of criminal property and/or removal of it from the
jurisdiction (Proceeds of Crime Act 2002, s 327). But this may be of limited comfort if the
property cannot be retrieved.
10
Proceeds of Crime Act 2002, s 76(1)(b).
11
For example France, whose criminal courts have jurisdiction over crimes (the most serious
category of offence) committed by French nationals abroad as well as in France and also over
délits (moderate offences) committed abroad, albeit with the additional proviso in the case of
délits that the act was also a criminal offence in the jurisdiction in which it was committed (the
double criminality rule). Code Pénal, art 113–16.
12
Bribery Act 2010, s 6.
13
Sexual Offences Act 2003, ss 48–50. For the purposes of these offences, a child is a
person under the age of 18 unless the defendant has reasonable grounds to believe that they were
at least 18 or a person under the age of 13 in any event. Trafficking persons for sexual
exploitation, whether within the United Kingdom or elsewhere, is a separate offence under
s 59A.
14
In his sentencing remarks, the trial judge, Judge Anthony Pitts, referred to the £50 million
which Ibori admitted to having laundered as ‘perhaps … a ludicrously low figure and the figure
may be in excess of £200 million’. Mark Tran, ‘Former Nigeria state governor James Ibori
receives 13-year sentence’ The Guardian, 17 April 2012.
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The procedure leading to a confiscation order begins with a hearing that follows the
conviction itself. It is triggered either by the prosecution or by the trial judge: under
section 6 of the 2002 Act, the court must proceed with a confiscation hearing if either
the prosecution asks it to or if it ‘believes it is appropriate to do so’. The first stage is
to determine whether or not the defendant has a ‘criminal lifestyle’. In practice,
however, this will be a simple matter. The criteria for determining a criminal lifestyle,
discussed below, are clearly stated, and hence there is little room for discretion. Put
another way, either the defendant satisfies one of the criteria (and if they do, this will
already be a matter of record) or they do not. If they do not, the court focuses on the
specific offences of which the defendant has just been convicted. This will include any
offences ‘taken into consideration’,15 but not any offences of which they were
convicted in the past or in respect of which they have been charged but not yet
prosecuted.16 Aided by the prosecution, the court then determines what ‘benefit’ the
defendant has derived from their present crime(s). This will often be the money that
they have derived from the offence. For example, in a case involving the sale of
smuggled alcohol or tobacco,17 it will be the money that they have received from
selling the contraband goods; in a fraud case, it will be the proceeds of the fraud. It
may, however, be other forms of property: in an insider dealing case the securities that
were purchased, in a theft case the property that was stolen.
It should also be considered that while some crimes enable the offender to make
money, others enable them to save it. An example is where a person (natural or legal)
engages in a business that is in itself legitimate but saves costs by employing
undocumented, or even trafficked, workers.18 This will enable them to pay these
workers below the legally prescribed minimum wage and also evade the payment of
National Insurance contributions. The money from the business is derived from a
legitimate activity such as farming, food processing or the manufacture of clothes, but
costs are saved, resulting in higher profits, through a criminal offence.19 Where this is
15
Where the defendant has in fact committed several other offences similar to that for which
they have been prosecuted, they may ask for these to be taken into consideration by the court for
the purposes of sentencing. This will not result in further actual convictions; however, it will
mean that they receive a somewhat higher sentence than would otherwise have been the case (to
reflect their overall criminality). These other offences are then considered dealt with: the
defendant will not be prosecuted for them at some later date.
16
Past convictions may, however, trigger the criminal lifestyle provisions; similarly, a future
conviction may trigger them in a subsequent hearing. See below.
17
A conviction for any kind of drug trafficking offence will trigger separate criminal
lifestyle provisions; see below.
18
It is preferred to use the term ‘undocumented workers’ rather than the more popular
‘illegal workers’, since the persons are not illegal per se, they are merely not legally permitted to
work in the jurisdiction concerned. See Hsiao-Hung Pai, Chinese Whispers: The True Story
behind Britain’s Hidden Army of Labour (Penguin 2008).
19
For a detailed discussion of how saved costs have been deemed by the English courts
(although less so in the United States) to constitute the proceeds of crime, see R.C.H. Alexander,
‘“Cost savings” as proceeds of crime: a comparative study of the United States and United
Kingdom’ (2011) 45(3) The International Lawyer 749.
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the case, the position taken by the English courts has been that the entire proceeds
(receipts) derived through the illegal activity.20
A further category of proceeds is where the criminal offence does not directly
produce an income but creates the opportunity to obtain it. The classic example of this
is bribery. In the case of the corrupt recipient of the bribe, the money or other gift, such
as the payment of tuition fees for the recipient’s children at expensive overseas schools
or universities, is the proceeds. But the payer of the bribe also gets something: this is,
for the most part, why they pay it! A company may pay a bribe in order to obtain a
commercial contract. Mabey & Johnson and Innospec are merely two well-publicised
examples; in both cases, the sentence imposed included a confiscation order based on
the profits from the contracts corruptly obtained plus, where it may be calculated, the
value of the pecuniary advantage of excluding competitors from the bidding process.21
One may remark that the focus on profits, rather than gross receipts, in corruption
cases, as confirmed by the Court of Appeal in R v Sale (Peter 22) somewhat contrasts
with that taken with respect to cases involving the illegal use of undocumented workers
in R v Xu, cited with approval by the Court of Appeal in R v Harvey (Jack) less than a
month earlier.23 Space, however, precludes a further discussion of this here.
It must be stressed that in such cases, the burden is firmly on the prosecution to
prove that the property to be confiscated (or rather its value – see below) is a benefit
from the defendant’s crime; it is not for the defendant to prove that it is not. The court,
in order to establish the benefit, may order the defendant to provide it with specified
information, such as financial records, and, if the defendant fails to do so, may draw
such inferences from the refusal as it sees fit.24 Further, section 6 of the 2002 Act
makes clear that the standard of proof is the civil one of the balance of probabilities,
that is, 50.0001 per cent. But ultimately, it is down to the prosecution to demonstrate to
the court that the assets to be confiscated are the defendant’s benefit from their criminal
behaviour. Demonstrating this is by no means simple in every case. The case of James
Ibori, referred to above, is a case in point. The first part of the proceedings was clearly
a success: Ibori pleaded guilty to a series of offences, including both fraud and money
laundering, and was sentenced to 13 years’ imprisonment. Further, in his sentencing
remarks, Judge Anthony Pitts made clear that a confiscation hearing would follow. The
course of that confiscation hearing, however, has to date been less than ideal from the
prosecution’s point of view.25 Originally scheduled for October 2013, itself 18 months
after Ibori was sentenced, it was adjourned to April 2014. The 2014 hearing, however,
20
R v Xu (David Kai) [2008] EWCA Crim. 2372, approved in R v Harvey (Jack) [2014] 1
WLR 124 at p. 139.
21
R v Innospec Ltd. [2010] Lloyds Rep. FC 462. That it may not always, however, be
possible for the court to calculate this additional pecuniary advantage was stated clearly by the
Court of Appeal in R v Sale (Peter) [2014] 1 WLR 663 at pp. 675–76.
22
Note 21 supra. It is to be noted that that the Court in Sale did not seek to distinguish
Harvey on this point; where it did cite the decision (in another context), it did so with approval.
It did not refer to Xu at all.
23
Note 20 supra.
24
Proceeds of Crime Act 2002, s 18.
25
The confiscation case, at the time of writing, is still ongoing following a reference to the
Court of Appeal and hence no final outcome has yet been reached.
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ended with Judge Pitts admitting that by the end of the defence submissions, he was
‘confused’.26 Those submissions had included that the fact that Ibori had admitted
defrauding and laundering £50 million27 did not, as the prosecution claimed, prove that
he had personally benefited at all; this notwithstanding the fact that he had been shown
to have considerable assets, including properties both in London and elsewhere in
England and luxury cars.
It should further be noted that it is not in fact mandatory after a criminal conviction
to seek a confiscation order at all. The court is obliged to hold a hearing if the
prosecution asks it to do so or, alternatively, if it itself deems it appropriate. Should the
prosecutor not apply for confiscation or the court not decide that it is appropriate,
neither is required to explain why. In consequence, by no means every conviction for a
crime that potentially gives rise to proceeds is followed by a confiscation hearing. A
combined report in March 2010 by the bodies responsible for overseeing the Crown
Prosecution Service, the courts and the police stated as much: ‘not all cases with
restraint and confiscation potential are identified as such, largely because issues are not
mainstreamed into the daily work of frontline police investigators and CPS area
prosecutors’.28 In possible explanation, the report went on to remark on the complexity
of confiscation hearings: ‘there is a feeling that the identification of and exploitation of
cases is a job best left to the specialists, because it is a separate complex area of law
which should not impinge on the main job of prosecuting and sentencing criminals in
the conventional way’.29 Since that report was published, some action has been taken
and asset recovery specialists are now used by the CPS in at least some cases, including
the Ibori case However, it may be remarked that the Ibori case is not the kind of case
that the report most had in mind; even before 2010, a confiscation order would be
sought in a large-scale fraud and money laundering case such as this. One suspects that
it is the smaller cases of acquisitive crimes that the report had in mind – and in these,
confiscation orders are still not sought as often as they might be.
Where the defendant is shown to have a criminal lifestyle, however, the matter, from
the prosecution point of view, becomes a little simpler: the burden of proof shifts to the
defendant. Every item of property that the defendant received during the period of six
years up to the start of their trial is presumed to derive from crime; similarly, every
item of expenditure during the same period is presumed to have been funded from the
proceeds of crime. This may seem draconian – indeed, it is and is intended to be – but
26
‘Ibori London case: I’m confused, British judge admits’ This Day Live, 16 April 2014
<http://www.thisdaylive.com/articles/ibori-london-case-i-m-confused-british-judge-admits/176300/>
27
Emma Glanfield, ‘Former Wickes cashier who became a Nigerian state governor and
defrauded some of the world’s poorest people out of £157 million may not have to pay back a
penny’ Mail Online, 9 April 20 <http://www.dailymail.co.uk/news/article-2600746/Former-
Wickes-cashier-Nigerian-state-governor-defrauded-worlds-poorest-people-157million-not-pay-
penny.html> accessed 17 August 2014.
28
Criminal Justice Joint Inspection, ‘Joint thematic review of asset recovery: restraint and
confiscation casework’ (2010) para. 2.4 <http://www.hmic.gov.uk/media/joint-thematic-review-
of-asset-recovery-restraint-and-confiscation-casework-full-report-20100324.pdf> accessed 17
August 2014.
29
Ibid.
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the third presumption is harsher still. Every asset that the defendant holds on the day
following their conviction is presumed to derive from crime, regardless of how long
ago they acquired it. Section 76 is explicit: property acquired or expenditure incurred
before the 2002 Act was passed is included. In other words, if the defendant acquired
an asset, say, 35 years ago (at the time of writing 23 years before the 2002 Act was
passed), but still has it on the day after their conviction, the presumption will apply to
it.
The presumption is rebuttable: if the defendant shows that a particular asset or item
of expenditure has a legitimate origin, its value will not be included in the confiscation
order. But if they cannot, it is subject to confiscation. Also not included is any property
that was the subject of an earlier confiscation order. Hence, although earlier convictions
may, as seen below, cause the criminal lifestyle provisions to be applied, the value of
any confiscation order that followed them will be subtracted from the sum of the
defendant’s assets. No item of property is to have its value confiscated twice.
As indicated above, however, a criminal lifestyle will only be determined in certain
circumstances. Three categories are set out in section 75. The first is where the
defendant is convicted of one of a specified list of offences. This is in many ways a
successor to the original ‘confiscate all’ presumption applied to those convicted of drug
trafficking under the Drug Trafficking Offences Act 1986, part of the 1980s ‘war on
drugs’ and since replaced by the 2002 Act itself. Drug trafficking is still a ‘criminal
lifestyle’ offence, but it has been joined by a number of categories, contained in
Schedule 2 of the Act:
1. money laundering (except for acquisition, use or possession of criminal property

under section 329 of the 2002 Act);
2. directing terrorism;
3. people trafficking;
4. arms trafficking;
5. counterfeiting of currency;
6. intellectual property offences;
7. sexual exploitation of children (whether for prostitution or pornography);
8. causing, inciting or controlling prostitution for financial gain.
A number of these offences are substantive crimes under English law regardless of
where in the world they are committed; however, it will be recalled that the definition
of criminal property extends to the proceeds of any act committed outside the United
Kingdom if it would be a criminal offence were it committed within it.
A single conviction for any of the above offences will trigger the criminal lifestyle
provisions; this is designed to indicate the seriousness with which the British
Government regards them.
The second category applies to repeat offenders: either where the defendant has two
previous convictions from two separate occasions – again, the relevant period is six
years up to the start of the current proceedings – or where they have been convicted of
three other offences in the current proceedings. In either case, for the criminal lifestyle
provisions to apply, the prosecution must also show that the defendant derived a benefit
from each of the offences. This contrasts sharply with the first category, where the mere
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conviction is sufficient: no actual benefit need be proven. Furthermore, for the repeat
offender category, the prosecution will be required to show that the benefit from the
current offence was at least £5,000. Thus, for example, three convictions of relatively
small scale insider dealing, giving rise to total proceeds of £3,000, will not suffice. The
prosecution may seek to show that the benefit was in fact higher than that, in order to
trigger the criminal lifestyle provisions, but the burden of proving this will be on it.
The final category is where the offence was committed over a continuous period of at
least six months; an example would be sustained embezzlement or other fraud. Again,
the prosecution must show that the offence gave rise to a benefit of at least £5,000
before the burden of proving the origin of the assets will shift to the defendant.
Although the criminal lifestyle provisions have rightly been described as draconian,
they do offer an advantage to the prosecution that is more than the obvious. It is not
simply that the prosecutor is spared the effort of calculating the defendant’s removable
assets: they, or their investigator, will still need to assess what assets the defendant
holds now, what they have received over the past six years (or more if the trial has been
lengthy) and what they have spent over the same period. This will be all the more
challenging where some, possibly even a large part, of the assets are located abroad: it
is well known that some jurisdictions are rather more cooperative with foreign
investigations than others. Rather, where the defendant has been convicted of acquisi-
tive crimes and has significant established assets, but there is doubt regarding what
level of benefit they actually derived from those crimes, the criminal lifestyle
provisions require the defendant to ‘explain or lose’. The Ibori proceedings, discussed
above, were a case in point. Ibori pleaded guilty to laundering £50 million derived from
fraud and was found to have assets that included a number of high-value real estate
properties in London and elsewhere and a number of luxury cars including a Bentley, a
fleet of Range Rovers and an armoured Mercedes Benz,30 as well as amassing a credit
card balance of £920,000, despite having an official salary of £4,000 per annum.31
However, his defence claimed that the prosecution had failed to show that he had
personally benefited from the fraud. Had the criminal lifestyle provisions been applied,
it would have been for Ibori himself, not the prosecution, to show how these assets,
including the credit card expenditure, had been funded.
This in turn raises a further issue. It highlights the problems that can be caused by
only certain money laundering offences being included in the list of specified criminal
lifestyle offences. Although transfer, conversion, concealment and removal from the
jurisdiction of criminal property under section 327 of the 2002 Act, as well as
facilitating another person’s benefit from criminal property under section 328, are
on the Schedule 2 list, acquisition, use and possession of criminal property under
section 329 are not. That is not to say that the presumptions can never be applied in
section 329 cases, but it does mean that, for them to be, either the defendant will need
to have been convicted of multiple offences or the prosecution must show that the
current offence was committed over a protracted period of time. Neither is necessary
following a conviction under either section 327 or 328. Yet acquisition, possession or
30
‘Former Nigeria governor James Ibori jailed for 13 years’, BBC News, 17 April 2012
<http://www.bbc.co.uk/news/world-africa-17739388> accessed 18 August 2014.
31
Mark Tran, note 14 supra.
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use are precisely the kind of money laundering offences with which Ibori and his like
are most vulnerable to being charged. While one could argue that houses, cars, and so
on represent conversion of criminal property, that is, from money to a house, car or
whatever, it may be more difficult to prove to a criminal standard that the conversion
took place in the United Kingdom; the purchases may have been made from abroad.32
In contrast, proceeds discovered in a U.K. bank account or houses, cars and the like can
much more easily be shown to have been received within the jurisdiction – and
certainly possessed and used there. If the criminal lifestyle provisions could be applied
following a conviction for a section 329 offence, the assets of such individuals could
much more simply be pursued.
Lest the extension of the criminal lifestyle provisions be considered a draconian step
too far, it must be remembered that, as stated above, the presumptions are rebuttable.
Although the burden of proof is on the defendant, section 10(6)(a) of the 2002 Act is
clear: no presumption is to be applied if it is shown to be incorrect. If the defendant
shows that a given asset has a legitimate origin, that asset is not subject to confiscation.
Although mention has been made of criminal property consisting of cars, houses and
the like as well as actual cash, it should be stressed that what is actually confiscated,
whether or not the criminal lifestyle provisions are applied, is the value of the assessed
property, not the property itself. This was remarked on in the recent case of R v Waya
(Terry).33 Often, this will make little difference. The only way that a defendant can
raise the funds necessary to meet the order may well be to sell the assets concerned.
Alternatively, if the defendant fails to pay, an enforcement receiver may take property
that has already been seized pending the confiscation order and sell it. However, if a
defendant does have sufficient funds from a legitimate source and chooses to use them
to pay the order rather than part with an asset that they particularly like, they are free
to do so. An example would be a senior officer of a financial institution convicted of
insider dealing or fraud who has significant assets derived from the salary from the
position which they abused to commit the offence.
Brief mention should be made of the position of victims of crime. Unlike some other
jurisdictions,34 the United Kingdom does not require confiscated funds to be used for
certain specific purposes.35 Rather, they are paid into the ‘Consolidated Fund’, in effect
for HM Treasury to use to whatever end it pleases.36 That purpose may be linked to law
enforcement; alternatively, it may be contributing to the building of a new railway line
or even simply reducing the deficit. It is not, however, the purpose of the Act that a
victim seeking compensation finds that, by the time a compensation order is made, all
32
In Ibori’s case, one of the properties and at least one of the cars were located in South
Africa and the purchase transactions may well have taken place there.
33
[2013] 1 AC 294.
34
For example, several U.S. states.
35
Other than expenses incurred during the confiscation process, such as the fees of
management receivers: ss.54 and 55.
36
http://www.parliament.uk/site-information/glossary/consolidated-fund/. Last accessed, 26
June 2015. The key exception to this is that part of the funds may be paid to the authorities of
another jurisdiction if either the offence was committed there or that jurisdiction has provided
assistance in the investigation. More recently, funds have also been allocated to community
projects or other “good causes”.
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assets that could have satisfied it have been confiscated. Section 13 of the Act therefore
provides that where the court finds that, following the making of a confiscation order,
the defendant will not have sufficient assets left to satisfy a compensation order in full,
the balance (i.e. the difference between the level of the compensation order and the
level of the remaining assets) is to be paid out of the confiscated assets. Nonetheless, it
should be considered in this context that under English criminal procedure, in contrast
to that of some civil law jurisdictions,37 the victim is not separately represented at the
offender’s trial and the amount awarded in a compensation order may therefore be less
than they might have received in a subsequent civil action.
At the other end of the scale is the power to award compensation to the alleged
offender. Although a confiscation order may only be made after a criminal conviction,
suspected assets may be seized, or an account frozen, before that as an interim measure
if there is reason to fear that they will otherwise be dissipated. This raises the question:
what if assets are seized, but the defendant is acquitted at trial? In many cases, the
answer is simple: the assets are returned or the freezing order lifted as the case may be.
But in others, the assets may have significantly deteriorated in value or the business
that they were used to fund gone into insolvency. Where, therefore, the defendant is
acquitted or their conviction is quashed on appeal or the investigation is dropped before
the matter even gets to trial, but, by then, they have suffered loss in relation to seized or
restrained property due to ‘serious default’ on the part of an investigating officer,
section 72 of the 2002 Act provides them with the right to compensation. A wide range
of investigating agencies are covered, including the police, the Crown Prosecution
Service, the National Crime Agency and even the immigration services.38 As with most
causes of action, the onus is on the person concerned to make an application, but if
they do so, the Crown Court is empowered to make the order. A similar power exists
under section 73 of the 2002 Act where a confiscation order is made but later amended
or discharged.
‘Serious default’ is not defined in the Act, nor has its meaning been clarified by the
judiciary: in the few cases in which section 72 has been considered, they focused on
other issues, such as whether a confiscation order should have been made at all,39
whether a private prosecutor is entitled under the 2002 Act to apply for such an order40
or who, when assets have been held by an appointed management receiver under an
order which should not have been made, should pay the management receivers’ fees.41
It was remarked in submissions in Crown Prosecution Service v Eastenders Group that
it is a high test to satisfy,42 but the Supreme Court did not comment on this in its
judgment. That such a provision for compensation exists at all, however, may be seen
by some as controversial. The author held ‘off the record’ conversations with senior
representatives of law enforcement from two other jurisdictions as to their view on
whether compensation should ever be paid in such circumstances. One remarked that if
37
For example, France.
38
The full list is set out in s 72(9).
39
Sumal & Sons (Properties) Ltd v Newham LBC [2013] 1 WLR 2078.
40
R v Zinga [2014] 1 WLR 2228.
41
Crown Prosecution Service v Eastenders Group [2015] AC 1.
42
Ibid. at p. 12.
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a person is arrested on suspicion of a serious offence and held on remand for several
months, but then acquitted, they were not entitled to compensation either in his home
jurisdiction or in England and Wales; the same, he felt, should apply to wrongful
seizure of assets. Another took a rather more nuanced approach: precisely in order to
avoid the introduction of a provision like section 72 of POCA 2002, his agency had
offered a settlement in cases where it took the view that the assets should not have been
restrained. In England and Wales, the debate over how to balance the protection of the
innocent (or at least the acquitted – one must remember that a criminal conviction
requires a very high standard of proof) against the risk to the budgets of law
enforcement agencies, not least in an age of austerity, may well continue.
CIVIL RECOVERY
A chapter on the pursuit of criminal property would not be complete without at least
referring to the civil recovery regime, contained in Part 5 of the 2002 Act. This
provides that the National Crime Agency43 may bring civil proceedings to recover
proceeds of crime. The targeted property is termed ‘property obtained through unlawful
conduct’, but its definition is much the same as ‘criminal property’ discussed above.
The key feature is the civil standard of proof: not only must it be shown on the balance
of probabilities that the property to be removed is derived from a criminal offence, but
the same standard applies to showing that a criminal offence even occurred. Nor need
it be shown what type of offence gave rise to the property: it is sufficient to show, on
the balance of probabilities, that the property derived from one of a number of possible
activities, each of which is a criminal offence (or would be if it were committed in the
United Kingdom). Similarly, the criminal conduct may be that of the current holder of
the property or, alternatively, that of someone else: section 242 is clear that either will
suffice.
Such a wide-ranging provision might be expected to be a very powerful weapon
indeed against the proceeds of crime. Its effect, however, at least at present, is less
significant than its counterparts in some other jurisdictions. A key reason is that that it
is only to be used when there is no realistic prospect of the offender being convicted,
for example where they are deceased or, less extreme, in a jurisdiction that is unlikely
to extradite them.44 The policy is that asset recovery should not be used as a convenient
alternative to prosecution: criminals should be prosecuted and sentenced wherever
possible and their assets can then be removed through confiscation. The 2000 Report of
the Cabinet Office’s Performance and Innovation Unit, ‘Recovery of the Proceeds of
Crime’, referred to at the beginning of this chapter, made this very clear. It even
referred to cases in the United States, where, faced with a limited prosecution budget,
it was decided to prosecute a cannabis trafficker rather than a heroin dealer because the
43
Previously the Serious Organised Crime Agency and, before that, the Asset Recovery
Agency,
44
For a full discussion of this, see Anthony Kennedy, ‘Civil recovery proceedings under the
Proceeds of Crime Act 2002: The experience so far’ (2006) 9(3) JMLC 245.
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former had greater funds that could be forfeited.45 That said, at least two prosecutors in
the United States46 informed the author that the volume of forfeitable assets had never
been the decisive factor neither in their offices nor that of any other prosecutor’s office
that they had encountered. It would appear, therefore, that the British Government’s
concern was inspired by a fairly atypical case.
The reservation of civil recovery actions for cases where it has been accepted that a
criminal prosecution is unrealistic is, certainly, a marked contrast to the approach in the
United States. As has been stated directly by leading U.S. asset forfeiture specialist
Stefan Cassella:
Civil forfeiture is not part of a criminal case. In a civil forfeiture case, the Government files
a separate civil action in rem against the property itself, and then proves by a preponderance
of the evidence that the property was derived from or used to commit a crime. Because a civil
forfeiture does not depend on a criminal conviction, the forfeiture action may be filed before
indictment, after indictment, or if there is no indictment at all.47
Either/or it most definitely is not. A further contrast, however, is referred to rather more
obliquely in Cassella’s remarks: civil forfeiture can be and regularly is used to remove
not merely the proceeds of a crime but also any property that is used to commit it,
termed in U.S. forfeiture law the instrumentality. Although there are, as previously
referred to, specific cases where an instrumentality of a crime may be removed under
English law (and indeed that of the United Kingdom in general), they are the exception,
not the rule and furthermore do not form any part of the civil recovery regime. In Part
5 of the Proceeds of Crime Act 2002, as seen above, property liable to civil recovery is
‘property derived from unlawful conduct’, not property used to commit it. In contrast,
in the United States, property that forms the instrumentality of a crime will often be
very much the target of the civil forfeiture laws.48 Examples have included not only a
ranch used for drug trafficking but also the horses on the ranch as these, by providing
the superficial appearance of legitimate activity, were also held to facilitate the
45
It should here be clarified that the term ‘forfeiture’ has rather different meanings in the
United Kingdom and the United States. In the United Kingdom, it refers to: (1) the removal of
cash – but only cash – where a legitimate origin cannot satisfactorily be shown, (2) the removal
of assets which are unlawful by their very nature, such as contraband goods, illegal drugs and
firearms or pornographic material, (3) property used to commit certain very specific offences. In
the United States, in contrast, it refers to the removal of any property linked to crime, whether
proceeds, instrumentality or subject.
46
It is a common requirement imposed both on law enforcement officers and prosecutors in
the United States that any comments they make may not be attributed either to them personally
or to their agency/office. This applied to the two prosecutors referred to here.
47
Stefan D. Cassella, Asset Forfeiture Law in the United States (Juris, 2nd edition, 2013),
p. 14.
48
The United States does not have any all-encompassing civil forfeiture statute analogous to
Part 5 of the Proceeds of Crime Act 2002 in the United Kingdom, but rather has a very wide
range of different statutes covering property related to different specific crimes. Whether the
proceeds, instrumentality or both, can be forfeited will depend on the particular crime and
statute. See Cassella (2013) supra, pp. 4–5. The 1st edition in fact contains a CD supplement,
providing a chart of which statutes provide for the forfeiture of property related to which crimes.
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offence.49 Nor does there appear to be any particular requirement of proportionality

between the value of the instrumentality and the gravity of the offence. A Porsche used
for kerb crawling was forfeited,50 in contrast to an unreported case in Chelmsford
Crown Court in which the court held that to forfeit (in the English sense) a Maserati in
which the defendant had committed the offence of dangerous driving would be
excessive.
A key question is the position of ‘innocent owners’, persons who own the property
but who had no knowledge of the offence. In confiscation cases, the question does not
arise: the removed assets are the proceeds of the defendant’s own crimes and hence, by
definition, there is no innocent owner. The exception to this is that proceeds passed on
to a third party will be covered; however, since it is the criminal defendant who is
presented with the confiscation order and since, moreover, the order is for the
confiscation of the value of the assets, not the assets themselves, this may be
considered to be a relatively minor exception. With civil recovery, however, it is not. By
definition, the perpetrator of the originating crime will often not be around; hence it
will often be a third party that holds the property.
One category, under the 2002 Act, is clearly protected: victims of theft. If a person
steals property and that property is later found in their possession or that of a third
party (perhaps a fence), it clearly constitutes the proceeds of unlawful activity and
hence is liable to recovery. Section 281 of the 2002 Act makes clear, however, that the
interests of the person from whom it was stolen take priority. The court may make a
declaration that the property belongs to the applicant, was taken from him unlawfully
and furthermore was not recoverable (i.e. liable to civil recovery before it was taken).
Where such a declaration is made, the property is not recoverable. In other cases, the
position is less clear: there is an innocent owner defence of sorts, but it is difficult to
satisfy. Section 266(3) states that a civil recovery order must not be made if a number
of conditions are satisfied. The first four are that:
(a) the respondent obtained the recoverable property in good faith;

(b) he took steps after obtaining the property which he would not have taken if he had not
obtained it or he took steps before obtaining the property which he would not have taken
had he not believed he was going to obtain it;
(c) when he took the steps, he had no notice that the property was recoverable; and
(d) if a recovery order were made in respect of the property, it would, by reason of the steps,
be detrimental to him.
In themselves, however, even these four will not be sufficient; a fifth condition must
also be met: ‘it would not be just and equitable’ for the court to make the order. The
combination was described as ‘a high hurdle’ in the recent case of National Crime
Agency v Amir Azam and others (No. 2).51 Here, Kalsoom Sanam, the ex-wife of Amir
Azam, a man claimed by the National Crime Agency to have funded his assets through
drug dealing and money laundering, sought to oppose a civil recovery order in respect
of a house on the basis that that house would form the basis of a claim for financial
49
U.S. v Rivera 884 F.2d 544 (11th Circuit, 1989).
50
City of Portland v 1985 Porsche 944 924 P.2d 334 (Court of Appeals of Oregon, 1996).
51
[2014] EWHC 3573. High Court of Justice, Queen’s Bench Division, 30 October 2014.
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provision following their divorce. Andrews J made it clear that she found Kalsoom a
completely innocent party and indeed had considerable sympathy for her:
She has done nothing to deserve the situation in which she has found herself. This is not the
case of a woman who was happy to live ‘high on the hog’ from the proceeds of crime with no
questions asked, turning a blind eye to where the money was coming from. … She genuinely
believed that Thurza Court was hers to keep as a wedding gift; that was what she was told by
both Mohammed [her ex-father-in-law] and Mr. Azam, although it was not in fact the truth.
… If the court had an unfettered discretion as to what should happen to the property
registered in her name, there would be much to be said for allowing her to keep it.52
She went on, however, to state clearly that the court in fact had no discretion at all:
either the conditions in section 266(3) and (4) were satisfied, in which case an order
must not be made, or they were not, in which case they must be. The innocence of the
holder of the property, or even any hardship that might be caused to them, was
irrelevant. In the present case, she found that Kalsoom had not taken any steps either
before obtaining the property or afterwards which she would not have done otherwise –
since she neither knew that she would receive the house until shortly before it was
transferred to her, nor was in a position to do much with it afterwards. Thus the
condition in section 266(4)(b) was not satisfied. Parliament had clearly intended the
exceptions set out in section 266(3) and (4) to be the only exceptions to the rule that
recoverable property was to be recovered and the court’s duty was to give effect to that.
CONCLUSION
In conclusion, the United Kingdom is equipped with significant measures to remove
criminal proceeds from offenders and those linked to them. In practice, however,
although there have been a number of successes, the record could be significantly
better: the Ibori case, in particular, has not proven the system’s finest hour. It is
suggested that amendment of the criminal lifestyle provisions, to include all money
laundering offences, would be a useful step forward. Another would be to have a group
of confiscation specialists within the Crown Prosecution Service, not merely the
National Crime Agency, and to place confiscation hearings in their hands rather than
the general prosecutors. This was hinted at four years ago in the Criminal Justice Joint
Inspection report; perhaps it is now time that it was implemented. As for civil recovery,
this is already in the hands of a specialist unit, the National Crime Agency, and the
recent case of National Crime Agency v Azam and others (No. 2) demonstrates that the
National Crime Agency has both the willingness and the ability to use the provisions
effectively. It could, however, be more effective if its use were widened. In the United
States, criminal prosecution and civil forfeiture work well under a ‘both and’ system
rather than ‘either/or’. Perhaps the United Kingdom could learn from this. The scope
for removal of the instrumentality of a crime could perhaps also be extended: the
offences whose instrumentality is currently liable to forfeiture in the United Kingdom
are few and a decidedly ‘mixed bag’.
52
Ibid. at paras. 66–67.
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On the other hand, the Azam case does raise troubling questions about whether the
application of the civil recovery regime in the United Kingdom is unduly inflexible. In
the United States, although the innocent owner defence does not exist in the laws of all
states, it does in several, as it also does at Federal level. The Federal defence was
introduced as part of the Civil Asset Forfeiture Reform Act (CAFRA) of 2000, passed
in response to a perception that the previous system was on occasion abusive. It may be
that a similar review is required in the United Kingdom.
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37. Confiscation and forfeiture

Kenneth Murray
INTRODUCTION
A criminal should not benefit from his crimes. The proposition has long been accepted,
but only in the last generation has it translated to an explicit feature of international
jurisprudence. A consensus has formed in support of the proposition that ownership of
wealth obtained through crime is a rescindable title. The mechanisms designed to bring
that proposition to effect can be considered under the headings of confiscation and
forfeiture.
Sticking with founding principles, there are two issues claiming early consideration.
The first relates to the nature of the mechanisms that enable a court to confiscate
wealth and force forfeiture. Are they a means of imposing further punishment against
the offender? Or are they instead actions to be focussed on the wealth itself, no matter
who owns it when the action is enforced? To embrace the Latin: are these actions in
personam, that is, against the person; or in rem, that is, against the thing or object or
amount of money that embodies the wealth?
The answer in practice is both: some of these mechanisms are in personam and some
are in rem. The significance of the distinction and how it is applied, however, is a
useful way into considering different approaches to confiscation and forfeiture: what
unites and what separates them, and what the key differences are.
The second issue relates to justification. What is the basis for the action being
undertaken in the first place? That a crime has been committed? That might seem
obvious; but in practice it is not actually so straightforward. What crime, for instance?
How do you attach the crime to the wealth being confiscated or forfeited? Is there even
a need to define or specify the crime that renders the wealth recoverable under these
mechanisms? If so: to what standard of proof?
Issues around justification remain contentious, but again offer a useful entry point to
understanding the key issues relating to confiscation and forfeiture that exercise the
minds of legislators, prosecutors, defenders, law enforcers, and also (let’s not forget!)
criminals everywhere.
A WORKING DISTINCTION BETWEEN CONFISCATION AND

FORFEITURE
For the purposes of this chapter, ‘confiscation’ is taken to describe conviction based
mechanisms which require a criminal trial and conviction. The confiscation element
either forms part of the sentencing process or is otherwise a separate measure
constituting a linked penalty. These are therefore in personam mechanisms involving
462
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Confiscation and forfeiture 463
orders applied against the person convicted. The basis of the confiscation order may
either be object based, with a value applied to specific assets proven to be the proceeds
of crime, or value based, using an assessment of the benefit obtained from the crime.
‘Forfeiture’ is taken to refer to mechanisms which are not conviction based – often
referred to in the literature as non-conviction based asset forfeiture. These are
mechanisms relying on civil process to assert legal title over property deemed to be
criminal on behalf of the state. These are therefore in rem measures against the objects
held to constitute criminally derived wealth; for example, cash deposits, cars, yachts,
racehorses, real estate and other forms of value investment.
IMPLICATIONS FOR REQUIRED STANDARD OF PROOF

The above distinction between criminal process and civil process implies that confis-
cation mechanisms require a criminal standard of proof to be applied in the form of a
conviction to get the process at least started, whereas forfeiture mechanisms are able to
establish title through a less onerous civil test of balance of probabilities. The reality is
less distinct; differences of treatment arise depending upon the nature of the prevailing
jurisdiction.
Some jurisdictions incorporate a civil standard of proof to the confiscation mechan-
ism, albeit that the basis for applying the mechanism has been a criminal conviction. In
the UK, the confiscation mechanism is enabled by lifestyle offences which allow
assumptions to be established on the basis of a balance of probability test that wealth
obtained in a defined period has been achieved through criminality. Switzerland, on the
other hand, applies a criminal standard of proof in all forfeiture cases in the form of the
‘intimate conviction’ of the judge that the assets concerned are the proceeds of an
offence. Even in the absence of a related conviction, the Swiss process of forfeiture
applies a criminal standard.
INTERNATIONAL IMPETUS FOR CONSENSUS AND

CO-OPERATION
The consideration of legal process enabling forfeiture without conviction was a
requirement placed on all signatory jurisdictions by the United Nations Convention
against Corruption (Article 54(1)(c)). This encouraged jurisdictions based on case law
tradition, such as the UK and the US, as well as those based on civil law tradition, such
as most jurisdictions on the European continent including Switzerland, to find ways to
co-operate with each other based on an appreciation of common objectives and how
different processes could be adapted to comply with the international consensus.
Legislatures of both traditions have accordingly established common features, such as
in rem action against assets with no conviction required but requiring proof of criminal
conduct. But even apparently fundamental differences relating to required standard of
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proof have been at least partially accommodated by the relevant courts to enable cross
border co-operation.1
The self-evident reality of globalisation is that a continuous increase in levels of such
co-operation is vital for the maintenance of any effective response to organised crime in
every jurisdiction. Criminals will continue to exploit borders to frustrate the objectives
of confiscation and forfeiture mechanisms. Improved understanding of how different
traditions interpret their international obligations is therefore clearly a necessary
ongoing cause. But that understanding is dependent on the ability to build international
consensus, which in turn might require settlement of some notable bones of contention.
THE UK CONFISCATION MECHANISM – IN BREACH OF

NATURAL JUSTICE?
The UK mechanism is set out in the Proceeds of Crime Act 2002. There are some
differences in how it is applied in Scotland (which will be touched on later), but its
principal features are distinctive. In essence, the offender is ordered to pay back the
value of the benefit of criminal proceeds. There is no need to link a particular crime to
a particular benefit and the court can assume, under an option known as ‘general
criminal conduct confiscation’, that all property held by the offender over the previous
six years are the proceeds of crime and therefore recoverable.
It is this feature, often characterised as ‘the criminal lifestyle assumption’ – and in
particular the manner in which it has been applied in England and Wales – that has
encountered formidable criticism since enactment. The principal complaint has been
that cherished traditional tenets of justice, such as the burden of proof remaining with
the prosecutor, and even the presumption of innocence, have been set aside and
overridden.
In essence, the mechanism requires, given certain preconditions, that the criminal
lifestyle assumption be made unless the convicted person can rebut it.2 If he cannot do
this – if, in other words, he cannot shoulder the burden of proof that has accordingly
been passed to him – then all of his assets and wealth within the six year period are
recoverable as the proceeds of crime.
The point has been made that the fruits of innocent endeavours that cannot be
vouched are thus caught in the net of the criminal lifestyle assumption.3 Moreover, it is
argued that any attempts to establish that innocence are hampered by the setting aside
of criminal rules of evidence. Although a criminal conviction is required to engage the
process, the confiscation mechanism is a civil procedure and so evidence can be used
against the defendant which would be inadmissible in a criminal court, such as
‘hearsay’ evidence.
The use of civil process in the context of the confiscation mechanism is justified on
the basis that, guilt having been established to a criminal standard of proof, the injury
1
For example, A_Company v. Federal Office of Justice ATF 132 II 178 (Switzerland).
2
Proceeds of Crime Act UK S75.
3
‘Draconian and Manifestly Unjust: How the Confiscation Regime Has Developed’, Sir
Ivan Lawrence QC Amicus Curiae, Issue 76, Winter 2008, 22–24.
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suffered by the state becomes enforceable in the normal way of a civil claim. This
interpretation has been challenged in the UK courts, but without success.4 The net
effect of the case law has been to establish that a confiscation order is a ‘penalty’ for
the purposes of European Convention on Human Rights (‘ECHR’) Article 7 (‘No
punishment without law’), but that the confiscation proceedings do not entail a
‘criminal charge’ for the purposes of Article 6 (‘Right to a fair trial’). This is despite
the fact that confiscation proceedings form a non-discretionary part of the sentencing
procedure following conviction. The conviction is regarded as one thing; asking the
court to assume identified property as criminal is regarded as another.5
STANDARD OF PROOF IN CONFISCATION PROCEEDINGS

The hybrid arrangement of criminal conviction with attached penalty enforced by civil
process raises the issue of what the appropriate standard of proof should be in respect
of the relevant lifestyle offences.6 On the basis that another cherished shibboleth of
justice – namely the presumption of innocence – should apply to the confiscation
mechanism, it has been argued (from the English bench, no less) that the prosecution
must prove the relevant ‘lifestyle’ offending to the criminal standard even if it hasn’t
been formally charged.7 In other words, if the prosecution relies for confiscation
purposes on offences not charged to establish that property obtained was criminal,
those uncharged offences require to be proved to a criminal standard.
That view has not prevailed, however. A subsequent judgment in Gale v SOCA,
citing ‘Strasbourg jurisprudence’ (referring to the seat of the European Court of Human
Rights), established that the standard of proof applied in confiscation proceedings in
the UK was the civil standard of balance of probabilities.8 In that case, the contention
that an order of confiscation required proof to criminal standard of the offences from
which the property was said to have been derived was explicitly not supported.
VARIATIONS IN CALCULATION OF ‘CRIMINAL LIFESTYLE’

BENEFIT
Within the UK there is variation on how the relevant ‘criminal lifestyle’ benefit is
calculated. Scotland retained a separate legal system in the wake of the Act of Union of
Parliaments of 1707. The Scottish legal system carries the same influence of Roman
law that informs civil law systems and the tradition is to establish matters from first
principles. In Scotland, the calculation of ‘criminal lifestyle’ benefit focusses on cost of
4
Welch v the United Kingdom [1995] 20 EHRR 247.
5
R v Briggs-Price [2009] 1 AC 1026.
6
I am indebted in respect of this section to a succinct analysis of the relevant case law and
arguments included in his paper presented at the CBA Spring Conference at Newcastle in April
2012 by Rudi Fortson QC, entitled ‘Confiscation, Sentencing in Drug Cases, and Other “News”’.
7
Lord Rodger, para 65, R v Biggs-Price, ibid.
8
Gale v SOCA [2011] UKSC 49.
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assets and amounts of identifiable and deemed expenditure, including assessments

based on cost-of-living statistics. Schedules are prepared designed to establish on this
basis the discrepancy between these values and amounts and income from legitimate
sources. Thus the criminal benefit will derive from the calculated discrepancy, with no
direct reference to the benefit obtained from the offence giving rise to the conviction.
Once the amount of benefit is accepted by the court, it essentially becomes a bill the
convicted person has to pay. No diligence can currently be imposed by the Scottish
courts on specific assets, leaving open the possibility that such bills might be paid from
sources which are also criminal. However, a parliamentary bill enabling such diligence
was published in the summer of 2014.9
In England and Wales there is case law which specifically disavows the need for the
calculations used in Scotland. The relevant influencing judgment asserted that the
statute appeared ‘deliberately worded so as to avoid the necessity … of carrying out an
accountancy exercise’.10 Instead, the prosecutor relies on bankings, cash outlays and
current market values of assets held, together with an explicit estimate of benefit from
the offence giving rise to the conviction, using no schedules and placing little emphasis
on expenditures.
The impact of the difference is that benefit calculations in respect of ‘criminal
lifestyle’ cases tend to be higher in England and Wales than Scotland, even though both
jurisdictions are using the same statute. In England and Wales, at least up until now,
there has been closer identification of specific assets to be realised in order to meet the
bill, and a willingness to assert, with some alacrity, relevant rights over them as
required.
THE POTENTIAL IMPACT OF ‘CRIMINAL LIFESTYLE’

The English case of R v Steed centred on some startling core facts which placed the
potential impact of the criminal lifestyle provisions into sharp focus.11 On the basis of
a conviction for tax evasion, where the tax payable for the year in question was £3,558
and there was a failure to submit a tax return, a confiscation order was made on the
basis of lifestyle assumptions in the amount of £863,303. How did that work?
The key judicial finding was that, on the balance of probabilities, there had been
sufficient evidence presented which indicated involvement in various offences, includ-
ing money laundering and drug trafficking – activities which were in addition to the
defendant’s legitimate trades of vehicle trading and building. On the basis of that
finding the judge in the original case concluded that, while the defendant would not be
convicted of these offences to a criminal standard, the ‘overall picture’ supported the
9
Serious Crime Bill (HL), 2014, Chapter 2.
10
R v Banks [1996] EWCA Crim 1655. This quote is highlighted in a short survey by David
Winch, ‘Confiscation Contrasts – England v Scotland’, www.accountingevidence.com, October
2008.
11
R v Steed [2011] EWCA Crim 75.
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contention that ‘it was more likely than not that he was involved in criminal conduct
over and above the Count to which he pleaded guilty’.12
On appeal, these findings were considered ‘fatal’ to the defendant’s case. They
demonstrated that the appellant was unable to establish on the balance of probability
the extent to which sources of his assets and expenditure were legitimate and which
were illegitimate. Since he was unable to prove the relevant split the court was entitled
to assume it all constituted criminal benefit.13
The conviction for tax evasion was sufficient in this case to provide the key in the
door to the levelling of the lifestyle charges. This was despite the fact that the de
minimis requirement for the use of the lifestyle provisions was £5,000. This difficulty
was overcome by adding the following year’s assessed tax payable to the £3,558
already found to have been evaded. The defendant had not submitted a tax return for
that period either.
It was suggested afterwards that the use of an apparently token tax evasion charge in
these circumstances may have been to ‘free up resource’ in the prosecutor’s office by
avoiding the need to prove the underlying criminal offences, and that this might be
regarded as a new way of fining criminals without full complex trials.14 The obvious
response is that the prosecutor is bound to take all decisions on the basis of a judgment
on what serves the public interest. How that judgment might be affected by the
availability of confiscation and forfeiture mechanisms is a key consideration, however,
in developing consensus on how they should be used and in what circumstances. This
is considered more explicitly towards the end of the chapter.
There have been instances where the UK Court of Appeal has considered that the
prosecutor has stretched the intention of the relevant legislation too far. In Shabir v R,
it was held in the original case that the defendant, a dentist, had falsely inflated claims
made to the National Health Service for payment.15 The amount relating to the false
items claimed over six monthly claims was in total £464. Each of the monthly claims
had included legitimate items which had taken the total value of the six claims to
£179,731. The defendant was convicted of obtaining money by deception in respect of
six money transfers, totalling £179,731. As he had been convicted of six offences, and
the benefit of £179,731 exceeded the de minimis threshold of £5,000, the confiscation
mechanism was applied on the basis that it had been established by the rules of that
mechanism that the defendant had a ‘criminal lifestyle’.
This was too much for the Court of Appeal. It held that the true extent of the
offending was £464, quashed the confiscation order of £179,731, and replaced it with
one for £464 instead.16
The case perhaps illustrates that prosecutors are not above brazen opportunism (and
also that higher courts of appeal are not deaf to common sense), but again the issue of
12
R v Steed, ibid, Judgment, para 42 (a)–(c).
13
In R v Jatvinder Singh [2009] EWCA Crim 1095 paras 8–9, the court said, ‘Where there
is a mixed legitimate and illegitimate business … it is for the (defendant) to demonstrate what
those proportions are.’
14
Elspeth Orcharton, ‘Crime and Punishment’, CA Magazine, April 2011, Institute of
Chartered Accountant of Scotland.
15
Facts as related in Shabir v R [2008] EWCA Crim 1809.
16
Shabir v R, ibid.
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motive lurks in the background. In England, prosecutors are able to lay claim to some
18 per cent of recovered criminal funds. There is therefore an incentive to seek value
from cases, wherever it might be deemed to be had. It is hard to imagine that in this
case the monetary ‘prize’ did not have a bearing on the decision to attempt confiscation
of the higher number.
JUSTIFICATION FOR NON-CONVICTION BASED ASSET

FORFEITURE
The very existence of non-conviction based asset forfeiture mechanisms suggests that
there is a job that conviction based confiscation isn’t doing, or maybe can’t do. What is
that?
Perhaps the best way of answering that question is to consider how these mechan-
isms came about. The US enacted the powerful RICO (Racketeer Influenced Corrupt
Organisations) legislation of 1970 as a response to organised crime – specifically the
impression that the authorities had run out of tools to do anything about it.17 In Europe,
arguably the leading jurisdiction in the field has been that of the Republic of Ireland.
The prompt to action there was of a similar vein – a visceral complaint arising from an
impression of impotence against a visible rise in organised crime.
This reached a crescendo with the murder of an investigative journalist writing for
the Sunday Independent in 1996. Veronica Guerin’s reporting on organised crime and
its principal perpetrators bit too deep for her targets, and the immediate legacy of her
martyrdom was the establishment of a non-conviction based asset forfeiture regime18
and a multi-disciplinary agency whose sole purpose was to target criminal assets.19
The Criminal Assets Bureau in Ireland (‘CAB’) is not a prosecuting authority. It is a
multi-agency investigating authority – containing police, revenue and social welfare
officers – which identifies properties it considers to be the proceeds of crime and
applies a radical mechanism known as Civil Forfeiture. If CAB can satisfy a court of
criminal derivation on the balance of probabilities, an interim order is granted over that
property. Subsequently, under full hearing, this can lead to an interlocutory order being
placed on that property for seven years, during which time it is open to anyone to move
to have the order lifted on the basis that it can be shown to the court the property is not
the proceeds of crime. Otherwise, on elapse of the seven year period, CAB can seek a
disposal order with the proceeds accruing to a central fund at the Irish Exchequer.
This is a civil remedy operating under civil law procedures in the High Court of
Ireland. How does it relate to conviction based confiscation? Between 1996 and 2011
CAB froze assets of a value in excess of 70 million Euros, secured final confiscation
17
RICO was enacted by section 901(a) of the Organised Crime Control Act of 1970,
codified as Chapter 96 of Tile 18 of the United States Code.
18
The Proceeds of Crime Act 1996 (Ire).
19
The Criminal Assets Bureau Act 1996 (Ire).
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orders of some 57 million Euros, and tax payments of some 137 million Euros.20 This
success, at least initially, overshadowed the use of the criminal process, and left CAB
open to the criticism that it was operating outside the basic tenets of Human Rights –
in particular those relating to presumption of innocence and the right to a trial by jury.
Was this not essentially a process of criminal sanction that escaped the obligations of
the criminal standard of proof (i.e. beyond reasonable doubt)?
These criticisms have been tested extensively in the Irish and European courts, and
the CAB mechanism has proven resilient. In particular, it has established beyond
further challenge that it is a civil and not a criminal process. Like RICO in the US, the
statutory objective of CAB is to deprive access to criminal assets, and therefore falls to
be considered a punitive rather than a criminal process. There is a separate post-
conviction criminal confiscation process in which CAB has no role, and, where the two
processes arise in the same case, there is a specific provision that the criminal
confiscation route takes precedence.
As to its essential fairness, the Irish Supreme Court gave its settled view in 2012 as
follows: ‘… as has been pointed out, repeatedly, a person directly or indirectly in
possession of the proceeds of crime can have no constitutional grievance if deprived of
their use.’21
The same judgment went on to assert that the relevant provisions of the Proceeds of
Crime Act 1996 were ‘… designed to achieve a desirable social objective and be
proportionate’.22 An essential feature underpinning this objective, therefore, is that the
public purse is the beneficiary and not CAB itself, an issue of some sensitivity in
adjacent jurisdictions.
FUNDING AND INCENTIVISATION

In England and Wales, the history of asset recovery is somewhat more chequered than
it has been in Ireland. The main reasons for this are clearly contentious, but it might at
least be argued that principal of these was that asset recovery became something of a
political football, with premature emphasis placed on the achievement of financial
targets. The Assets Recovery Agency (‘ARA’) was a civilian body staffed in the main
by retired police officers which was established under the Proceeds of Crime Act in
2002. From the outset it was required to recover sufficient funds to meet its £60 million
budget. Something it failed to do.
As a consequence it was merged into the Serious Organised Crime Agency in 2003.
This latter body was in turn disbanded in 2013 to be replaced by the National Crime
Agency. The inherent instability of this history can hardly have helped asset recovery in
England and Wales achieve the slickness and potency of the Irish CAB, on which the
20
CAB Statistics, Irish Examiner and Francis H. Cassidy, ‘Targeting the Proceeds of Crime:
An Irish Perspective’ published in ‘Stolen Asset Recovery’, Theodore S. Greenberg et al, World
Bank 2009.
21
CAB v Kelly & another [2012] IESC S64.
22
ibid.
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ARA was originally modelled. But it is the fundamental difference of attitude to

funding that draws out key issues of legitimacy and purpose.
The Assets Recovery Incentivisation Scheme (‘ARIS’) in operation in England and
Wales essentially offers the relevant agencies (i.e. the agencies with cash and seizure
and detention powers under the UK Proceeds of Crime Act 2002) 50 per cent of the
value of what they recover. This bounty is split as follows: 18.75 per cent to the
investigation agency (e.g. the police force); 18.75 per cent to the prosecutor; 12.5 per
cent to enforcement. In Scotland, as in Ireland, all of the money is currently applied to
central funds.
The regime has been justified in terms of surveys of public attitudes, which claim
significant support for asset recovery,23 albeit on the back of relatively low levels of
overall public awareness. This has been bolstered, however, by the introduction in 2007
of Community Cashback Schemes throughout the UK. These schemes provide local
communities with centrally allocated funding for social and recreational projects. As
such they are devices which offer considerable political attractions.
The more money raised for such schemes, the more good works that can be funded.
So why not offer direct incentive mechanisms to prosecuting agencies? This can enable
further investment in the specialist financial investigation skills necessary to identify
criminal assets for confiscation or forfeiture, and increase the size of the pot of criminal
funds still further. In Scotland, there has been explicit allocation of a portion of
recovered money to fund financial investigator posts, although not on a basis that
would amount to a direct incentive.24
How is the balance to be struck between the exercise of justiciary process and the
raising of distributable revenue? Different jurisdictions have different attitudes and
these have led to differences of approach as already outlined. But the reality of modern
organised crime is that there has to be some rapprochement of these different
approaches if any of them are to be effective in the international theatre in which they
now have to operate.
That implies the need for international consensus on core principles. It might be
helpful to move to the conclusion of this chapter by considering what these might be.
CORE PRINCIPLES FOR AN INTERNATIONAL CONSENSUS

1. Forfeiture without Conviction is Not a Substitute for Conviction
Public trust in criminal justice can be reckoned to depart at the point non-conviction
based forfeiture starts to be perceived as a substitute for criminal prosecution. If the
state’s activity in crime can be reduced, even if in caricature, to an exercise in state
revenue raising, then domestic consent and the scope of international co-operation will
evaporate. The sense that you can buy yourself out of prosecution and its consequences
23
‘Public Attitudes to Asset Recovery and Awareness of the Community Cashback Scheme
– Results from an Opinion Poll’ Eva Gottschalk (Research and Analysis Unit – Home Office)
September 2012.
24
www.scotland.gov.uk/Proceeds of Crime and Asset Recovery.
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is not something that nation states can afford to take root, being essentially the first
cousin of corruption.
2. The Gateway to Forfeiture without Conviction is an Understood Process of

Assessment that there is No Feasible Option to Prosecute
In Scotland, the decision to refer cases to the asset forfeiture agency (known as the
Civil Recovery Unit (‘CRU’)) rests with the national prosecuting agency (The Crown
Office and Procurator Fiscal Service ‘COPFS’). The prosecutor takes responsibility for
the relevant decision by applying well understood criteria used in considering prosecu-
tions. These are: (a) there is a reasonable prospect of conviction; and (b) the
prosecution is in the national interest. The referral by COPFS to the CRU embodies the
decision that on current evidence there is no feasible prosecution. The primacy of
criminal prosecution is thereby recognised and the process for transferring a case from
this sphere to civil asset recovery is commonly understood. The clarity of this process
sustains confidence in the criminal justice system and enables the civil recovery process
to engage with clarity of remit. The risk of civil recovery becoming a fast track to
disposal of difficult cases where there are assets to be had is practically and visibly
managed and the respective workings of the prosecution mechanism and the non-
conviction based asset recovery mechanism are distinct and clear.
3. The Primacy of the Prosecution Process Underpins the Appropriateness of

Using the Civil Standard of Proof in Both Conviction Based Confiscation and
Non-conviction Based Forfeiture
The debate concerning appropriate standard of proof in asset recovery has been
exhaustively tested in transnational courts, in particular the European Court of Human
Rights. The settled view is that the civil standard is appropriate, which is not to ignore
that in some civil law jurisdictions, such as Switzerland, the criminal standard of
‘intimate conviction’ will continue to be applied. The difference has not proved
insurmountable in enabling co-operation between states of different jurisdictional
tradition, such as the US and Switzerland. The legitimacy of using this standard,
however, would soon erode if the primacy of criminal process was perceived as being
undermined in those jurisdictions which exercised the civil proof consensus.
4. There is Adequate Accountability of Decision Making and Process where the

Asset Recovery Mechanism Allows Direct Incentivisation
The fiscal benefits of allowing direct incentivisation are not easily dismissed. The most
significant barriers to effective prosecution of serious economic crime are resource
based – principally, the availability of the relevant, generally expensive, skills.
Incentivisation provides a solution that has the potential to make all of the regimes and
mechanisms discussed more effective and more capable of serving public benefit.
There are pitfalls of course to allowing the relevant agencies to operate apparently in
the manner of a profit maximising private enterprise. But rather than closing off the
option and the benefits it can provide, the introduction of such schemes can be rendered
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palatable, not to say safe, through properly manned and funded independent account-
ability mechanisms with a remit of maintaining public confidence in the relevant
criminal and civil processes and possessing suitable discretionary reproving powers.
IN CONCLUSION
The idea of depriving criminals of their assets has taken root in all the major
jurisdictions. Informal networks like CARIN (Camden Assets Recovery Interagency
Network) have emerged to share experience, consider best practice and develop a pool
of international expertise. The continued development of confiscation and forfeiture as
principal tools deployed against organised crime will depend upon the continued
development of this shared expertise to the extent that the levels of capability are
achieved that match the skills available to modern criminality. That means resourcing
will become more prominent as an issue and the debate will deepen about how the
ethical purpose of justice based systems can accommodate the revenue raising function
they increasingly, at least in some cases, resemble. One thing is certain: no lasting
progress will be made unless it is on the basis of securing and developing international
consensus.
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38. Money laundering offences

Jeffrey Bryant 1
ORIGIN
Modern day money laundering offences derive from three main sources.
1. International Conventions
The provisions of these conventions may have direct or indirect effect depending upon
the constitutional law of the signatory state. The main treaties dealing with money
laundering are as follows:
a. Vienna Convention,2 a United Nations treaty dealing with drug trafficking;

b. Palermo Convention,3 a United Nations treaty dealing with transnational organ-
ised crime of a serious nature. An organised criminal group is defined as covering
“a structured group of three or more persons”.4 Serious crime is defined as
“punishable by a maximum deprivation of liberty of at least four years or a more
serious penalty”.5
c. Strasbourg and Warsaw Conventions,6 Council of Europe treaties dealing gener-
ally with money laundering.
2. Inter-governmental Bodies
The Financial Action Task Force (“FATF”) is a policy making inter-governmental body,
which issues Recommendations and other guidance aimed at combating money
laundering.7
1
I am most grateful for the invaluable assistance of Gary Balch, Shane Nainappan, Jeremy
Rawlins, Ryuji Hirako and Yuichiro Tachi who have assisted me with my research for this
chapter.
2
The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances, Vienna, 1988.
3
The United Nations Convention against Transnational Organized Crime, Palermo, 2000.
4
As above, at Article 2(a).
5
As above, at Article 2(b).
6
The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of
the Proceeds from Crime, Strasbourg, 1990, and the Council of Europe Convention on
Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing
of Terrorism, Warsaw, 2005. It is of interest to note that not all the signatories to Council of
Europe conventions are European. For example, the Strasbourg Convention has also been ratified
by and is in force in Australia. Not all countries are yet signatories to both conventions.
7
http://www.fatf-gafi.org/pages/aboutus/.
473
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FATF members currently represent most major financial centres in the world.8
Countries wanting to become FATF members must provide a written commitment at
the political/Ministerial level, to include the endorsement and support of the Recom-
mendations, which they are expected to implement in domestic legislation. Members
must also agree to be monitored by way of mutual evaluations to ensure compliance
with FATF Membership Criteria.9
3. Domestic or Regional Law
The provisions in some jurisdictions might extend beyond that required under inter-
national law or expected pursuant to, for example, the FATF Recommendation.
INTERNATIONAL LAW
Article 3 of the Vienna Convention includes the money laundering provisions. Article 6
of the Palermo Convention covers the same. Although worded slightly differently, in
part because of the Conventions’ different aims, it can be seen in these provisions that
each party to the Convention must establish domestic criminal offences for the
following types of money laundering, when committed intentionally:
1. The conversion or transfer of criminal property.

2. Concealment or disguise of criminal property.
3. Acquisition, possession or use of criminal property.
4. Participation in, association with or conspiracy to commit, attempts to commit
and aiding, abetting, facilitating and counselling of the above.
The requisite level of mens rea under the provisions of both Conventions is knowledge
– in the case of the Palermo Convention knowing that the property is the proceeds of
transnational organised crime and in the case of the Vienna Convention knowing that
the property is derived from a specified drug trafficking offence.
8
At present there are 36 members of FATF – 34 countries and two regional organisations,
the European Commission and the Gulf Cooperation Council. Associate Members cover much of
the remainder of the world, including the Asia/Pacific Group on Money Laundering, Caribbean
Financial Action Task Force, Eurasian Group, Eastern and Southern Africa Anti-Money
Laundering Group, Financial Action Task Force on Money Laundering in South America, Inter
Governmental Action Group against Money Laundering in West Africa, and the Middle East and
North Africa Financial Action Task Force. A number of other organisations and governmental
bodies have observer status. For an up-to-date list, see http://www.fatf-gafi.org/pages/aboutus/
membersandobservers/.
9
http://www.fatf-gafi.org/pages/aboutus/membersandobservers/membershipprocessand
criteria.html.
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Money laundering offences 475
FATF RECOMMENDATIONS
The FATF Recommendations adopt the basis of the Palermo and Vienna Conventions
but extend them to a far wider number of offences than to mere transnational organised
crime or drug trafficking. Recommendation 3 states that
Countries should criminalise money laundering on the basis of the Vienna Convention and the
Palermo Convention. Countries should apply the crime of money laundering to all serious
offences, with a view to including the widest range of predicate offences.10
Not all FATF members have yet complied with implementing the Vienna and Palermo
Conventions. For example, Japanese legislation was not considered to be Palermo
Convention compliant in the 2008 FATF Mutual Evaluation Report.11 Article 60 of the
Japanese Criminal Code (Punishment of Co-principals) required the
actions of at least one member of the group to rise [sic]the group to the level of an attempt to
commit the agreed upon crime … Absent an action which can be punished as an attempt by
at least one member of the group, common planning and preparations to commit a crime are
not punishable.12
Corrective legislation was before the Diet. It was also noted that although signed, Japan
had not yet ratified the Palermo Convention. These issues have still not been resolved.13
The Interpretive Note to Recommendation 3 of the FATF Recommendations explains
that:
… Predicate offences may be described by reference to all offences; or to a threshold linked

either to a category of serious offences; or to the penalty of imprisonment applicable to the
predicate offence (threshold approach); or to a list of predicate offences; or a combination of
these approaches.14
Predicate offences should, at a minimum, comprise:
10
FATF “International Standards on Combating Money Laundering and the Financing of
Terrorism and Proliferation: The FATF Recommendations” (February 2012), at page 12, found
at http://www.fatf-gafi.org/topics/fatfrecommendations/documents/internationalstandardson
combatingmoneylaunderingandthefinancingofterrorismproliferation-thefatfrecommendations.
html.
11
Third Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing
of Terrorism –Japan (FATF, 17 October 2008), at paragraphs 944–949.
12
As above, summarised at paragraph 186.
13
For the continued lack of a conspiracy offence, see the Japan Times report “Conspiracy
law in the works, Japan tells FATF” (19 January 2014) which details that the Bill before the Diet
was defeated, found at: http://www.japantimes.co.jp/news/2014/01/19/national/conspiracy-law-
in-the-works-japan-tells-fatf/#.U-XOBLQQFkU. For the continued failure to ratify the Palermo
Convention, see “FATF calls on Japan to enact adequate anti-money laundering and counter
terrorist financing legislation” (FATF, 27 June 2014) found at: http://www.fatf-gafi.org/countries/
j-m/japan/documents/japan-aml-cft-deficiencies.html.
14
As above, footnote 10, at page 34, paragraph 2.
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… all offences that fall within the category of serious offences under their national law, or
should include offences that are punishable by a maximum penalty of more than one year’s
imprisonment, or, for those countries that have a minimum threshold for offences in their
legal system, predicate offences should comprise all offences that are punished by a minimum
penalty of more than six months imprisonment.15
Whichever approach is adopted, each country should “… at a minimum, include a

range of offences within each of the designated categories of offences …”.16
The designated categories of offences are much wider than those covered by the
Vienna and Palermo Conventions, in addition to the fact that the offences need not be
drug related, or related to transnational organised crime in relation to serious offences.
For example, in 2012, the FATF Recommendations included for the first time “tax
crimes (related to direct and indirect taxes)”.17
Other important parts of the Interpretive Note to Recommendation 3 are as follows:
1. The offence of money laundering should extend to any type of property that
directly or indirectly represents the proceeds of crime.18
2. It should not be necessary that a person be convicted of a predicate offence.19
3. Predicate offences to extend to conduct that occurred in another country, subject
to a dual criminality provision.20
4. There is no requirement for money laundering offences to apply to persons who
committed the predicate offence, where required by the fundamental principles of
a country’s domestic law.21
As well as the offences required to be criminalised in the FATF Recommendations, it is

also a requirement of the Recommendations that there are laws in place requiring the
reporting of suspicious transactions by financial institutions and prohibiting tipping off
by financial institutions.22 Although reporting and tipping-off breaches have criminal
sanctions in many countries23 so as to ensure sufficient deterrence, this is not always
the case. For example, Angola was recently evaluated according to the FATF Recom-
mendations by the World Bank. The report was adopted as a first mutual evaluation of
the Republic of Angola by the Eastern and Southern Africa Anti-Money Laundering
15
As above, at page 34, paragraph 3.
16
17
As above, at page 113. Its inclusion in the 2012 FATF Recommendations is detailed in the
FATF Annual Report 2012–2013 (FATF/OECD, 2013).
18
19
20
21
22
Note laws rather than criminal offences, as is required for concealing etc. in FATF
Recommendation 3.
23
In England and Wales, see sections 330–332 and 333 of the Proceeds of Crime Act 2002.
In the United Arab Emirates there is a failing to report offence (Articles 15 and 7) and a
tipping-off offence (Article 16) in relation to suspicious transactions, the Article numbers
relating to the Federal Law No (4) of 2002 Regarding Criminalization of Money Laundering.
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Group, which is an Associate Member of FATF.24 In this report it was said that a breach
of the prohibition on tipping off in Angolan law “is sanctioned by an administrative
penalty” of between US$12,500 and US$2,500,000 for a natural person and double that
for a financial institution. The report concluded that “[c]onsidering the level of income
in Angola, these penalties are considered adequate and dissuasive”.25 A criminal
sanction only existed for revealing or facilitating the disclosure of the identity of the
reporting person. So although many countries criminalise tipping off or failing to report
by financial institutions, it is not necessarily a requirement of the FATF Recommenda-
tions that this be the case.
DOMESTIC AND REGIONAL LAW

In some countries, domestic criminal law seeks to mirror as best as possible the
requirements under the Vienna and Palermo Conventions and the FATF Recommenda-
tions. For example, Article 301 of the Spanish Criminal Code states that:
Whoever acquires, possesses, uses, converts, or conveys assets, knowing they originate from
a criminal activity, committed by himself or by any third party, or who perpetrates any other
act to hide or conceal their unlawful origin, or to aid the person who participated in the
felony or felonies to avoid the legal consequences of his acts, shall be punished with …26
In other countries, domestic criminal law extends beyond that required under inter-
national law or through FATF Recommendations. Two examples are as follows.
1. Mens Rea
In the United Kingdom the requisite level of mens rea required to commit the offence
of money laundering is just suspicion. The relevant section within England and Wales
is section 340(3) of the Proceeds of Crime Act 2002, which defines criminal property
for the purposes of the money laundering offences contained within sections 327–329
of the Act (amongst others):
24
Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of
Terrorism – Republic of Angola (Eastern and Southern Africa Anti-Money Laundering Group,
October 2012), see Title Page 2.
25
This flexible standard of penalties dependent upon the country can be conversely
demonstrated with the example of Japan. The 2008 FATF Mutual Evaluation Report on Japan
noted with regard to the penalties for concealment/receipt money laundering offences at
paragraph 199 that “While both comparatively light punishments and harsh punishments
(imprisonment with labour) seem to be provided, there does not appear to be an adequate middle
ground. While these two types of punishments can be sentenced separately or together, there
does not appear to be a punishment available which a rich individual would find dissuasive
below the threshold of imprisonment with labour.”
26
Organic Act 10/1995, dated 23 November, on the Criminal Code, as published in the
Official State Gazette for Spain number 281 on 24 November 1995. This translation is of the
2011 Criminal Code, as found at http://www.legislationline.org%2Fdownload%2Faction%
2Fdownload%2Fid%2F5160%2Ffile%2FSpain_Criminal_Code_Codigo_Penal.pdf.
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(3) Property is criminal property if –

(a) it constitutes a person’s benefit from criminal conduct or it represents such a benefit
(in whole or part and whether directly or indirectly), and
(b) the alleged offender knows or suspects that it constitutes or represents such a benefit.
(Emphasis added)
Lowering the standard of mens rea prevents defendants from arguing that although they
suspected or believed they were laundering funds, they did not actually know that this
was the case. On the other hand, difficulties can arise.
First, there may be difficulties with mutual legal assistance if the overseas state
cannot find dual criminality.
Second, it may be that offences such as conspiracy to commit money laundering still
require a higher standard of proof. This was the case in the English House of Lords
case of Saik,27 in which it was found that although “[r]easonable grounds for suspicion
are enough for the substantive offence of laundering money”28 the mental element
required for a conspiracy under English law was “intention or knowledge that a fact or
circumstances necessary for the commission of the substantive offence will exist”.29 In
conspiracy cases, mere suspicion was not enough – “a decision to deal with money
suspected to be the proceeds of crime is not the same as a conscious decision to deal
with the proceeds of crime”.30
2. Specific Offences
Some countries have heightened sentencing powers and separate offences for niche
wrongdoing. Such offending can be explicitly criminalised. For example, in Japan there
is a very complicated criminal provision at Article 9 of the Act on Punishment of
Organized Crimes and Control of Crime Proceeds (established in 1999)31 running in
length in the English translation to around a thousand words. In short,32 Article 9
makes it an offence for a shareholder to control a company using criminal proceeds
from specified offences, in particular where such property is indistinguishably mixed
with other kinds of property. One of the purposes of this Article is to increase the
sentencing powers available. Whereas such offending could also be caught by the
standard concealment offence found at Article 10 (the sentence for which is a minimum
of five years and/or 3,000,000 yen) or the receipt of criminal proceeds offence found at
Article 11 (the sentence for which is a minimum of three years and/or 1,000,000 yen),
the Article 9 offence carries a minimum sentence of five years and/or 10,000,000 yen.
27
[2007] 1 A.C. 18 (HL).
28
As above, at paragraph 1.
29
30
31
I use a “Tentative Translation” available at the OECD website found at www.oecd.org/
site/adboecdanti-corruptioninitiative/46814471.pdf.
32
Though the Article is obviously much more complicated than this
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As well as domestic legislation, the law in some countries is also governed by

regional legislation; for example, in the European Union, the Third Anti-Money
Laundering Directive applies.33
SPECIFIC ISSUES
There are a number of specific issues with money laundering offences that are either
important or interesting to consider. I will be focusing in particular on the laws of the
United Kingdom, the United States of America, Japan and the United Arab Emirates.
1. Type of Criminality Required
As detailed above, and as permitted by FATF, there is some variation as to the predicate
offences required for a money laundering offence to be committed in each jurisdiction.
In the United Kingdom, the approach is open-ended. The proceeds of any crime,
wherever committed in the world, can be laundered, subject to dual criminality. For
England and Wales, this can be seen at section 340(2) of the Proceeds of Crime Act
2002 which states:
(2) Criminal conduct is conduct which –

(a) constitutes an offence in any part of the United Kingdom, or
(b) would constitute an offence in any part of the United Kingdom if it occurred there.
In the United Arab Emirates and Japan, there is a list of specified offences.34 The
United Arab Emirates however takes an interesting approach. Article 1(2)(g) of Federal
Law No (4) of 2002 regarding Criminalization of Money Laundering includes as a
specified offence for money laundering “[a]ny other related offences referred to in
international conventions to which the State is a party”. This is a flexible approach that
assists the United Arab Emirates in being as compliant as possible with its international
obligations.
In the United States of America, there is also a list-based approach to predicate
offences. The laundering must relate to a “Specific Unlawful Activity” or “SUA”. The
list of SUAs is set forth in 18 U.S.C. § 1956(c)(7), which cross-references another SUA
33
Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005
on the prevention of the use of the financial system for the purpose of money laundering and
terrorist financing. Draft legislation was approved by the European Parliament for a Fourth
Anti-Money Laundering Directive in March 2014; however, the final test is yet to be finalised.
34
In the United Arab Emirates, see Article 2 of Federal Law No (4) of 2002 Regarding
Criminalization of Money Laundering (updated 10 February 2002, but understood to be recently
updated to meet the FATF Recommendations. This is apparent from UAE Anti-Money Launder-
ing Draft Law Amended (The National, 20 April 2014) found at http://www.thenational.ae/uae/
government/uae-anti-money-laundering-draft-law-amended. In Japan, see Article 2 of the
Schedule to the Act on Punishment of Organized Crimes, Control of Crime Proceeds and Other
Matters; the list of specified offences is quite extensive running to 68 paragraphs, many of which
contain multiple qualifying offences. Obviously, the Japanese Anti-Drug Special Provisions Law
containing money laundering provisions relates to specific offences.
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list at 18 U.S.C. § 1961. Certain foreign predicate offences can form the basis of a
money laundering charge pursuant to § 1956(c)(7)(B), as long as the requisite financial
transaction occurred in whole or in part in the United States of America. The defendant
must have known that he was conducting a transaction with the proceeds of some form
of unlawful activity, although he does not need to know precisely which unlawful
activity on the SUA list produced the proceeds. It is not therefore a defence to money
laundering for the defendant to say “I didn’t know it was drug money; I thought it was
the proceeds of insurance fraud.”
2. Need to Prove Specific Crime?
It is one thing to have a list of crimes that can constitute predicate offences, but what if
the prosecution cannot prove the specific offence that the money is supposed to have
derived from? There is again a variety of positions throughout the world.
The United States of America has a strong position on this issue. The Government
need not trace laundered funds to a particular offence (e.g. a specific instance of drug
dealing on a certain date and time).35 The Government only needs to prove that the
money came from a category of offences such as drug dealing or mail fraud; in other
words, that the money is the proceeds of some specific unlawful activity.36 The
Government may rely upon circumstantial evidence, such as the defendant’s involve-
ment in criminal activity, a lack of legitimate income, a history of using the proceeds of
crime to purchase personal items and so on, to prove that funds are the proceeds of
criminal activity.37 Courts have consistently held that evidence of a lack of legitimate
income is enough to establish the proceeds element.38 In addition, the jury does not
even need to be unanimous as to which specified unlawful activity was the source of
the laundered funds.39
In the United Kingdom, the position is even stronger in the criminal courts. As well
as being able to prove the predicate offence by showing that it derives from unlawful
conduct of a specific kind or kinds, it will also suffice to provide “evidence of the
circumstances in which the property is handled which are such as to give rise to the
irresistible inference that it can only be derived from crime”.40 There is therefore not
even a requirement to prove a category of offending. Obviously, this is more easily
facilitated in a jurisdiction which does not have a list-based approach to predicate
offences. Such irresistible inferences cannot however be reached in the same manner in
non-conviction based forfeiture proceedings, where money laundering is said to be the
unlawful conduct. Such action is taken under Part 5 of the Proceeds of Crime Act 2002
(which deals with civil recovery and cash forfeiture). In these non-conviction based
35
United States v. Jackson, 983 F.2d 757, 766 (7th Cir. 1993).
36
United States v. Mankarious, 151 F.3d 694, 702 (7th Cir. 1998).
37
United States v. Shafer, 608 F.3d 1056, 1067 (8th Cir. 2010); United States v. Eastman,
149 F.3d 802, 804 (8th Cir. 1998).
38
United States v. Hardwell, 80 F.3d 1471, 1483 (10th Cir. 1996); United States v. Eastman,
149 F.3d 802, 804 (8th Cir. 1998); United States v. Taylor, 239 F.3d 994, 999 (9th Cir. 2001);
United States v. Souffrant, 517 Fed. Appx. 803, 821 (11th Cir. 2013).
39
United States v. Loe, 248 F.3d 449, 468 (5th Cir. 2001).
40
R v. Anwoir [2009] 1 W.L.R. 980 (CA), at paragraph 21.
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proceedings, the applicant must “show that the property seized was obtained through
conduct of one of a number of kinds each of which would have been unlawful
conduct”.41
In the United Arab Emirates, the legislation is not clear on this point. Article 2(1) of
Federal Law No (4) of 2002 regarding Criminalization of Money Laundering states that
a person must intentionally convert, transfer, conceal, and so on, property derived from
an offence specified in Article 2(2) but gives no guidance as to what the position is if
alternatives are alleged. In addition, the legal system in the United Arab Emirates is not
based upon the common law doctrine of binding precedents. The view of the Crown
Prosecution Service Liaison Magistrate in the United Arab Emirates is that “[i]n
practice the State will need to prove the predicate offence” and that “[m]ere inference
relating to a ‘category’ of offences in a broad sense is unlikely to be sufficient – unless
you have a Judge who is willing to adopt a ‘wider’ definition”.
The position in Japan is not dissimilar – again this is a jurisdiction with a list-based
approach of specified predicate offences. The view of two Prosecutors in the Tokyo
District Prosecution Office’s Special Investigation Unit is that “[t]he court requires
[the] prosecutor to clarify the contents of [the] predicated offence because predicated
offences are limited in Japanese legislation”. In general, the prosecutor has to show “by
whom, when, where, [and] how … the alleged proceeds was [sic] made. It is not
enough for [the] prosecutor to point the category of predicated offence or criminal
origin of the proceeds. In addition [the] prosecutor has to prove the mens rea that [that]
defendant knew the proceeds was derived from specific crime”.
3. Tax Offences
As noted above, in 2012, the FATF Recommendations included for the first time within
the designated categories of cases “tax crimes (related to direct and indirect taxes)”
and, according to the Interpretive Note to Recommendation 3, “each country should, at
a minimum, include a range of offences within each of the designated categories of
offences”. Also included for tax purposes within the FATF Recommendations is
“smuggling; (including in relation to customs and excise duties and taxes)”.
There is, however, considerable variance between jurisdictions as to how tax offences
are dealt with in money laundering cases, and a number of difficulties can arise, no
doubt in part due to this international obligation being only recently formed.
In the United Kingdom, domestic law “recognises that the proceeds of crime can
include not just specified money or property, but also a pecuniary advantage, such as
not paying tax that is lawfully due”.42 By way of contrast, where an overseas authority
seeks confiscation assistance from the United Kingdom in a tax evasion case, the
United Kingdom does not appear to be able to assist. There is reference only to benefit
41
Angus v. United Kingdom Border Agency [2011] E.W.H.C. 461 (Admin) at paragraph 29
– a cash forfeiture case. For civil recovery cases, see The Director of Assets Recovery Agency v.
Green [2005] E.W.H.C. 3168 (Admin).
42
From paragraph 107 of the Explanatory Notes to the Serious Crime Bill 2014–15. For
England and Wales, see sections 76(4) and (5) of the Proceeds of Crime Act 2002 and the House
of Lords case of R v. Smith (David Cadman) [2002] 1 W.L.R. 54.
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and not to a “pecuniary advantage” within the governing legislation.43 The United
Kingdom is seeking to correct this potential loophole within the Serious Crime Bill
2014–15.44
The position is different in the United Arab Emirates, which has no direct tax and, as
a consequence, no tax offences. There is therefore an issue when dealing with the
laundering of some foreign “tax proceeds” and it adds an extra dimension when the
United Arab Emirates deals with mutual legal assistance requests for assistance in
overseas tax cases. In addition, the UAE law on international cooperation45 states at
Article 53 that:
The request of the judicial assistance may be denied in the following instances:
1 – If the act on which the request is based does not constitute a crime if it is committed
in the State territory …
… 4 – If the request is related to an absolute financial crime (such as taxation and customs
crimes).
Of course, the above is only discretionary, but it may cause difficulties. It may be that
some tax offences could be described as equivalent to a “fraud”, which might assist.
In Japan, the Schedule to the Act on Punishment of Organized Crimes and Control of
Crime Proceeds, as described above, does not include tax evasion within its long list of
specified offences.
In the United States of America, tax evasion on legal source income is also not a
specified predicate offence, whether for foreign or domestic money laundering.
However, it should be noted that pursuant to 18 U.S.C. § 1956(a)(1)(A)(ii), any person
who, knowing that the property involved in a financial transaction represents the
proceeds of some form of unlawful activity, conducts or attempts to conduct such a
financial transaction which in fact involves the proceeds of a specified unlawful activity
with the intent to violate section 7201 of the Internal Revenue Code (tax evasion) is
guilty of a money laundering offence. It is understood that this “intent” is rarely
charged and in any event requires approval from the Department of Justice’s Tax
Division. Thus, while intent to evade taxes on illegal-source income can be a
motivation for money laundering, “laundering the proceeds of tax crimes” does not
violate US anti-money laundering laws in their current form.
43
Part 11 of the 2002 Act, in particular section 447, and the Proceeds of Crime Act 2002
(External Requests and Orders) Order 2005, in particular articles 7–8, 21–22 and Chapter 4.
44
Paragraph 109 of the Explanatory Notes to the Serious Crime Bill 2014–15 states that
“[n]ew subsection (6A) of section 447 of POCA provides that the value of any pecuniary
advantage obtained as a result of criminal conduct is to be treated as if it were a sum of money
to the same value. The effect is to enable external orders to be used for the recovery of a
pecuniary advantage obtained by criminal conduct in the same way as such orders can currently
be used to recover property or sums of money.”
45
Federal Law No 39 on International Judicial Co-operation in Criminal Matters (issued on
31 October 2006).
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4. Self-laundering
Another area with variance between jurisdictions, albeit decreasingly so, is whether or
not a defendant can commit a money laundering offence when laundering the proceeds
of his own crime.
In the United Kingdom, the United Arab Emirates and the United States of America
there is no requirement within the domestic legislation for laundering to be of a third
party’s assets. Self-laundering is a criminal offence.46 By way of contrast, in Germany
there is no criminal liability for self-laundering.47
The position in Japan is that self-laundering is an offence but not in all situations:
The perpetrator of the predicate offence is not punishable under Japanese law for the initial
acquisition, and subsequent possession and use of the proceeds of a predicate offence … For
the initial perpetrator of a predicate offence, the property in question is not (yet) derived from
a predicate offence, but is the object of the predicate offence. Acquisition, use and possession
of the object of the predicate offence, by its perpetrator, are therefore part and parcel of
committing the predicate offence … The initial perpetrator only commits a money laundering
offence by attempting to hide the criminal origin of the proceeds, which is adequately
covered by the Japanese Law.48
By way of contrast, see two other jurisdictions where the position is less clear. First, in
Iceland, the position on self-laundering was reported in the last FATF Report in 200649
as being unclear:
Legal practice has been based on the principle that it is not possible to convict the same
individual for the further exploitation of the gains of a criminal act, and in particular an
offence of an economic nature, following a conviction of that individual for the original
offence. However, Icelandic authorities believe that it is possible under the current legislation
to convict someone at the same time of both of the predicate offence and money laundering,
although no judicial rulings have been passed resolving this point finally.50
Second, in China, the position is more clear-cut the other way. As FATF explain in their
Mutual Evaluation Report on China,51 “[a]ll three money laundering offences apply to
46
See the lack of such a requirement in the wording of sections 327–329 and 340 of the
Proceeds of Crime Act 2002 for England and Wales as representative of laws within the United
Kingdom; 18 U.S.C. § 1956(c)(9) for the United States of America; and Articles 1 and 2 of
Federal Law No 4 of 2002 regarding Criminalization of Money Laundering for the United Arab
Emirates.
47
Mutual Evaluation of Germany: 3rd Follow-Up Report (FATF, June 2014); see page 7
where it is noted that draft legislation to address this point “should be presented to the
Bundestag by the end of 2014”.
48
See the FATF Mutual Evaluation Report on Japan as referred to above, at paragraphs
179–183.
49
Third Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing
of Terrorism – Iceland (FATF, 13 October 2006). There has been no FATF Report since to
determine if this is still the position.
50
Above at page 5.
51
First Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of
Terrorism – China (FATF, 29 June 2007).
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third parties, not to the perpetrator of the predicate offence”.52 Self-laundering is

considered by Chinese judicial and legislative authorities to be “natural continuity of
the predicate behaviour or that the predicate offence is a conditio sine qua non for
money laundering”.53 As FATF notes though, the practice of prosecuting for the
substantive offence “does not necessarily provide a satisfactory solution”54 and FATF
gives the example of a predicate offence being committed by a foreigner on foreign
soil; a prosecution would then be impossible for self-laundering in China and such
money laundering activity would become “untouchable”.55 In FATF’s 2012 Follow-Up
Report on China in 2012,56 it was noted that “[t]his deficiency has not yet been
addressed”57 and “given the specific condition and unique legal culture of China, it is
anticipated that improvement on this issue will take a long time”.58
CONCLUSION
In summary, although there is increasing international convergence as to what domestic
money laundering offences should cover, significant variations remain between the
jurisdictions. Where differences remain, so too does the potential for the more liberal
jurisdictions to become the forum of choice for money launderers. In addition, dual
criminality problems may arise when requests for mutual legal assistance are made.
52
See above at paragraph 90.
53
54
55
56
Mutual Evaluation 8th Follow-Up Report: Anti-Money Laundering and Combating the
Financing of Terrorism – China (FATF, 17 February 2012).
57
58
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39. Money laundering and the consent regime in the

United Kingdom – time for change?
Andrew Campbell and Elise Campbell
INTRODUCTION
This chapter examines one particular aspect of the anti-money laundering framework in
the United Kingdom1 which has proved problematic in practice. It focuses on the part
of the anti-money laundering framework which requires, in appropriate circumstances,
the making of suspicious transaction reports coupled with the need to obtain consent to
proceed with transactions. It also considers the potential problem of tipping off after a
report has been made. It then considers whether this rather complex and cumbersome
regime is actually making an effective and balanced contribution to the fight against
organised crime and money laundering.2
Although the focus of the chapter is on the current position in the UK, it is necessary
to study the development through the various international efforts, in particular by first
of all examining the pioneering work of the Financial Action Task Force on Money
Laundering in issuing its Recommendations3 in relation to making suspicious activity
reports. This will then be followed by an exploration of developments at the European
Union4 level in response to the FATF Recommendations. The position the UK will then
be examined.
As will be seen later in the chapter, what is in place is a complicated anti-money
laundering framework which is no longer concerned simply with banks and other
financial service providers, but also with a wide range of professionals such as lawyers
and accountants, as well as other types of businesses such as bureaux of exchange and
even casinos.5 The legal and regulatory framework which the UK has in place is
intended to be in compliance with both the FATF Recommendations and European
Directives. It is no surprise that the framework is really complicated, and for those in
1
Hereafter ‘UK’.
2
This is a continuation of our work on this topic and considers further some of the matters
contained in our earlier publication: A. Campbell and E. Campbell ‘Solicitors and Complying
with the Anti-Money Laundering Framework: Reporting Suspicions, Applying for Consent and
Tipping-off’ in N. Ryder, U. Turksen and S. Hassler (Eds) Fighting Financial Crime in the
Global Economic Crisis (Routledge, 2014), Chapter 6 110; see also the Editorial ‘Some
Thoughts on Reporting Suspicions, Applying for Consent and Tipping-off’ in (2014) 17.3
Journal of Money Laundering Control 258.
3
Hereafter ‘FATF’ and the ‘FATF Recommendations’.
4
Hereafter ‘EU’.
5
The FATF and the global anti-money laundering efforts resulted from a meeting of the G7
in France in 1989. The G7 group of Ministers consisted of the leaders of the following countries:
Canada, France, Italy, Japan, United Kingdom, United States and West Germany.
485
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the regulated sector,6 compliance is both an expensive and time consuming business.
According to Colin Tyre, complying ‘with the statutory anti-money laundering regime
has imposed a heavy burden on the legal profession in the UK’,7 but this applies
equally to all types of business covered by the framework. Not surprisingly this heavy
burden does not make anti-money laundering compliance very popular with many of
those in the regulated sector, and that is particularly true in the UK where the general
perception is that the authorities have taken a ‘gold-plated’ approach, and in many
respects have gone significantly further than required either by the FATF Recommenda-
tions or EU requirements. Despite this the level of compliance in the UK is actually
very high, but it is not without its problems. The relationship between consent
applications and ‘tipping-off’, after a suspicious activity report has been made, is one
such problem area, and it is this which is the focus of this chapter.
THE BACKGROUND
At a meeting of the G78 in 1989 the decision was taken to establish a body which
would produce a set of measures to assist in the international fight against money
laundering,9 and in 1990 the newly created FATF published a set of 40 Recommenda-
tions which, since then, have formed the basis of the international effort in the fight
against money laundering;10 this in turn led to the European Community publishing the
first Anti-Money Laundering Directive the following year. This chapter concentrates on
those parts of the Recommendations and European Directives which are concerned
with reporting suspicious activity and the related issues of consent applications and
tipping off.11
6
This term is being used to cover all of those legal persons who are subject to money
laundering reporting requirements. In the UK this not only includes banks but such professionals
as solicitors and accountants when involved in certain activities.
7
Tyre was writing specifically about the legal profession. See Colin Tyre QC ‘Anti-money
Laundering Legislation: Implementation of the FATF Forty Recommendations in the European
Union’ (2010) Journal of the Professional Lawyer 69, at 82.
8
It was not intended only to apply to the G7 countries, but also to as many other countries
as possible.
9
Kevin Shepherd has produced an excellent history of the creation and development of the
FATF and its work: ‘Guardians at the Gate: The Gatekeeper Initiative and the Risk Based
Approach for Transactional Lawyers’ (2009) 43 Real Property, Trusts and Estates Law Journal
607.
10
After the events of September 11th 2001 the focus also turned to terrorist financing, but
that is beyond the scope of this chapter.
11
For a detailed account of the anti-money laundering framework in the UK see Robin
Booth, Simon Farrell, Guy Bastable and Nicholas Yeo Money-Laundering Law and Regulation:
A Practical Guide (Oxford University Press, 2011). For a specialist account in relation to the
legal profession see Peter Camp Solicitors and Money Laundering: A Compliance Handbook
(3rd ed) (The Law Society, 2009).
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Money laundering and the consent regime in the United Kingdom 487
The original FATF Recommendations introduced the concepts of making suspicion

based reports to the competent national authorities in each state and the prevention of
tipping off another person that a report had been made.12
The original Recommendation on reporting13 provided that ‘if financial institutions
suspect that funds stem from a criminal activity, they should be permitted or required to
report promptly their suspicions to the competent authorities’,14 and this was followed
by a Recommendation15 that ‘financial institutions, their directors and employees,
should not, or, where appropriate, should not be allowed to, warn their customers when
information relating to them is being reported to the competent authorities.’
Recommendation 18 provided that ‘in the case of a mandatory reporting system, or
in the case of a voluntary reporting system where appropriate, financial institutions
reporting their suspicions should comply with instructions from the competent author-
ities.’
It is interesting and somewhat surprising that not only do the 1990 Recommendations
not make the reporting of suspicious activity mandatory, they also do not provide a
clear basis for a consent procedure being used. The new concept of tipping off was
introduced and was quite clear and direct.
Interestingly, the first set of FATF Recommendations did not even require that
countries introduce a mandatory suspicious transaction reporting system, but when the
updated set of FATF Recommendations was issued in 1996 the position had changed in
that the relevant reporting Recommendation read: ‘if financial institutions suspect that
funds stem from a criminal activity, they should be required to report promptly their
suspicions to the competent authorities.’
This represented a considerable shift in direction by requiring that each state should
have a mandatory reporting system for the suspicion of criminal activity which also
required that suspicions should be reported ‘promptly’, a word which had not been
previously used.
The next amendment came in 2003 and produced one significant change in that the
wording read: ‘… suspects or has reasonable grounds to suspect …’. So in addition to
actual suspicion, it had been widened to cover the situation where there was no actual
suspicion, but where there were ‘reasonable grounds’ in existence which should have
led to the formation of suspicion.
The current FATF Recommendations, which were published in 2012, include the
following two Recommendations relating to suspicious transactions, tipping off and
confidentiality:
Recommendation 20. Reporting of Suspicious Transactions. If a financial institution16

suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activity,
12
Since then the term Financial Intelligence Unit (FIU) has come to be used for the body in
each country to which reports must be made.
13
Recommendation 16. The FATF Recommendations (FATF, Paris, 1990).
14
The issue of what would amount to suspicion is not being discussed here but it has not
been unproblematic. For reading on this see Booth et al. above n 11 at 44.
15
Recommendation 17, 1990.
16
Although the term financial institution is used in the wording of the Recommendations,
these also apply to what are described as ‘designated non-financial businesses and professions’,
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or are related to terrorist financing, it should be required, by law, to report promptly its
suspicions to the financial intelligence unit.
Recommendation 21. Tipping-off and Confidentiality. Financial institutions, their directors,

officers and employees should be: (a) protected by law from criminal and civil liability for
breach of any restriction on disclosure of information imposed by contract or by any
legislative, regulatory or administrative provision, if they report their suspicions in good faith
to the FIU, even if they did not know precisely what the underlying criminal activity was, and
regardless of whether illegal activity actually occurred; and (b) prohibited by law from
disclosing (‘tipping-off’) the fact that a suspicious transaction report related information is
being filed with the FIU.
So, in relation to reporting and tipping off, the position has not changed,17 but now it is
not only financial institutions which have to comply with these requirements, but also
several designated non-financial businesses and professions. For reporting and tipping
off this means lawyers,18 accountants and dealers in precious metals/stones.19 The
scope of the Recommendations has been considerably widened as a result of this, but at
the time of writing not all countries have included lawyers within their money
laundering reporting frameworks.20
Interestingly, the Article from the earlier sets of FATF Recommendations which
provided that financial institutions refrain from carrying out transactions until they have
apprised the authorities is no longer there.
THE EUROPEAN RESPONSE TO THE RECOMMENDATIONS

The first Directive21 on money laundering was an almost immediate response to the
publication of the Recommendations, and it is not an exaggeration to say that the
European Council responded very positively and enthusiastically to the FATF Recom-
mendations. It contained a mandatory approach to reporting suspicions of money
laundering.
Article 6 required Member States to ensure that financial institutions inform the
relevant authorities ‘… on their own initiative, of any fact which might be an indication
of money laundering’. The word ‘suspicion’ was not used at that time in relation to
a term which covers lawyers, notaries and accountants as well as dealers of precious metals and
trusted company service providers.
17
Other than incorporating terrorist financing.
18
This covers lawyers, notaries and other independent legal professionals when they engage
in a financial transaction on behalf of a client. It does not cover the situation where legal
privilege applies. It is beyond the scope of this chapter to discuss this aspect, but for further
information see Peter Camp above n 11 at 304.
19
For further information see Recommendation 23.
20
These include Canada, Japan and the United States. For further reading on this see A
Lawyers Guide to Detecting and Preventing Money-Laundering: A Collaborative Publication of
the International Bar Association, the American Bar Association and the Council of Bars and
Law Societies of Europe (International Bar Association, the American Bar Association and the
Council of Bars and Law Societies of Europe, October 2014).
21
Directive 91/308/EEC.
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making a report, but Article 7 provided that ‘Member States shall ensure that credit and
financial institutions refrain from carrying out transactions which they know or suspect
to be related to money-laundering until they have apprised the authorities referred to in
Article 6.’ So, in effect, it was a suspicious transaction report regime. The Article goes
on to provide that ‘those authorities may, under conditions determined by the national
legislation, give instructions not to execute the operation’. So under this provision there
was no actual requirement for consent to be obtained before continuing with the
transaction. Once a report had been made the FIU would have had the power to prevent
the transaction taking place, but only if it acted quickly enough to give instructions not
to proceed with the transaction before it had been executed. If the transaction had
already taken place there would be no liability for the financial institution. The
financial institution’s duty was to make a report and then carry out its customer’s
instructions – there was no requirement to delay proceeding with the transaction until
consent from the FIU had been received.
Article 8 introduced the concept of ‘tipping-off’ by providing that financial insti-
tutions and their directors and employees ‘shall not disclose to the customer concerned
nor to other third persons that information has been transmitted to the authorities … or
that a money laundering investigation is being carried out’.
This Directive introduced a reporting regime based on the first set of FATF
Recommendations but actually going further than was strictly required as it introduced
a reporting regime which was mandatory, but there was no need to obtain the consent
of the authorities to proceed with a transaction. The only real difficulty which the
reporting institution faced would be where the FIU instructed it not to proceed with the
transaction in question, and that instruction was received prior to the transaction having
taken place.
Articles 6 and 7 were amended by the second money laundering Directive22 but only
in so far as to extend the reach of the legislation beyond the financial sector to include
lawyers, accountants and others.23 Articles 6 and 7 essentially remained the same in
terms of the reporting requirements but now extended beyond the financial sector and
lawyers and accountants when performing so-called Gatekeeper functions, which were
now covered.24
In 2005 the third, and current, Directive25 was published. Article 22 contained an
amended reporting requirement which now provided that those in the regulated sector
shall be required to cooperate fully:
22
Directive 2001/97/EC.
23
Once again the EU was responding to changes to the FATF Recommendations.
24
This FATF Recommendation to include lawyers was controversial and, although adopted
by the EU, has been the subject of a number of challenges e.g. by Belgian lawyers. It has also
been criticised by organisations representing lawyers. Challenges elsewhere have been more
successful e.g. Canada. The United States has declined to follow this FATF Recommendation. It
is beyond the scope of this chapter to discuss the position of lawyers in relation to anti-money
laundering compliance in general and in relation to the topics which are the focus of this chapter.
For further information see A Lawyer’s Guide to Detecting and Preventing Money-Laundering:
A Collaborative Publication of the International Bar Association, the American Bar Association
and the Council of Bars and Law Societies of Europe (October 2014).
25
Directive 2005/60/EC.
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(a) by promptly informing the FIU, on their own initiative, where the institution or person
covered by this Directive knows, suspects or has reasonable grounds to suspect that
money laundering or terrorist financing is being committed or attempted; (b) by
promptly furnishing the FIU, at its request, with all necessary information, in accordance
with the procedures established by the applicable legislation.
This Directive has clearly followed the relevant FATF Recommendation and imposed a
greater sense of urgency by including the term ‘promptly’. The scope of the mental
element was also widened to ‘knows, suspects or has reasonable grounds to suspect’.
What about proceeding with a transaction after a suspicious activity report has been
made? Article 24 (a) is rather vague about this: ‘Member states shall require the
institutions and persons covered by this Directive to refrain from carrying out transactions
which they know or suspect to be related to money laundering or terrorist financing until
they have completed the necessary action in accordance with Article 22 (a).’
This simply contains the requirement to make a suspicious activity report in
appropriate circumstances. So the necessary action under the Directive only extends to
making a report to the FIU. The Article goes on to provide: ‘In conformity with the
legislation of the Member States, instructions may be given not to carry out the
transaction.’
So there is still no EU requirement that an application for consent to proceed with
transactions has to be made to the FIU before the transaction is actually undertaken. To
comply with Article 21 (a) all that is required is that a report be made to the FIU before
the transaction is undertaken.
At the time of writing there is a proposal for a fourth Directive, but this will not
bring about any changes in relation to the reporting requirements and the wording will
be unchanged.26
THE LEGAL AND REGULATORY FRAMEWORK IN THE UK: THE

REPORTING REGIME, CONSENT PROCESS AND TIPPING OFF
The Legal Framework – Proceeds of Crime Act 2002
The UK’s predicate money laundering offences are found in sections 327–329 of the
Proceeds of Crime Act 200227 and, in addition, there are two related offences of failing
to disclose and tipping off. However, this chapter is not concerned with the actual
money laundering offences, but instead with the action which has to be taken when a
person in the regulated sector has knowledge or suspicion of money laundering. This
requires the making of a suspicious activity report and a consent application, if a
transaction is to take place, and introduces the tipping off offence.
Basically, where a person in the regulated sector has been instructed to undertake a
transaction on behalf of a customer/client but has knowledge or suspicion that the
property involved is derived wholly or partly from criminal activity, that person is
26
The 4th Money Laundering Directive is expected to be introduced in 2015.
27
Hereafter ‘POCA’.
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required to make a suspicious activity report and apply for consent to proceed with the
transaction.
In relation to the money laundering offences in each of the three sections, the
wording provides that an offence is not committed if an authorised disclosure has been
made to the National Crime Agency28 and the person carrying out the transaction has
received appropriate consent before doing the act referred to in the relevant section.29
A person in the regulated sector will be guilty of the offence of failing to disclose if
she ‘(a) knows or suspects, or (b) has reasonable grounds for knowing or suspecting
that another person is engaged in money laundering’.30
This means that when a person in the regulated sector has made a suspicious activity
report to the NCA that person will have a defence provided that the report is made as
soon as is practicable after having formed the knowledge or suspicion. Of singular
importance, under the UK legislation, is that the person who made the report must
refrain from undertaking the relevant transaction until consent to proceed has been
provided by the NCA or, otherwise, by the lapse of the relevant time periods.31 To
proceed with any transaction without either the appropriate consent or by the passage
of time exposes the reporter to criminal liability for being involved in money
laundering.
So essentially, as soon as a report has been made to the NCA, the proposed
transaction is frozen until consent is given or the relevant period of time has elapsed.32
It is at this point the position becomes complicated and sometimes difficult for the
person who made the suspicious activity report, particularly because of the tipping off
offence. Under the UK law tipping off is the communication to another person of the
fact that a suspicious activity report has been made and that this is likely to prejudice
an investigation. Leaving aside the issue of ‘likely to prejudice an investigation’, this
brings about some potentially difficult problems for anyone who has made a report and
is expected to proceed with a transaction by a customer/client. For example, a bank
which has been instructed to transfer money overseas with immediate effect, and which
has formed reasonable suspicion, must make a suspicious activity report, but as soon as
it has done so it will not be able to continue with the transfer until consent has been
received.33 The customer may demand an explanation for the delay to the transfer being
made but the bank cannot inform its customer of the fact of the suspicious transaction
report having been made.
The Consent Application Process
The decision to give or refuse consent is now made by the NCA as the UK’s FIU. After
a number of concerns had been raised about the decision-making process for consent
28
Hereafter ‘NCA’ – the UK’s FIU.
29
See POCA section 338 ‘Authorised Disclosures’.
30
POCA section 330.
31
See below for details on the time periods.
32
Further details on the time periods are provided below. For how they work, see A.
Campbell and E. Campbell, above n 2 at 123.
33
Or the relevant time period has elapsed.
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applications,34 the Home Office issued guidelines regarding the policy on consent
applications, and this focuses on the principles of effectiveness, proportionality and
engagement.35 It is recognised that in relation to the issue of proportionality, ‘in the
majority of cases consent should only be refused when a criminal investigation with a
view to bringing restraint proceedings is likely to follow or is already under way.’
The NCA has only been in operation for approximately fifteen months at the time of
writing and the latest published figures available are for the year ending October 2012;
however, as the Home Office guidelines are still applicable the policy should be
unchanged.36 This shows that the average turnaround time for a consent application was
3.1 days, having risen from 2.8 days the previous year.37 The figures also show that 9.5
per cent38 of consent applications were refused during that year.
So in just over 90 per cent of cases consent will be given, but it is interesting to note
that in more than 50 per cent of cases consent requests were referred to other bodies,
such as HM Revenue and Customs, and this can obviously lead to delays in the consent
process.
So, on the basis of the latest figures available, it would appear that anyone making a
suspicious activity report will have to accept the possibility of an average delay in
being able to continue with the transaction of at least three days. However, it is also
quite possible that the delay could be considerably longer, especially if the matter has
also been passed on to another agency.
The two time periods which come into play as soon as a consent application has been
made also need to be understood. The first is a seven working day period, which starts
on the day after the suspicious activity report has been received. In practice this means
the possibility of this period lasting up to 11 calendar days.39 At the end of this period,
if nothing has been heard from the NCA, the person who made the report can proceed
with the transaction. However, where consent is refused during this period a second
time period comes into operation. This is a 31 calendar day period running from the
day consent is refused. This means that there can, in total, be a period of up to 42 days,
although it seems unlikely to be the case in practice that this would happen very often.
34
See Booth et al. above n 11 at 110: ‘The absence of criteria governing the exercise of the
discretion to refuse consent fuelled concerns in the reporting sector and in the judiciary about the
potential for “… the arbitrary and capricious exercise of power …” (Judge Norris QC in New
Bridge Holdings & Enjien Ltd v Barclays Bank [2006] EWHC 3773 (Ch), quoted by Longmore
LJ in K Ltd v National Westminster Bank Plc [2006] EWCA Civ 375), whether by SOCA or by
a law enforcement agency.’ Booth et al. also quote the observation of Ward LJ that ‘as matters
stood at the time … there were no published criteria for checking whether or not SOCA were
acting lawfully. Their inner workings were totally lacking transparency’.
35
Home Office, Consent Policy, 2008.
36
When the Serious Organised Crime Agency was responsible.
37
Suspicious Activity Reports Regime Annual Report 2012 (NCA, November 2014) at 29.
38
A total of 1229 out of 12,915 consent applications made according to the NCA; the range
has tended to be between 8 per cent and 12 per cent a year.
39
For example, if a report is made on a Friday, the period of seven working days will only
commence on the following Monday.
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Tipping Off
Anyone who makes a suspicious activity report needs to be fully aware of the tipping
off offence and its relationship with the consent process. It has to be fully appreciated
by the person making a report that the customer/client about whom the report has been
made can be told nothing about the reason for any transactional delay. That will often
be difficult in practice. If a customer of a bank or a client of a solicitor wants to know
why a transaction has not proceeded at the expected time, it is simply not possible to
give any explanation, and the problems associated with this are obvious. As Nicola
Bolton notes, ‘… there are only so many ways of saying nothing, even for an
experienced solicitor …’.40
On the one hand, an innocent customer/client is likely to assume incompetence on
the part of the bank, solicitor or accountant and will not want to deal with them in
future. And, of course, they may wish to take legal proceedings for failure to complete
the transaction on time if any loss has occurred as a result. The professional who has
made the report will have no defence available in this situation. On the other hand, the
professional criminal will quickly work out the reason for the delay. The fact that the
transaction has not gone ahead and that no explanation is being given will effectively
suffice to ‘tip off’ the customer/client but without giving rise to the tipping off offence.
Also, the professional on the other side of the transaction, whether a bank awaiting the
receipt of a money transfer or a solicitor awaiting completion of the conveyance of a
property, will quickly be able to work out the reason why no explanation is being given
for the delay. However, the reason cannot be communicated to the customer/client.
CONCLUSIONS
As has been seen from the foregoing, neither the FATF Recommendations nor the
European Directives actually require a consent process such as that which is in place in
the UK.
It is not entirely clear where the impetus for the current legal position in the UK
came from, but it is suggested that this form of ‘gold plating’ has gone much further
than is actually necessary in the fight against money laundering. The requirement of the
Directives is to report suspicions to the national FIU and only desist from entering into
the transaction if the FIU orders it not to proceed. The UK has, of its own volition,
added this additional layer to the reporting and tipping off process.
Perhaps a rethink of the whole procedure is necessary. For a start, is it really
necessary to have to apply for consent for all transactions where there might be some
element of criminal activity, especially if that amount is very small in relation to the
value of the transaction in question?
Arguably, the need to make an application for consent should depend on the type of
transaction that is taking place. It is fully understandable that an application for consent
40
Nicola Bolton Tipping Off: A Practical Guide to What You Can Tell Your Client (The Law
Society, London, 2010). Available at www.thelawsociety.org.uk/advice/articles/a-practical-guide-
to-tipping-off/ (accessed 18 December 2014).
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may be necessary when a customer of a bank, where the bank has some suspicions,
wishes to immediately make an electronic transfer of a large amount of money outside
of the jurisdiction. However, the situation is surely different, for example, in the
situation where a client of a solicitor wants to purchase a residential property. In this
situation the money being used for the purchase is simply being transferred from one
form of asset to another. Does there really need to be a requirement that consent should
have to be applied for to continue with the transaction? What does this really achieve in
practice?
The relationship between the consent process and tipping off is, in our opinion, an
unhelpful and unnecessary part of the UK’s anti-money laundering regime which is in
need of some degree of reform. Although the Home Office has issued guidance on the
consent process it is arguable that the lengthy time periods which exist are also
unhelpful. Although the average time period for consent to be given is a little over three
days, there is the potential for a much lengthier period of delay. Also, a delay of three
days in the completion of the transaction can often cause significant problems for the
person who has made a report.
It may be that it is considered necessary to continue to have a consent application
regime to apply in certain situations, but the current position ensures that the NCA will
receive far more applications for consent than are strictly necessary, and many of these
will be for relatively superficial criminal activity and not really the kind of matters that
the NCA needs to focus on. Reform in this area would clearly relieve the burden on the
NCA and allow it to focus its attention on the more serious forms of criminal activity
and money laundering.
Our research has demonstrated that this process is unpopular with those who operate
within the regulated sector in the UK and most do not really understand why they are
subjected to such a regime. Those with an awareness of other jurisdictions often ask
why the UK has subjected them to such a complex and difficult process while in some
other jurisdictions this would not be the case. The most obvious example is in relation
to lawyers, who often point out that although the United States subscribes to the FATF
Recommendations, are not covered by the relevant legislation and therefore do not have
to report suspicious transactions or make applications for consent to continue with
transactions. It is difficult to provide an adequate explanation to them as to why UK
lawyers should be treated differently.
As Tyre notes:
The present regime, however, remains open to the criticisms that it is unnecessarily complex
and risks criminalising normal business activity and technical errors committed unwittingly
by practitioners. Unfortunately, the Government is not yet persuaded that a radical overhaul
of the statutory regime is required in order to meet these criticisms.41
Booth, Farrell, Bastable and Yeo make the point that
41
Tyre above n 7 at 82.
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the most unhelpful aspect of the tipping off offences is that they are counter-productive. It is
the combined effect of the operation of the consent regime and the tipping off offences that is
itself most likely to alert money launderers as to the fact that they are under suspicion and
have been reported to the authorities.42
42
Booth et al. above n 11 at 198.
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40. Civil asset recovery: the American experience

Stefan D. Cassella1
INTRODUCTION
In the United States, federal prosecutors routinely employ asset recovery as a tool of
law enforcement. The approach takes two forms. In criminal cases, the prosecutor may
seek to recover or “forfeit” property as part of the defendant’s sentence, if the
defendant is convicted. Alternatively, the prosecutor may commence a civil proceeding,
naming the property as the defendant and seeking to forfeit the property independent of
any criminal proceeding.
This chapter discusses the American experience with civil, or non-conviction-based,
asset recovery. It discusses the prosecutor’s motivations for seeking to forfeit assets, the
types of property that may be forfeited, the procedures that govern civil asset forfeiture,
the advantages of civil or non-conviction-based asset forfeiture over criminal forfeiture,
and the ways in which the United States, through judicial decisions and legislation, has
reconciled the non-conviction-based approach with the requirements of basic human
rights and civil liberties.
TERMINOLOGY
In the United States, the term “civil forfeiture” refers to non-conviction-based forfeiture
proceedings. It contrasts with “criminal forfeiture,” which requires a criminal convic-
tion and is imposed as part of a criminal sentence. Experience shows, however, that the
term “civil forfeiture” can be confusing when employed in the international context.
To avoid the confusion and the unnecessary distraction created by the use of the term
“civil forfeiture” when discussing asset recovery in the international context, I will use
the term “non-conviction-based” forfeiture from this point forward.
WHY DO FORFEITURE?
The prosecutor may have multiple reasons for seeking to recover the assets involved in
the commission of a criminal offense. Indeed, it would be the rare case if only one of
1
The views expressed in this chapter are solely those of the author and do not necessarily
reflect the views of the United States Department of Justice or any of its agencies. This chapter
is an updated version of an article entitled “Civil Asset Recovery: The American Experience”
that appeared in Eucrim: The European Criminal Law Associations’ Forum, 3/2013, pp 98–103.
496
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Civil asset recovery: the American experience 497
the following motives were to apply. Frequently, they are overlapping and mutually
reinforcing.
As the US Supreme Court recently recognized, forfeiture serves a multitude of
punitive and remedial purposes.2 First, forfeiture serves the non-punitive purpose of
taking the profit out of crime.3 Whatever benefit the wrongdoer obtained or retained as
a consequence of his offense is simply forfeited to the Government.
Second, forfeiture is seen as a form of punishment. Incarceration is a form of
punishment but so is forcing the wrongdoer to disgorge the accouterments of the lavish
lifestyle he acquired through his criminal acts. Indeed, many prosecutors relate that it
was the loss of the luxury items acquired through a life of crime, not the period of time
to be spent behind bars, that most distressed defendants.
Third, forfeiture serves as a deterrent. If one fraudster, child pornographer, corrupt
politician, or drug dealer is not permitted to retain the fruits of his crime, perhaps the
next person will be less likely to travel the same road.
Fourth, forfeiture is used as a form of prevention; it allows the Government to
deprive wrongdoers of the tools of their trade and the economic resources they would
employ to commit similar or more serious crimes in the future.4 In drug trafficking
cases, for example, the prosecutor does not want the drug dealer to keep the airplane
that might be used again to smuggle drugs or the land where he could produce another
load of marijuana. The benefit of using the forfeiture laws to intercept the flow of guns
to Mexico or the export of a flight simulator to a government that sponsors terrorism is
obvious.
Fifth, another form of prevention is the disruption of criminal organizations.5 Money
is the glue that holds organized criminal enterprises together; they have to recycle the
money in order to keep the scheme going to lull more victims into the fraud scheme, to
buy more drugs, to finance acts of terrorism, or to pay bribes to corrupt officials.
Moreover, it is often noted that it is harder for a drug organization to replace the money
seized by law enforcement after the drugs have been distributed than it is to replace the
drugs if they are seized beforehand. Thus, taking the money does more to interrupt the
cycle of drug distribution than any number of buy/bust arrests of street dealers or
seizures of drugs as they are being imported.
Sixth, forfeiture is used in the United States as a means of recovering property that
has been taken from victims and of restoring it through processes known as “restitu-
tion” and “restoration.” The United States has a robust set of restitution laws, but for
2
See Kaley v. United States, 134 S. Ct. 1090 (2014) (noting that forfeiture serves to punish
the wrongdoer, deter future illegality, lessen the economic power of criminal enterprises,
compensate victims, improve conditions in crime-damaged communities, and support law
enforcement activities such as police training).
3
See United States v. Ursery, 518 U.S. 267, 291 (1996) (“[Forfeiture] serves the additional
nonpunitive goal of ensuring that persons do not profit from their illegal acts”).
4
See von Hofe v. United States, 492 F.3d 175, 184 (2d Cir. 2007) (“Like imprisonment,
which incapacitates convicted criminals, forfeiture may be said to incapacitate contraband”).
5
See Caplin & Drysdale v. United States, 491 U.S. 617, 630 (1989) (“[A] major purpose
motivating congressional adoption and continued refinement of the racketeer influenced and
corrupt organizations (RICO) and [continuing criminal enterprise] forfeiture provisions has been
the desire to lessen the economic power of organized crime and drug enterprises”).
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procedural reasons, forfeiture is a more effective way of recovering money for victims
than ordering the defendant to pay restitution.6
Seventh, forfeiture is used to protect the community and to demonstrate to the
community that law enforcement is working in its interest. If the police are able to use
the forfeiture laws to shut down a crackhouse and turn it into a shelter for battered
women, they have at once removed a hazard to public health and safety, provided a
much-needed resource to a community, and created a visible demonstration of the
effectiveness of the local law enforcement agency’s efforts.
Finally, forfeiture is used as a way of encouraging cooperation between state and
federal law enforcement agencies and of focusing their resources on the economic
aspects of crime. Through a program called “equitable sharing,” state and local law
enforcement agencies that assist federal law enforcement in investigating and prosecut-
ing federal offenses leading to the forfeiture of assets are allowed to use a portion of
those assets to supplement their budgets. They are not, however, allowed to pay the
salaries of the agents or officers who handle the cases and thereby are given an
incentive to dedicate resources to matters that have the highest federal priority.
NON-CONVICTION-BASED FORFEITURE
All of these motives apply equally to criminal and non-conviction-based forfeiture. The
difference between the two approaches is procedural.
In a criminal case, forfeiture is part of the defendant’s sentence.7 After the defendant
is found guilty beyond a reasonable doubt, the court determines on a balance of the
probabilities whether the property the Government is seeking to forfeit was derived
from, used to commit, or was otherwise connected to the crime in a way that would
allow it to be forfeited to the Government. If the property is unavailable, the
Government may obtain a personal money judgment against the defendant and may
satisfy that judgment out of any assets of equal value that the defendant may own –
property known as “substitute assets.”8 Finally, the Government must give notice of the
forfeiture order to any third parties with an interest in the forfeited property and afford
them an opportunity to contest the forfeiture on the ground that it belongs to the third
party and not to the defendant.
6
See United States v. Blackman, 746 F.3d 137, 2014 (4th Cir. 2014) (“The Government’s
ability to collect on a [forfeiture] judgment often far surpasses that of an untutored or
impecunious victim of crime … Realistically, a victim’s hope of getting paid may rest on the
Government’s superior ability to collect and liquidate a defendant’s assets” under the forfeiture
laws).
7
See Libretti v. United States, 516 U.S. 29, 39 (1995) (“[C]riminal forfeiture is an aspect of
punishment imposed following conviction of a substantive criminal offense”).
8
See, e.g., United States v. Vampire Nation, 451 F.3d 189, 201–03 (3d Cir. 2006) (rejecting
the argument that a forfeiture order must order the forfeiture of specific property; as an in
personam order, it may take the form of a judgment for a sum of money equal to the proceeds
the defendant obtained from the offense, even if he no longer has those proceeds, or any other
assets, at the time he is sentenced).
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In a non-conviction-based forfeiture proceeding, there is no requirement of a

criminal conviction or even of a criminal investigation.9 The Government brings the
action against the property as the defendant in rem, and any person seeking to oppose
the forfeiture action must intervene to do so. This is why, in the United States at least,
non-conviction-based forfeiture cases have such unusual names, such as United States
v. $65,000 in U.S. Currency or United States v. 2005 Mercedes Benz E500.10
The forfeiture process is straightforward and is described in detail in statutes and
rules.11 Basically, the Government seizes the property and must provide notice to the
owner and any other interested party of the forfeiture action and the right to intervene.
If the property owner, universally referred to at this stage as the “claimant,” chooses to
intervene by filing a proper claim, the case proceeds through various stages in which
the parties can conduct discovery to obtain evidence, the claimant may move to
suppress evidence or to dismiss the Government’s case, and the Government may move
to strike the claim for lack of standing (i.e., the lack of a sufficient interest in the
property). Finally, if the case goes to trial, the Government has the burden of
establishing on a balance of the probabilities that a crime occurred and that the
property was derived from, used to commit, or was otherwise involved in the offense in
terms of the particular statute authorizing forfeiture. If the Government meets that
burden, the claimant then has the burden of establishing that he was an “innocent
owner,” or that the forfeiture of the property would be “grossly disproportionate to the
gravity of the offense” on which the forfeiture is based.
WHAT CAN BE FORFEITED

Forfeiture actions in the United States may be brought against contraband, the proceeds
of crime, and any property that is used to commit or facilitate the commission of a
criminal offense. There are, however, statutes that sweep more broadly. In money
laundering cases, for example, the Government may forfeit all property involved in a
money laundering offense, including untainted property that was commingled with the
criminal proceeds at the time the money laundering offense took place.
9
See United States v. One Assortment of 89 Firearms, 465 U.S. 354, 361–62 (1984)
(holding that acquittal on gun violation under 18 U.S.C. § 922 does not bar civil forfeiture under
18 U.S.C. § 924(d); One Lot Emerald Cut Stones & One Ring v. United States, 409 U.S. 232,
234–35 (1972) (per curiam) (determining that acquittal on a criminal smuggling charge does not
bar later civil forfeiture).
10
See United States v. $196,969.00 in U.S. Currency, 719 F.3d 644, 646 (7th Cir. 2013) (in
a civil forfeiture case, the defendant is “the thing”; the claimant is like a plaintiff in a “suit
nested within the forfeiture suit”); United States v. $8,440,190.00 in U.S. Currency, 719 F.3d 49,
57 (1st Cir. 2013) (in a civil forfeiture case, the defendant is the property, and persons raising
defenses to the forfeiture must establish standing to intervene).
11
See 18 U.S.C. § 983 (2009); Fed. R. Civ. P. Rule G (Supplemental Rules for Admiralty or
Maritime Claims and Asset Forfeiture Actions). The process is also described in detail in
chapters 3–14 of Stefan D. Cassella, ASSET FORFEITURE LAW IN THE UNITED STATES, Second
Edition, Juris Publishing (New York 2013).
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ADVANTAGES OF NON-CONVICTION-BASED FORFEITURE 12

We now turn to some examples in which asset recovery would not be possible were it
not for the availability of non-conviction-based forfeiture proceedings or in which
non-conviction-based forfeiture is at least the superior option.
1. Where the Forfeiture is Uncontested
If the Government files a forfeiture action directly against the property, and no one files
a disputing claim, the property may be forfeited to the Government directly without any
judicial forfeiture proceeding. In the United States, 80 percent of forfeiture cases –
involving as much as $600 million in a recent year – are resolved in this fashion.
2. Where the Defendant has Died
The Government can only obtain a forfeiture order as part of the sentence in a criminal
case if the defendant lives long enough to be tried, convicted, and sentenced. If the
defendant dies before his conviction is final, as in the case of Kenneth Lay, head of the
Enron Corporation, non-conviction-based forfeiture becomes the principal means of
recovering property traceable to the underlying crime.
3. Where the Wrongdoer is Unknown
In the United States, law enforcement agents commonly find criminal proceeds in the
hands of a courier – a person who was not himself involved in the commission of the
crime. It is often clear from the circumstances that the money at issue is criminal
proceeds, but neither the Government nor (in most cases) the courier knows who the
money belongs to or who committed the underlying criminal offense. In such cases,
there is no chance of bringing a criminal prosecution, yet it is still desirable for the
Government to recover the money. Thus it is not unusual in the United States to file a
forfeiture case against a very large sum of currency that was seized from a courier.
Many of these are drug cases, but the scenario appears in other contexts as well (the
financing of terrorism being one prominent example).
4. Where the Property Belongs to a Third Party
It is quite common for a person to commit an offense using property that belongs to a
third party. For example, a robber may carry out a robbery using someone else’s gun.
In a criminal case, the Government cannot forfeit property that belongs to a third
party if the third party has been excluded from the proceeding, as this would violate the
12
The advantages and disadvantages of criminal and non-conviction-based forfeitures under
US federal law are discussed in more detail in Chapter 1 of ASSET FORFEITURE LAW, supra note
11. See also Stefan D. Cassella, The Case for Civil Forfeiture: Why In Rem Proceedings Are an
Essential Tool for Recovering the Proceeds of Crime, 11 Journal of Money Laundering Control
8 (2008).
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third party’s right to due process. In fact, criminal forfeiture laws have a procedure
specifically designed to exclude the property of third parties from a criminal forfeiture
order, even if the third party knew about or was even complicit in the commission of
the crime. Yet if the third party was aware that his property was being used for a
criminal purpose – or was willfully blind to that fact – he should be made to forfeit the
property. The procedural device for forfeiting property held by a non-innocent third
party is non-conviction-based forfeiture.
5. Where the Interests of Justice Do Not Require a Criminal Conviction
There are many cases where the interests of justice do not require a criminal conviction
on the offense giving rise to the forfeiture. Some of them involve relatively minor
crimes, while others involve property owned by a person who played a minor role in
the offense and is not going to be prosecuted. In such cases, the forfeiture of the
property in a separate non-conviction-based forfeiture action – and not criminal
prosecution – is probably the best way to recover the property.
Finally, there are very serious cases in which the criminal defendant will admit to
committing a particular offense but will not admit to other conduct that gave rise to the
lion’s share of his criminal proceeds. In such a case, non-conviction-based forfeiture is
needed to recover the much larger body of assets involved in the scheme.
In all of these instances, the point is the same: because criminal forfeiture is imposed
as part of the defendant’s sentence, there can be no forfeiture if no one is convicted or
if the property belongs to a person who was not convicted. So, where the interests of
justice do not require a conviction, non-conviction-based forfeiture provides a means of
imposing a punishment that fits the crime.
6. Where the Wrongdoer is a Fugitive
Criminal forfeiture is available only when there is a conviction, but there can be no
conviction as long as the accused is a fugitive from justice. Non-conviction-based
forfeiture, however, allows the Government to file an action against the assets that the
fugitive left behind, or placed in a jurisdiction from which they may be recovered. For
example, if a person steals money from a US aid program in Afghanistan and cannot be
extradited to the US, but has placed the proceeds of the fraud in a country that
recognizes and enforces external forfeiture judgments, the United States may use
non-conviction-based forfeiture to obtain a judgment against the money.13 The fugitive
retains the right to contest the forfeiture, but only if he is willing to surrender to face
the criminal charges; he cannot ignore the process of the court in the criminal case and
ask the court to protect his property interests in the civil one.14
13
See United States v. Sum of $70,990,605, 4 F. Supp.3d 189, 203 (D.D.C. 2014) (forfeiture
action against funds fraudulently derived from aid for Afghanistan Reconstruction).
14
See 28 U.S.C. § 2466 (codifying the “fugitive disentitlement doctrine”).
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7. Where the Criminal Case is Prosecuted by Another Sovereign
Finally, federal prosecutors use non-conviction-based forfeiture when the defendant has
already been prosecuted elsewhere (in one of the 50 states or in a foreign country) and
thus will not be prosecuted federally, but there are assets related to the crime that may
be recovered under federal law. For example, if someone commits an offense in
Norway or Nigeria and conceals the proceeds of the crime in the United States, a
federal prosecutor can use the non-conviction-based forfeiture laws to recover that
property, even though the defendant has already been convicted of the criminal offense
in a Norwegian or Nigerian court. This can often be a more efficient way of recovering
the property than trying to register and enforce a foreign confiscation order.
CIVIL LIBERTIES AND DUE PROCESS CONCERNS

In most instances, the protection afforded to property owners’ civil liberties in
non-conviction-based forfeiture cases is the same as it is in criminal cases. In both
proceedings, for example, the property owner can seek to suppress evidence obtained in
violation of the Fourth Amendment protection against unreasonable searches and
seizures; is entitled to fair notice and an opportunity to be heard as guaranteed by the
Fifth Amendment Due Process Clause; is entitled to cross-examine witnesses and insist
on the application of the Rules of Evidence; and is protected from the imposition of a
forfeiture that is grossly disproportionate to the gravity of the offense under the
Excessive Fines Clause of the Eighth Amendment. There is also a right to a trial by
jury, which is actually more robust under the Seventh Amendment in the non-
conviction-based context than it is in the criminal context. In neither case is the
defendant or the property owner entitled to use property subject to forfeiture to finance
his defense.15
For other purposes, however, the non-conviction-based proceeding does not contain
the same constitutional protections for basic human rights that are available in a
criminal proceeding. In non-conviction-based proceedings, the Government’s burden is
to establish the forfeitability of the property by a balance of the probabilities (not
beyond a reasonable doubt); there is no right to remain silent and there is no right to
the provision of counsel at Government expense if the claimant is unable to afford
counsel of his or her own choosing. As the Supreme Court has held, non-conviction-
based forfeiture proceedings are not criminal proceedings for purposes of invoking the
provisions of the Bill of Rights that are reserved for the protection of criminal
defendants whose liberty is placed in jeopardy by the filing of criminal charges.
The process of determining which constitutional protections would apply in non-
conviction-based forfeiture proceedings and which would not has evolved piecemeal
over many years. The procedures governing civil forfeiture practice were borrowed
from 18th Century admiralty practice and needed to be modified to fit modern usage
and the concept of due process. Many of the constitutional issues were addressed by
15
See Caplin & Drysdale, 491 U.S. at 630.
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the Supreme Court in the decade from 1992–2002; others were addressed legislatively
in the Civil Asset Forfeiture Reform Act of 2000 (CAFRA).
The following is a brief discussion of how some of the most prominent issues were
resolved.16
1. Presumption of Innocence and the Burden of Proof
The practice in admiralty included a reverse burden of proof: once the Government
showed that it had a reasonable basis to believe the property was subject to forfeiture
(what the courts in the United States call “probable cause”), the burden was on the
property owner to prove that it was not. The Supreme Court repeatedly held that this
was constitutional: the presumption of innocence embodied in the Bill of Rights applies
only in criminal cases. But the presumption of innocence is so ingrained in American
practice and culture, and in the expectations of the jurors who will decide civil cases if
they go to trial, that it made sense to modernize the procedure by placing the burden on
the Government to establish the connection between the property and a criminal
offense in the first instance. This was accomplished with CAFRA.
In practice, placing the burden of proof on the Government has made very little
difference to the outcome of cases. Generally, the Government’s evidence is fairly
strong, and the number of cases in which the evidence was evenly divided, such that
the allocation of the burden of proof mattered, were few. Indeed, the amount of
property forfeited has more than tripled since CAFRA was enacted.
2. The Innocent Owner Defense (Bennis)
Finding a way to deal with innocent third parties who have an interest in the property
subject to forfeiture was more controversial. In Bennis v. Michigan,17 the Supreme
Court affirmed two centuries of precedent and held that imposing strict liability on
third parties does not violate their due process rights. But in CAFRA, the Justice
Department proposed, and Congress enacted, a uniform innocent owner defense. By
statute, the defense gives third parties the opportunity to protect their property from
forfeiture, even if it was derived from or used to commit a crime, if (1) they did not
know of, or took all reasonable steps to prevent, the illegal use of the property; or (2)
they acquired the property interest as a bona fide purchaser for value without reason to
know that it was subject to forfeiture.18
16
For a complete discussion of the development of asset forfeiture law in the United States,
including the application of constitutional protections embodied in the Bill of Rights to
non-conviction-based proceedings, see Chapter 2 of ASSET FORFEITURE LAW, supra note 11.
17
516 U.S. 442, 446 (1996).
18
See United States v. One 1990 Beechcraft, 619 F.3d 1275, 1278 (11th Cir. 2010)
(explaining that § 983(d) was enacted in response to the Supreme Court’s decision in Bennis,
holding that an innocent owner defense is not constitutionally required, and to bring uniformity
to federal forfeiture law which contained a variety of inconsistent innocent owner provisions
prior to CAFRA). The uniform innocent owner defense, codified at 18 U.S.C. § 983(d), is
discussed in detail in Stefan D. Cassella, The Uniform Innocent Owner Defense to Civil Asset
Forfeiture, 89 KY. L.J. 653 (2001).
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3. Due Process and Notice (Dusenbery)
There was also a great deal of litigation over the steps the Government must take to
provide notice of the forfeiture action to interested parties. In an in rem action, it is not
always immediately apparent that the property owner is aware that a forfeiture action
has been commenced. The rule that emerged, and was eventually codified, is that the
Government must send written notice to any person who appears to have an interest in
the property within 60 days of its seizure and must also publish notice on the Internet
on an official Government website.19
4. The Eighth Amendment and the Excessive Fines Clause (Bajakajian)
Another controversial issue – and the subject of three separate Supreme Court cases in
the 1990s – involved the proportionality of the forfeiture to the seriousness of the
crime. A forfeiture may potentially be large enough to implicate the Excessive Fines
Clause of the Eighth Amendment, making the forfeiture unconstitutional. Thus, in
United States v. Bajakajian,20 when a traveler leaving the Los Angeles airport with
$347,000 concealed in his luggage committed the relatively minor offense of not
reporting the currency on his Customs form, the Supreme Court held that the forfeiture
of the entire $347,000 was unconstitutional because it was “grossly disproportional to
the gravity of the offense.” However, the Court did not say how much could be
forfeited without being unconstitutional; lower courts have been wrestling with this
question ever since.
Generally, the forfeiture of the actual proceeds of a crime is never problematic – it is
difficult to envision how the forfeiture of a crime’s proceeds could be disproportional,
let alone grossly disproportional, to the gravity of the offense. But the situation may be
different when valuable property, such as a person’s home, is used to facilitate the
commission of an offense. At what point, for example, does the forfeiture of the home
become disproportional to the offense of collecting or producing child pornography, or
subjecting children to sexual abuse?21
5. Self-Incrimination, the Right to a Stay, and Adverse Inferences
Another set of issues arises when there is a non-conviction-based forfeiture action and
a parallel criminal investigation or trial.
Under the Fifth Amendment to the Bill of Rights, a criminal defendant has the right
to remain silent and put the Government to its proof. When the Government files a
parallel civil forfeiture action, however, the defendant is presented with a Hobson’s
choice: does he invoke his right to remain silent so that what he says cannot be used
against him in his criminal case but in doing so foregoes his opportunity to defend his
property, or does he give evidence in the forfeiture case? There are various ways to deal
19
See United States v. Dusenbery, 534 U.S. 161, 167, 172–73 (2002).
20
524 U.S. 321, 322–23 (1998).
21
The case law on the application of the Excessive Fines Clause to civil and criminal
forfeiture is discussed in detail in Chapter 28 of ASSET FORFEITURE LAW, supra note 11.
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with this problem, but the choice that was made in CAFRA was to allow the defendant
who is subject to criminal liability in a related case to ask that a related non-criminal
case be stayed until the criminal case is over, thus making it unnecessary for him to
make the choice between his property and his right to remain silent.22
6. The Sixth Amendment Right to Counsel
A criminal defendant has the right to court-appointed counsel in a criminal case under
the Sixth Amendment but, as mentioned earlier, that right does not extend to civil cases.
In CAFRA, however, Congress created a limited right to court-appointed counsel if the
property subject to forfeiture is the claimant’s primary residence. The view was that no
one should be at risk of losing his home without having counsel to defend him.
The right to counsel also arises when the defendant in a criminal case claims that he
needs property that the Government has seized or restrained under the forfeiture laws to
pay for counsel of his choice in the criminal case. The Supreme Court has held that
there is no constitutional right to exempt criminally derived property from forfeiture so
that a defendant may use it to hire counsel;23 but criminal defendants who first
demonstrate that they lack other funds with which to retain counsel do have a right to
a pre-trial hearing at which the Government must establish probable cause to believe
that the property is likely to be forfeited.24
CONCLUSION
The American experience with civil, or non-conviction-based, asset forfeiture spans
more than two centuries. In that time, it has become an essential tool of law
enforcement, resulting annually in the recovery of over $2 billion in assets derived from
or used to commit federal crimes. As the use of non-conviction-based forfeiture has
expanded, enormous attention has been given to the protection of individual rights and
civil liberties by the courts and the national legislature, with the result that litigants now
have a high level of confidence that their rights will be protected regardless of what
form the Government’s forfeiture action may take.
The process of refining the forfeiture laws and procedures is not yet complete.
Matters of significance are litigated daily, and new cases are pouring in from the trial
and appellate courts. But the major issues having been resolved, it is certain that
non-conviction-based forfeiture will continue to play a significant role in efforts to
deprive criminals of the fruits of their crimes and to take the instruments of crime out
of the hands of those who would use them to violate the law. Indeed, with the
22
See 18 U.S.C. § 981(g).
23
See United States v. Monsanto, 491 U.S. 600 (1989).
24
See United States v. Farmer, 274 F.3d 800, 804–05 (4th Cir. 2001) (defendant entitled to
a probable cause hearing where property he needs to hire counsel in criminal case has been
seized or restrained in related civil forfeiture case). Cf. Kaley v. United States, 134 S. Ct. 1090
(2014) (Roberts, C.J., dissenting) (“To even be entitled to the hearing, defendants must first
show a genuine need to use the assets to retain counsel of choice”).
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globalization of the financial system and the resulting ease with which criminals of all
persuasions are able to move criminal proceeds across international borders, it is highly
likely that non-conviction-based forfeiture will assume an even greater role in recover-
ing the proceeds of crime that are generated in one nation and transferred to another,
particularly where the Government has little likelihood of bringing the wrongdoer to
justice through a traditional criminal trial.
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41. The management of information in the context of

suspected money laundering cases
Alan Bacarese, Kenneth Levy and Hari Mulukutla
INTRODUCTION
With the almost daily diet of news of failed banks, rigging of rates, tax evasion and
complicity in money laundering the challenge for banks and financial institutions the
world over is becoming starkly clear. As Sarah Dahlgren, head of the Financial
Institution Supervision Group in the US, said recently, “We may be at a low point of
confidence and trust between the public and the financial sector.”1
The combating of financial crime continues to occupy a high political profile,
particularly in the wake of the economic crisis of the last few years and given the risks
to the integrity of our financial systems. In this sense the banks and other financial
institutions remain at the very centre of this fight against the twin evils of money
laundering and terrorist financing – to which one can now add compliance with
international sanctions.
Although the crusade against financial crime is an ever moving target, requiring ever
more resources and refocusing on the part of banks and others, a good deal of progress
has been made by both the banks and also those who enforce the laws and regulate the
industry. Despite the increased role of governments, law enforcement agencies and
even civil society, the pressure remains largely on the banks, in an increasingly global
and complex market, to retain the clearest perspective on the risks posed by their
commercial activities. This has created tensions for the banks and financial institutions
as they try to strike an appropriate balance between providing services in existing and
new markets, meeting their contractual obligations to their customers and increasing
economic well-being and market stability on the one hand, and properly discharging
their duties under criminal laws and regulatory requirements on the other. It has not
been an easy path.
There is no question that in recent years the pendulum has swung against the banks
and financial institutions due to reckless abandon in how they conduct their commercial
business, bordering in some cases on criminality, and led to a marked increase in
enforcement and regulatory investigations.2 But it has not just been at the institutional
1
Gina Chon, “New York Federal Reserve steps up pressure on bank ethics”, Financial
Times, 27 July 2014 – see http://www.ft.com/cms/s/0/e0dd5ee8-140a-11e4-b46f-0144feabdc0.
html?siteedition=uk#axzz3JF6lZ5ky.
2
See for example the Financial Services Authority’s Policy Statement “PS11/15 Financial
crime: a guide for firms” on 9 December 2011. This contains guidance on steps firms can take
to reduce their financial crime risk, including in their dealings with high risk and Politically
Exposed Person (PEP) customers.
507
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level that banks have felt the heat: Money Laundering Reporting Officers (MLROs),
those charged with maintaining a strong line against the activities of those intent on
using the financial systems for nefarious purposes, have now fallen individually into an
unwanted, and some would argue unexpected, spotlight. The 2012 fines by the UK’s
Financial Services Authority (FSA) against both Habib Bank AG Zurich and its former
MLRO, Syed Itrat Hussain, of £525,000 and £17,500, respectively, for failures to take
reasonable care to establish and maintain adequate anti-money laundering (AML)
systems and controls suggests a tough regulatory approach that puts bank officials
making judgment calls at risk for personal liability.3 That same year the FSA followed
up with a fine for Coutts of £8.75 million, once again for failings in respect of its AML
systems and controls.4
This chapter will examine the current regulatory environment in the UK, but first sets
the scene by reviewing the increasing jurisdictional enforcement of US interests in this
sector. We will discuss the risks businesses face in one of the most interconnected
industries in the world, and how well banks and financial institutions are rising to the
challenge.
THE US AND INTERNATIONAL POSITION

In any consideration of the perils of money laundering and the increasing reach of law
enforcement and regulatory agencies one must consider the position in the US and its
growing impact upon the scope and scale of risk to banks and financial institutions. The
US has, it is fair to say, been setting the pace, if not the agenda, for the enforcement of
AML laws for over a decade now.
In the wake of the September 11, 2001 attacks on the World Trade Center, the
revelation that terrorist groups are being financed by laundered money, the 2008
financial crisis and high-profile examples of tax evasion involving foreign banks, US
banks and financial institutions and foreign entities having ties to the US have come
under a spate of legislative and agency requirements to monitor, report and disclose
information about their accounts and conduct and have seen a marked increase in
auditing and enforcement actions.
The risks of non-compliance by banks and covered financial institutions far outweigh
the risks of civil liability to account holders or third parties potentially harmed as a
result of bank compliance or cooperation with governmental investigations. This
section will review the major US legislative and agency initiatives affecting US entities
and foreign financial institutions (FFIs) doing business with US interests, including the
safe harbour protections for compliance with their requirements. We will discuss the
relative risks of non-compliance versus compliance, recent examples and practical
considerations.
3
http://www.fsa.gov.uk/library/communication/pr/2012/055.shtml.
4
http://www.fsa.gov.uk/library/communication/pr/2012/032.shtml.
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Management of information in suspected money laundering cases 509
The Statutory and Regulatory Framework
Since 1970 the Bank Secrecy Act (BSA) has imposed information management and
disclosure requirements on financial institutions on the theory that the best means of
detecting illicit financial activities is by access to the businesses through which such
money flows. The 1992 Annunzio-Wylie Anti-Money Laundering Act (AMLA) man-
dated the current “suspicious activity report” (SAR) requirements in the BSA, which
took effect in the form of Treasury Department regulations in 1996. The USA
PATRIOT Act later amended the BSA to more broadly define covered financial
institutions and to require them to establish AML programmes that include internal
policies, procedures and controls; the designation of a compliance officer; an ongoing
employee training programme; and an independent audit function to test programmes.
It also requires financial institutions to exercise due diligence over private banking and
correspondent banking of foreign persons by implementing policies, procedures and
controls to reasonably detect and report instances of money laundering through those
accounts. Financial institutions are subject to civil and criminal penalties for non-
compliance.
Recognising the sensitivity of SARs and the concomitant risks to financial insti-
tutions and their employees, the BSA incorporates strict confidentiality requirements
and a safe harbour provision:
Any financial institution that makes a voluntary disclosure of any possible violation of law or
regulation to a government agency or makes a disclosure pursuant to this subsection or any
other authority, and any director, officer, employee, or agent of such institution who makes,
or requires another to make any such disclosure, shall not be liable to any person under any
law or regulation of the United States, any constitution, law, or regulation of any State or
political subdivision of any State, or under any contract or other legally enforceable
agreement (including any arbitration agreement), for such disclosure …
The litigation surrounding these provisions has produced somewhat mixed results,
warranting reasonable care on the part of financial institutions filing SARs in order to
protect themselves from civil liability in defamation and other actions. The scope of the
BSA’s confidentiality restrictions has been at issue in the context of litigation discovery
proceedings. The leading case is Whitney Nat’l Bank v Karam, 306 F. Supp. 2d 678
(S.D. Tex. 2004), in which the federal district court, relying on the statutory language
and agency regulations, held that the bank cannot be required to produce an SAR or
supporting documents pertaining to the preparation of an SAR or information that
would reveal the existence of an SAR. However, it denied the exemption for documents
developed in the ordinary course of business relating to the defendant’s banking
activities, transactions and accounts. Documents in this group may be evidence of
suspicious conduct that the bank relied upon in deciding to file the SAR, but inasmuch
as they are prepared in the ordinary course of business, they are subject to discovery.
The case law on the BSA’s safe harbour provision is split among the circuits of the
US Court of Appeals, and has not been reconciled by the Supreme Court of the US.
The 11th Circuit, in Lopez v First Union National Bank, 129 F.3d 1186 (11th Cir.
1997), held that in order to come under the safe harbour provision, the bank’s
disclosure must be based on a good faith suspicion of illegal activity involving the
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account. Of the two consolidated cases decided in Lopez, both alleged violations of
federal privacy laws in connection with bank disclosures to federal authorities and the
resultant seizure of accounts by the government. In the first case the bank had made
the disclosure in response to verbal instructions by a government agent. In the second
the bank disclosed information on 1100 accounts based on “unusual amounts” and
“unusual movements” of money at the bank. If the disclosures had been made in
connection with the presentment of a seizure warrant, the court held that the banks
would have been protected. In subsequent cases, however, the 2nd and 1st Circuits have
held that the safe harbour provision affords financial institutions an unqualified
immunity for filing SARs and that there is no requirement that the SARs be based on
a good faith suspicion. On 13 March 2013 the Comptroller of the Currency testified
before a Senate committee that his office would strongly support legislation that
clarifies that the safe harbour from liability for filing SARs is absolute and there is no
good faith requirement. What is growingly evident is that banks and financial
institutions must often make difficult judgment calls and incur heavy administrative
burdens in delivering on these obligations.
The PATRIOT Act provided additional tools for the US Government’s post-9/11 fight
against money laundering and terrorist financing by enacting “information sharing”
provisions. Section 314(a) authorises a programme under which the Financial Crimes
Enforcement Network (FinCEN) channels requests from federal state and foreign law
enforcement agencies to covered financial institutions which are required to search
their records and respond through FinCEN. The attendant procedures and certification
process are designed to ensure that the subject of a request is suspected based on
credible evidence of engaging in terrorist activity or money laundering. Financial
institutions are required to review the lists that FinCEN regularly publishes and report
matches of accounts and transactions in their records. Financial institutions are subject
to penalties for failure to maintain an adequate section 314(a) review system and may
incur significant administrative burdens, including BSA requirements that may be
triggered by the requests, as well as follow-up investigative demands by law enforce-
ment.
While section 314(a) is mandatory, section 314(b) encourages voluntary sharing of
information among financial institutions on the suspected use of transaction proceeds
for terrorist activities or money laundering and includes a safe harbour provision. In
order to qualify for this protection the financial institution must notify FinCEN of its
participation in the 314(b) programme; take reasonable steps to verify that the other
financial institution has submitted such notice to FinCEN; and set up a system to
safeguard the information and use it only for purposes of: (1) identifying and, where
appropriate, reporting on activities that may involve terrorist financing or money
laundering; (2) determining whether to establish or maintain an account, or to engage
in a transaction; or (3) assisting in compliance with AML requirements. Financial
institutions may not exchange SARs, but may be covered by the general BSA safe
harbour provision if they do not comply with all of the requirements for section 315(b)
protection. The Comptroller of the Currency has testified that his office would support
legislation to expand the section 314(b) safe harbour beyond money laundering and
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terrorist financing, and to eliminate or modify the notice requirement to FinCEN, which
may be limiting the ability of financial institutions to share information.5
FATCA and the Expanded Reach over Foreign Accounts
The reality that FFIs can be vehicles for terrorist financing, money laundering and tax
dodging by US entities has prompted Congress to enact innovative, and by some
accounts heavy-handed, legislation to empower the US Government to enforce its laws.
Taking full advantage of its legal jurisdiction and the importance of its financial
markets to other countries and their financial institutions, the US has mandated an
unprecedented, worldwide flow of financial information, apparently with great success.
Section 319 of the PATRIOT Act gives federal authorities the power to bring an in
rem forfeiture action against a foreign bank’s correspondent account in a US bank
where it can be shown that an account in the foreign bank houses illicit proceeds. The
forfeiture may be up to the amount in the foreign account, and it is the foreign bank’s
obligation to make itself whole by effecting a set-off from the foreign account,
provision for which typically would be included in the foreign bank’s agreement with
its customer. The illicit funds need never have transited the correspondent account in
the US and forfeiture actions may be brought against the proceeds of all specified
unlawful activities. The US Government generally brings section 319 forfeiture actions
only if the foreign jurisdiction is unable or unwilling to assist in the forfeiture of the
foreign account.
While US persons have long been required to report foreign income and accounts to
the Internal Revenue Service (IRS), and are subject to harsh penalties for non-
compliance, the 2010 Foreign Account Tax Compliance Act (FATCA) is starting to
make bank secrecy a thing of the past.6 This has created new tensions in the
relationship between the banks and its customers. The law requires FFIs to register with
the IRS and agree to report certain information on accounts of US persons and foreign
entities in which US persons have substantial interests. FATCA provides for a 30 per
cent withholding of taxable US amounts by non-participating FFIs, by participating
FFIs that are unable to obtain reportable information from their customers, and by US
financial institutions making US source payments to foreign entities if they are unable
to provide FATCA documentation about these entities.
The US Government has now finalised or reached agreements in principle with more
than 100 countries, including all key financial centers, and in the case of Russia a law
allowing its banks to participate. The agreements either obligate the country to gather
information from its FFIs and transmit it to the IRS or to facilitate the direct reporting
by its FFIs to the IRS. Where foreign legal or other impediments to FATCA compliance
exist, the country generally agrees to make changes or arrangements to enable
5
Testimony of Thomas J. Curry, Comptroller of the Currency before the Committee on
Banking, Housing, and Urban Affairs of the US Senate, 7 March 2013. See http://www.occ.gov/
news-issuances/congressional-testimony/2013/pub-test-2013-41-written.pdf.
6
See some of the international press about the far reaching nature of FATCA: http://
www.lejournalinternational.fr/FATCA-Brings-an-End-to-Swiss-Banking-Secrecy_a994.html and
http://www.economist.com/node/21547229.
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reporting. For example Switzerland, which chose the FFI direct reporting route,
exempts FFI FATCA reporting from liability under Article 271 of its criminal code. It
also streamlined its administrative assistance procedures and will process group
requests by the IRS to identify account holders who do not consent to FFI reporting of
their information.
FATCA implementation comes amidst a vigorous enforcement effort by the Depart-
ment of Justice (DOJ) to curb US tax evasion through offshore financial institutions.
The initiative began with the investigation and high-profile 2009 deferred prosecution
agreement with UBS AG in which the Swiss bank admitted guilt on conspiracy charges
to defraud the US, discontinued providing banking services to US customers with
undeclared accounts, and paid $780 million. This led to a 2009 agreement with the
Swiss Government that has provided the IRS with a wealth of information about secret
Swiss bank accounts used to evade US taxes and has fuelled numerous investigations.
In January 2013 Wegelin Bank, the oldest private bank in Switzerland, became the first
foreign bank to plead guilty to felony tax charges, and in May 2014 Credit Suisse AG
pleaded guilty to conspiracy to aid and assist US taxpayers in filing false income tax
returns and other documents with the IRS and agreed to pay $2.6 billion.
The Credit Suisse deal has been criticised as too lenient given the bank’s active role
in soliciting thousands of US accounts, the relatively small amount of money paid, the
lack of sanctions on continuing operations in the US and the failure to use available
resources to develop criminal cases against senior executives. On the other hand, in
November 2014 a federal jury acquitted Raoul Weill, formerly the third ranking
executive at USB, on criminal conspiracy charges in connection with the secret
accounts hidden from the IRS. The $1.9 billion settlement with HSBC in 2012 for
money laundering has also come under much fire. In the HSBC money laundering
settlement, one of the charges against its US operations was for the failure to maintain
an adequate AML compliance programme. Increasingly, US financial institutions are
being taken to task for such violations by regulatory agencies, which have the authority
to impose sanctions. For example in January 2014 FinCEN announced that it has fined
JPMorgan Chase Bank, N.A., $461 million for wilfully violating the BSA by failing to
report suspicious transactions arising out of Bernard L. Madoff’s decades-long,
multi-billion dollar fraudulent investment scheme. Nor are smaller banks overlooked.
The Office of the Comptroller of the Currency issued a consent order in June 2014 for
a $500,000 penalty against Associated Bank, N.A., Green Bay, Wisconsin, for failures
in its BSA compliance programme involving monitoring, due diligence, risk assess-
ment, testing of its programme and the training and adequacy of its staff.
THE UK POSITION
It should be no surprise given the significant changes that are occurring in the US and
internationally that the UK has been undergoing its own seismic changes in how banks
and financial institutions interact with government agencies and its own customers. The
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Financial Conduct Authority (FCA) and its predecessor the FSA7 have shifted their
emphasis in the last 4–5 years from advising banks and financial institutions on how to
create adequate policies and procedures to accountability under criminal laws and
regulatory obligations, partly in response to the Bribery Act of 2010. The FSA/FCA
thematic reviews have provided a clear direction on where the fault lines may lie for
banks and financial institutions, providing more guidance on issues such as third party
due diligence, Gifts and Hospitality, risk assessment, training and key performance
indicators. The UK Parliamentary Commission on Banking Standards has even now
suggested the implementation of new senior management level obligations on whistle-
blowing.8
The Statutory and Regulatory Framework
The statutory and regulatory position in the UK is now clear. The Proceeds of Crime
Act 2002 (POCA) is the UK primary legislation for money laundering while the
Terrorism Act 2000 (TACT) covers the situation with regard to the financing of
terrorism. Part 7 of POCA outlines the money laundering offences and what constitutes
criminal property, sets out the legal requirement to make a disclosure or SAR and the
offences of failing to disclose, and details a requirement to obtain consent to carry out
a prohibited act, placing time restrictions on the National Crime Agency (NCA) and
law enforcement to issue consent to those making the SAR. Part 3 of TACT covers the
corresponding provisions in cases of terrorist financing.
The three main money laundering offences are broad in scope and comply with the
international standards as set by the Financial Action Task Force (FATF). They are as
follows:9
+ concealing, disguising, converting, transferring, or removing criminal property

(s327);
+ arranging or facilitating criminal property (s328);
+ acquiring, using or possessing criminal property (s329).
Under POCA a conviction for one of the three money laundering offences carries a
14-year sentence and an unlimited fine. POCA also provides for an offence of failing to
disclose suspicion of criminal property/money laundering, which carries a 5-year
sentence and an unlimited fine.
POCA also requires any individual or company in the regulated sector who either (1)
knows or suspects or (2) has reasonable grounds to know or suspect, that another
person may be engaged in money laundering, or that any or all of the property they are
7
The FSA was replaced by the Financial Conduct Authority and Prudential Regulation
Authority in 2013.
8
See for example the British Bankers Association https://www.bba.org.uk/policy/financial-
crime/anti-bribery-and-corruption/anti-bribery-and-corruption-guidance/.
9
The FATF is an inter-governmental body established in 1989 and sets the standards and
promotes effective implementation of legal, regulatory and operational measures for combating
money laundering, terrorist financing and other related threats to the integrity of the international
financial system, http://www.fatf-gafi.org/.
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dealing with may be criminal property, to report their suspicion of money laundering to
a constable, a customs officer or nominated officer (MLRO or equivalent). The
nominated officer must report their suspicion to the NCA through the prescribed
methods.
Under Part 3 of TACT the decision as to whether or not to obtain consent will arise
in any of these scenarios
1. fund-raising for the purposes of terrorism – as defined in section 15;

2. use or possession of money or other property for the purposes of terrorism – as
defined in section 16;
3. making available money or other property for the purposes of terrorism – as
defined in section 17; or
4. facilitating the retention or control of terrorist property by, or on behalf of,
another person – as defined in section 18.
For those firms or individuals outside the regulated sector, the legislation only requires
the nominated officer to make the disclosure if they know or suspect that another is
engaged in money laundering or criminal property: the ‘reasonable grounds’ condition
does not apply.
In an effort to offer some protection to the banks and financial institutions, POCA,
through the UK Financial Intelligence Unit based in the NCA, provides a consent
regime which requires institutions or individuals to ask for permission to carry out a
prohibited act if a suspicion has been raised prior to the activity that there is a
suggestion of criminal property in whole or in part attached to the business. The
legislation also stipulates the type of permission required, which is either ‘nominated
officer’ consent, whereby NCA will issue consent to the nominated officer only, or
‘appropriate consent’, where a nominated officer, the NCA, a constable or a customs
officer, may issue consent to carry out the prohibited act.10
But compliance with the law creates a potential problem with regard to a POCA
regulated bank or financial institution and its customers, as the consent regime means
that the NCA has 7 working days from the day after the report was made in which to
give or withhold consent and on the 8th day consent is assumed. Or, in circumstances
where the consent is withheld, the NCA has a further 31 calendar days in which to
obtain a restraint order and on the 32nd day consent is assumed. The 31 days starts as
soon as consent is withheld during the initial moratorium period.
The Growing Risk to Banks and Financial Institutions of Civil Litigation
The compliance with the POCA and TACT regimes is now creating tensions for the
banks and financial institutions in the UK in how they regulate their relations with
customers once they are into the legal requirement to make an SAR, particularly since
POCA has “tipping off” provisions at section 333A.11 Under section 333A(1), it is a
10
See the NCA Guidance on consents at http://www.nationalcrimeagency.gov.uk/
publications/24-obtaining-consent-from-the-nca/file.
11
TACT also has similar tipping off provisions under section 21D(1) and section 21D(3).
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criminal offence to disclose to a third party that an SAR has been made by any person
to the NCA or other law enforcement agents if that disclosure might prejudice any
investigation that might be carried out as a result of the SAR. Under section 333A(3) it
is also a criminal offence to disclose that an investigation into a money laundering
offence is being contemplated or carried out if that disclosure is likely to prejudice that
investigation.12
The balance to be struck between the need to comply with the law and to provide a
contractual service to the customer is presenting quite a challenge for the UK’s banks
and financial institutions. In terms of the risks of civil litigation there are a number of
ways in which the banks, financial institutions and their staff expose themselves on the
basis of poor or inadequate compliance with the plethora of AML and related
standards.
Failure to undertake appropriate due diligence or to assess the due diligence
information obtained, in circumstances where, as a result, the institution is then used as
an instrument of fraud, means the victim of the fraud may sue for negligence.13
Of more concern, given compliance with the POCA requirements, in a case where
the bank or financial institution’s official comes to a conclusion that there may be an
underlying criminal offence and so seeks consent from the NCA, the bank may still be
the subject of a civil law suit on the basis that the bank has knowledge or provided
knowing assistance and so acted in breach of a fiduciary duty. The SAR, and the
materials and assessments made in advance of submitting the SAR, could possibly
provide the necessary evidence in a civil trial of such a breach. In fact, obtaining
“consent” may create the very evidence on which a claimant can rely to found a civil
liability. The risk to the bank, and even the individual making the decision, such as an
MLRO, is that the provision of “consent” from the NCA will only protect the bank
and/or the individual with regard to a prosecution under the AML regime. It will not
provide a defence from a civil law suit. So to mitigate the risk it’s imperative that the
information disclosed in the SARs is limited as much as possible to the statutory
POCA tests of “knowledge or suspicion of money laundering, or reasonable grounds to
suspect money laundering”. In this sense banks and financial institutions should be
wary of handing over privileged materials to prevent the client from seeking an order
for breach of contract as well as a breach of the fiduciary relationship.
In the haze of such difficult decision-making the bank or financial institution should
certainly notify professional indemnity insurers at the earliest opportunity of any
circumstances that might give rise to a claim. This should be the case whether the NCA
or law enforcement agents have provided consent yet or not, given the risk of civil
liability arising whether consent has been provided or not. That said the bank or
12
For those outside the remit of a regulated entity under POCA there is a catch all offence
under section 342(1) of prejudicing a confiscation, civil recovery or money laundering
investigation, if the person making the disclosure knows or suspects that an investigation is
being, or is about to be, conducted.
13
Armstrong DLW GMBGH v Winnington Networks Ltd [2012] EWHC 10 (Ch) (11
January 2012) http://www.bailii.org/ew/cases/EWHC/Ch/2012/10.html.
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financial institution should be wary of the criminal offences of “tipping off” as

discussed above.14
The 2012 case of Shah and Another v HSBC Private Bank (UK) Ltd [2010] EWCA
Civ 31 handed down on 16 May 201215 provides a very clear indication of the risks
that UK and, indeed, international banks and financial institutions run when complying
with the significant number of AML requirements.
The Shah case captured the imagination for a number of reasons, and although the
Appeal Courts found in favour of HSBC it was a difficult ride and exposed the risks
that banks, and others, face when trying to mitigate the risk that arises from the
increased enforcement of AML laws.
The proceedings arose from a number of SARs made by HSBC in accordance with
the legal provisions as set out above. During the period of seeking consent the Reserve
Bank of Zimbabwe, where Shah also held accounts, decided, upon learning of HSBC’s
decision, to make a number of mitigating changes to Shah’s bond holdings, which
meant that he sustained a loss. Shah sued HSBC for $300 million for breach of contract
for losses occasioned by the decision to refer the proposed transactions as SARs to the
Serious Organised Crime Agency (SOCA) and for failure to inform the client.
Initially the court ruled that HSBC could refuse to execute such payments, and so
was reliant upon the consent of SOCA, inferring therefore a contractual condition into
Shah’s contract with the bank.
But although Shah succeeded on appeal (and then lost the point before the Supreme
Court), the case raised a wider question about the necessary threshold of suspicion that
a bank or financial institution must reach before satisfying the legal requirement to
make an SAR and the guidance available to make such a decision.
The former FSA itself provided differing advice to financial institutions. In Decem-
ber 2006 the FSA announced that it wanted to ensure firms did not apply a test higher
than “reasonable grounds” for suspicion, whereas in August 2009 it suggested that
firms should not take an “overly legalistic approach” to the test. The court in Shah
resolved the issue by declaring that the standard to be applied in what are civil
circumstances was that established in K Ltd v National Westminster Bank plc (Revenue
and Customs Prosecution Office and Serious Organised Crime Agency intervening)
[2006] EWCA Civ 1039), a definition that was confirmed in R v Da Silva [2006]
EWCA Crim 1654, which found that an individual must believe that there is “a
possibility, which is more than fanciful” that the relevant facts exist.
So in this context the MLROs in banks and other financial institutions are now
increasingly in a difficult position and are seen as representing the mind of the bank. In
the case of Shah, the court confirmed that a Mr Wigley, HSBC’s MLRO, constituted
“the defendant for the purpose of the defendant having reasonable suspicion”, as he
was paid to perform such a risk assessment function.
But this still leaves a question about what test is to be applied, an objective or a
subjective one? Is the MLRO expected to have a detailed knowledge of the current
14
For a comprehensive review of possible risks see the Law Society’s Practice Notes at
http://www.lawsociety.org.uk/advice/practice-notes/aml/civil-liability/#sthash.JEML2KJo.dpuf.
15
Judgment available at http://www.outertemple.com/userfiles/Documents/SharvHSBC
Judgment.pdf.
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markets in Zimbabwe, for example, or will a court infer this at some point in the
future? All that the bank and its staff can currently do, or so it seems, is to record
detailed reasons evidencing consideration of the question and justification for not
submitting an SAR, as a guard against future possible investigation and even litiga-
tion.16
The Dahabshiil v Barclays Case – a Rush towards De-risking
The legal tussle during 2013–2014 between Barclays and Dahabshiil, one of the largest
remitters of money into and out of Africa, in particular Somalia, demonstrates the new
fault lines that are now emerging for banks and how they size up and deal with risk and
relationships that are seen as risky.17
Dahabshiil mounted a high-profile legal challenge against Barclays, the largest UK
bank dealing with remittance companies, after its decision to close its accounts and
those of some 250 other money transfer companies in May 2013 as part of a drive to
meet stricter UK money laundering rules. Dahabshiil initially managed to block the
closures on competition grounds, arguing that although Barclays contractually had the
right to close any accounts it wanted by giving notice of its intention to withdraw
banking services from their businesses, Barclays’ closure was an unlawful abuse of its
dominant position in the market for the provision of banking services to money service
businesses contrary to Article 102 of the Treaty on the Functioning of the European
Union (TFEU) and the Chapter II prohibition in the Competition Act of 1998.
Dahabshiil initially won an injunction against Barclays and eventually agreed an
out-of-court settlement with the bank, that included making alternative banking
arrangements, in April of this year.
Aid groups criticised Barclays’ move saying that such actions could have far-
reaching adverse consequences for countries like Somalia with no formal banking
system and raising fundamental questions about the trend in risk-minimising account
closures across the world’s financial centres. This practice, now known as de-risking,
can be seen as a natural reaction to the double risks of law enforcement attention and
the threat of civil litigation.
The question is now whether the banks and others are unreasonably avoiding risk or
are reasonably minimising it. The issue has become topical at the highest levels, with
the FATF, in October, producing guidance on this issue and reminding banks to only
“terminate customer relationships, on a case-by-case basis, where the money laundering
and terrorist financing risks cannot be mitigated” and to avoid “the wholesale cutting
loose of entire classes of customer”.
In an effort to inject some proportionality into the debate and lower the risk of
withdrawing banking from more classes of individuals and firms, the UK Government
and other groups, such as the British Bankers’ Association, are working towards
creating a “safe corridor” for payments between the UK and Somalia. But this will not
16
For an excellent summary of the case see http://www.shlegal.com/Asp/uploadedFiles/File/
Newsletters/2012_newsletters/06_12/06-12%20Lessons%20from%20Shah.pdf.
17
Every year, migrant Somalis send around $1.3 billion back to their home country,
according to the charity Oxfam.
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solve the broader growing view of those in the banking world who feel that the risks
are simply not worth taking any longer.
CONCLUSIONS
The risk to US and UK banks and financial institutions of non-compliance with AML
laws and regulations and reporting requirements currently appear to outweigh any risks
of civil liability to customers or third parties. FATCA, just one example of this new
world of regulatory compliance obligations, is already imposing extraordinary admin-
istrative burdens on US institutions and foreign institutions and governments, and has
resulted in the closing of accounts and the withdrawal of assets. These business
challenges are the foreseeable consequences of a new environment of openness made
possible by technological capabilities and fuelled by the fight against money launder-
ing, terrorist financing, sanctions regimes and the determination of the US to recoup the
enormous revenues lost to tax evasion. Despite the collapse of the Swiss bank Wegelin
in 2013 after the US DOJ indicted it for federal felony tax charges, there remains the
feeling that the big banks are “too big to fail”.18 And yet after what has been a very
difficult period for banks and financial institutions and, of course, their clients, the
banks seem to be turning a corner as profitability seems to be returning to the financial
sectors.
So what now lies ahead for banks and financial institutions in terms of compliance
and their dealings with clients and the information that comes across their counters?
Well, in the US, the current global policeman in this area, the messages seem to be
clear. The Federal Reserve Bank of New York is stepping up pressure on banks to
improve their ethics and culture following allegations of benchmark rate rigging.
President of the Federal Reserve Bank, William Dudley, has already gone on record
to state that tougher capital requirements may not solve the problem of banks’
“apparent lack of respect for law and regulation”. He added, “There is evidence of
deep-seated cultural and ethical failures at many large financial institutions.” Mr
Dudley went on to say, “I reject the narrative that the current state of affairs is simply
the result of the actions of isolated rogue traders or a few bad actors within these firms
… The problems originate from the culture of the firms, and this culture is largely
shaped by the firms’ leadership.”19
If Dudley’s statement reflects government resolve, we can expect that banks and
financial institutions, their boards and officers will be held to yet higher standards of
accountability for their actions in order to promote a true corporate climate of lawful
compliance. In return banks and financial institutions can insist on clear and reliable
guidance from government and safe harbour protections against civil liability to their
customers. The risks from law enforcement, regulators and even clients need to be
assessed in a much more nuanced manner. From a UK perspective, what is a potentially
18
“HSBC, too big to indict?” New York Times, 11 December 2012, see www.nytimes.com/
…/hsbc-too-big-to-indict.html.
19
http://mic.com/articles/101920/wall-street-s-top-regulator-just-sent-a-shot-across-the-bow-
to-big-banks.
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worrying development is the response of the banks to those clients that represent
unnecessary risk. The Dahabsiil case highlights what may become a growing trend,
namely that in assessing risk even on a client-by-client basis, as the FATF advises, the
banks use the opportunity to clear their balance sheets of overly compliance demanding
clients. In addition to the consequent loss of business, damage to customer relationships
and possible harm to the economies of countries like Somalia, such behaviour may well
be counterproductive to government objectives, exacerbating rather than alleviating the
risks to the financial centres from money laundering and the financing of terrorism.
As the President of the FATF, Roger Wilkins, recently put it in an article to the
Financial Times, “You wouldn’t close a toll road because there may be a few criminals
travelling down it every now and then – but that is what is happening if you take it to
extremes.”20
20
Martin Arnold, Financial Times, “Financial task force warns on banks’ approach to
de-risking”, Financial Times, 13 November 2014.
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42. Anti-money laundering measures and the

effectiveness question
Louis de Koker and Mark Turkington
INTRODUCTION
Effectiveness is defined by the Financial Action Task Force (FATF) as ‘(t)he extent to
which the defined outcomes are achieved’.1 Universal agreement on what those
‘defined outcomes’ were for the Anti-Money Laundering (AML)/Combating the
Financing of Terrorism (CFT) system was absent in the past. During the drafting
process of the 2013 Procedures for the 4th Round of Mutual Evaluations2 the FATF
decided to define the outcomes and assess the extent to which countries achieve them.
After long internal debate the FATF defined the overall outcome of its measures against
money laundering as well as terrorist financing as follows for purposes of its mutual
assessment methodology: ‘Financial systems and the broader economy are protected
from the threats of money laundering and the financing of terrorism and proliferation,
thereby strengthening financial sector integrity and contributing to safety and security.’3
This chapter focuses on the effectiveness question relating to AML/CFT measures. It
considers the evolution of the effectiveness question from a focus on the FATF itself to
a focus on the impact of the implementation of its standards on crime and on the crime
risk profiles of countries. The chapter considers some tensions between the defined
outcome and the FATF Recommendations and closes with observations regarding
questions that are absent from the current focus.
THE FINANCIAL ACTION TASK FORCE

The 1980s saw increasing concern over the global drug problem, the extent of criminal
internationalisation, and a ‘heightened sensitivity’ to the growing financial power of
organised crime syndicates.4 In 1989 the Group of Seven nations (G7) commissioned
the FATF to examine the impacts of drug related crime within the financial sector and
advise on appropriate measures to ‘prevent the utilization of the banking system and
financial institutions for the purpose of money laundering’.5 The original task force
1
Financial Action Task Force, Methodology for Assessing Technical Compliance with the
FATF Recommendations and the Effectiveness of AML/CFT systems (2013) para 38.
2
Ibid, para 2.
3
Ibid, para 42.
4
William Gilmore, Dirty Money (Council of Europe, 3rd edn, 2004) 89.
5
G7 Summit, Economic Declaration (Paris, 14–16 July 1989) <http://www.g8.utoronto.ca/
summit/1989paris/communique/drug.html> para 52.
520
Barry Rider - 9781783475780
Anti-money laundering measures and the effectiveness question 521
assembled over 130 experts6 from a diverse range of backgrounds including diplomats,
‘civil servants, some senior police, investigating judges, regulators and politicians’ who
had a common interest in ‘monitoring and regulating different aspects of the drugs
trade on a global basis’.7 By February 1990, the task force had delivered a detailed
report containing what became known as the ‘FATF 40 Recommendations’. This report
was endorsed at Ministerial level in May of that year and presented to and adopted by
the G7 Houston Summit in July 1990.8
To advance AML, the Recommendations had to be adopted by the global community.
International recognition of the Recommendations as global standards was however
neither immediate nor automatic. The political sensitivity of some of the Recommenda-
tions, especially their impact on sovereignty, posed an obstacle. To address this, the
FATF emphasised the expertise informing the Recommendations, for example by
describing its working group sessions as ‘expert meetings’, with comprehensive inputs
from government agencies, law enforcement and policy departments.9 Kerwer and
Hülsse believe this ‘expertisation’ by the FATF assisted in acquiring legitimacy and
adding authority to the Recommendations.10 By the mid-1990s, the FATF gained
recognition as the global AML standard-setter and had developed into a politically
significant group. This standing was enhanced as the task force moved quickly to adopt
Special Recommendations on terrorist financing by December 2001, thereby position-
ing itself centrally within the global political response following the September 2001
terrorist attacks.
The FATF was not only concerned with legitimacy, however. During the first decades
of its existence it had sought ways to demonstrate the effectiveness of its strategy. This
question was largely focused on the effectiveness of the FATF as a global standard-
setter rather than the effect that its Recommendations had when implemented in
practice.
THE EFFECTIVENESS OF THE FATF AS STANDARD-SETTER

An immediate observation is that the task force has demonstrated a high degree of
success by obtaining the support and subscription of more than 190 jurisdictions.11 This
is remarkable for an entity with a small and relatively exclusive membership of only 34
6
Gilmore supra at n 4, 94.
7
Michael Levi, Controlling the International Money Trail: A Multi-level Cross-National
Public Policy Review (Economic and Social Research Council, 2003) 13.
8
Gilmore supra at n 4, 89.
9
Dieter Kerwer and Rainer Hülsse, ‘How International Organizations Rule the World: The
Case of the Financial Action Task Force on Money Laundering’ (2011) 2(1) Journal of
International Organization Studies 50, 56.
10
Ibid, 58.
11
Jason Sharman, ‘Power and Discourse in Policy Diffusion: Anti-Money Laundering in
Developing Countries’ (2008) 52(3) International Studies Quarterly 635–656.
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countries and two regional organisations,12 whose lack of representation could have
eroded the global legitimacy of its standards.13 The FATF mitigated this risk in two
ways.
First, it leveraged the influence and expertise of member countries to establish
regional FATF-style bodies (FSRBs) that resemble the FATF in their structure and
operations, and assume responsibility for implementation of the international standards
by countries within their region. By adopting this model, the FATF has been able to
achieve a global coverage of their standards, especially ensuring the engagement of
‘weaker’ jurisdictions where it was feared that financial crime might flourish if the
standards were not implemented.14
Second, after 2001 the FATF also leveraged the membership and expertise of the
international financial institutions (IFIs), particularly the World Bank and the Inter-
national Monetary Fund (IMF).15 Their Financial Sector Assessment Program (FSAP)
and Report on the Observance of Standards and Codes (ROSC) processes as well as
their technical assistance broadened and deepened the international implementation of
the Recommendations.
Two other critical components contributed to the success of the global programme.
The first was the adoption of an evaluation programme to assess how countries meet or
exceed compliance with the standards. The model used for this evaluation has been
‘borrowed’ from the Organisation for Economic Co-operation and Development
(OECD) and rests on the concept of mutual evaluation by other countries.16 FATF and
FSRB members17 contribute to evaluation teams who assess compliance levels of
countries against complex, standardised criteria. The second element was leveraging
political and economic pressure, especially exerted at a financial institution level,
against non-compliant countries. These may result in restrictions being placed on the
operations of that country’s financial sector.18
In 2000 the FATF launched a ‘name and shame’ process of ‘blacklisting’ those
countries that refused to cooperate or were slow to reach satisfactory levels of
implementation. The Non-Cooperative Countries and Territories (NCCT) programme
was a coercive measure encouraging states to adhere to, or comply with, the FATF
12
In June 2014 the FATF announced that it had commenced a process to consider the
readiness of a small number of candidate countries to join the FATF.
13
Kenneth Blazejewski ‘The FATF and Its Institutional Partners: Improving the Effect-
iveness and Accountability of Transgovernmental Networks’ (2008) 22(1) Temple International
and Comparative Law Journal 1, 2.
14
Ibid, 7.
15
The IFIs initially felt that financial crime, while a contributor to instability within a
country, may be outside of their jurisdiction. See William Holder, ‘The International Monetary
Fund’s Involvement in Combating Money Laundering and the Financing of Terrorism’ (2003)
6(4) Journal of Money Laundering Control 383, 386.
16
Levi supra at n 7, 14.
17
The IFIs also conduct evaluations through the FSAP and ROSC processes. Although these
are not strictly mutual evaluations, there is information sharing and collaboration between the
IFI assessment teams and those of the FATF.
18
IMF, Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) –
Report on the Review of the Effectiveness of the Program (International Monetary Fund, 2011)
83.
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Recommendations. While it can be claimed that the NCCT programme gained results,
it was controversial. The divisive programme was phased out and replaced with a more
objective and generally supported grey and blacklisting process, identifying high-risk
and non-cooperative jurisdictions as part of the International Co-operation Review
Group (ICRG) framework.
To date three rounds of mutual evaluation have been conducted and the fourth is
underway.19 In general the assessments have shown that adoption levels of individual
Recommendations differ from country to country. No country is yet fully compliant
with the FATF Recommendations, although the compliance levels of developed
countries are generally higher than those of developing countries, and levels of
compliance are also higher in relation to the more established Recommendations as
compared to newer Recommendations.20
By 2012 the FATF could therefore demonstrate nearly universal country-level
adoption of its standards with increasing levels of national compliance. The system was
therefore sufficiently mature to enable the FATF to move its focus from the adoption of
the Recommendations to the effectiveness of their implementation at a national level.
THE 2013 EFFECTIVENESS ASSESSMENT METHODOLOGY

There are two major components to the revised assessment methodology adopted in
2013 for the peer review of national compliance levels with the 2012 Recommenda-
tions.21 One focuses on a country’s technical compliance with the Recommendations,
and the other on the effectiveness of the country’s AML/CFT system. The technical
compliance component of the new assessment methodology assesses for example
whether the required laws were adopted but not whether they are implemented
effectively. That question is considered by the second component.
The effectiveness component is new to the assessment methodology. In the previous
assessment rounds aspects of effectiveness may have been considered and could have
impacted on a country’s compliance rating. In the new methodology it is a major,
compulsory component.
The effectiveness assessment requires a judgement as to whether, and to what extent,
defined outcomes are being achieved. The assessment is constructed around a hierarchy
of these defined outcomes. At the highest level, the outcome of the AML/CFT system
is defined as follows: ‘Financial systems and the broader economy are protected from
the threats of money laundering and the financing of terrorism and proliferation,
thereby strengthening financial sector integrity and contributing to safety and secur-
ity.’22
Three Intermediate Outcomes are then identified:23
19
Concepcion Verdugo Yepes, Compliance with the AML/CFT International Standard:
Lessons from a Cross-Country Analysis (IMF Working Paper 11/177, 2011).
20
Ibid, 6.
21
Financial Action Task Force supra at n 1.
22
Ibid, para 42.
23
Ibid, para 43.
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1. Policy, coordination and cooperation mitigate the money laundering and financing
of terrorism risks.
2. Proceeds of crime and funds in support of terrorism are prevented from entering
the financial and other sectors or are detected and reported by these sectors.
3. Money laundering threats are detected and disrupted, and criminals are sanctioned
and deprived of illicit proceeds. Terrorist financing threats are detected and
disrupted, terrorists are deprived of resources, and those who finance terrorism
are sanctioned, thereby contributing to the prevention of terrorist acts.
The actual effectiveness assessment focuses primarily on the extent to which a country
meets 11 specified Immediate Outcomes.24 In essence countries that meet these
Immediate Outcomes would be assumed to meet the three Intermediate Outcomes and,
in turn, the High-Level Outcome too.25
While there is much to commend in this set of outcomes it is important to appreciate
that they were identified as the intended outcomes of the FATF standards more than
two decades after the original Recommendations were adopted. There is little evidence
that a strategic outcome-focused approach – or indeed the High-Level Outcome defined
for purposes of this assessment – informed the drafting of the original Recommenda-
tions or the subsequent revisions of the Recommendations. The risk of such an ex post
facto definition of the purpose of the AML/CFT system is a possible misalignment
between the actual Recommendations and the defined outcome. It is submitted that
traces of such misalignment are present.
‘FINANCIAL SYSTEMS AND THE BROADER ECONOMY ARE

PROTECTED’
According to the High-Level Outcome, AML/CFT measures are aimed at protecting
‘financial systems and the broader economy’. While that objective is laudable, the
Recommendations are not designed to protect ‘the broader economy’ and it is not clear
that they are focused on the financial system as a whole.
During the consultation period preceding the 2012 revised Recommendations the
FATF was requested to clarify its understanding of its brief in relation to the economy
24
These are not directly relevant to this chapter. Examples of the Immediate Outcomes
include: ‘Money laundering and terrorist financing risks are understood and, where appropriate,
actions coordinated domestically to combat money laundering and the financing of terrorism and
proliferation’; ‘International cooperation delivers appropriate information, financial intelligence,
and evidence, and facilitates action against criminals and their assets’; ‘Supervisors appropriately
supervise, monitor and regulate financial institutions and DNFBPs for compliance with
AML/CFT requirements commensurate with their risks’; and ‘Financial institutions and
DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks, and
report suspicious transactions’.
25
Financial Action Task Force supra at n 1, para 43.
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as a whole.26 The FATF’s initial 1989 focus was primarily aimed at the banking sector
and bureaux de change. By 2003 it had broadened to a range of financial institutions
and designated non-financial businesses and professions (DNFBPs).27 While some of
its pre-2012 Recommendations and guidance reached broader than regulated financial
services and DNFBs,28 the FATF had not explicitly adopted a brief encompassing the
economy as a whole. Such a broad focus would have required appropriate Recom-
mendations to address money laundering and terrorist financing threats to non-financial
business activities, for example trade-based laundering controls for exporters,29 a
prohibition on the issuing of high denomination bank notes and measures to limit
informal economic activity.30 The revised Recommendations however retained their
limited focus on financial institutions and DNFBPs, not even explicitly broadening the
narrow, defined group of DNFBPs identified in 2003. Countries are however required
to consider extending AML/CFT regulation to other additional types of businesses and
professions that are identified in risk assessments as vulnerable to the risk of money
laundering or terrorist financing abuse.31 Any such counter-measures would only be
national rather than global in nature and may therefore have limited effect and even
negative economic consequences for the country concerned.
Despite not being reflected in the Recommendations the FATF did consider some of
the broader elements. Informal economic activity was for example considered a
sufficient risk factor to be included as a possible contextual matter that assessors should
consider when designing their assessment for a particular jurisdiction.32 These refer-
ences however are peripheral to the assessment and largely optional. It is also possible
that the risk-based approach that was entrenched as mandatory in the 2012 Recom-
mendations33 may lead countries over time to fashion and adopt control measures to
26
Louis de Koker, ‘Aligning Anti-Money Laundering, Combating of Financing of Terror and
Financial Inclusion: Questions to Consider when FATF Standards Are Clarified’ (2011) 14(4)
Journal of Financial Crime 361.
27
Financial Action Task Force, The Forty Recommendations (2003).
28
For pre-2012 Recommendations in this regard see Recommendation 20 on more secure
money management and broadening AML/CFT controls to other high-risk businesses and
Special Recommendations VI on alternative remittance and IX on cash couriers.
29
Ross Delston and Stephen Walls, ‘Reaching beyond Banks: How to Target Trade-Based
Money Laundering and Terrorist Financing Outside the Financial Sector’ (2009) 41(8) Case
Western Reserve Journal of International Law 85; John Zdanowicz, ‘Trade-Based Money
Laundering and Terrorist Financing’ (2009) 5(2) Review of Law and Economics 858; Samuel
McSkimming, ‘Trade-Based Money Laundering: Responding to an Emerging Threat’ (2009)
15(1) Deakin Law Review 37; Clare Sullivan and Evan Smith, Trade-Based Money Laundering:
Risks and Regulatory Responses (Australian Institute of Criminology, 2011). This topic was
deemed sufficiently important for the FATF to issue Best Practices on Trade-Based Money
Laundering (2008), but the guidance was not incorporated into the Recommendations.
30
Louis de Koker supra at n 26.
31
Financial Action Task Force, International Standards on Combating of Money Laundering
and the Financing of Terrorism and Proliferation: The FATF Recommendations (2012),
Recommendations 1 and 10, read with their interpretative notes.
32
Financial Action Task Force supra at n 1, para 8. See also pp 97 and 100 in respect of
potential relevant information that assessors may consider.
33
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mitigate broader money laundering risks that reach beyond the ambit of the current
Recommendations. This is however unlikely in respect of matters such as trade-based
laundering or even the issuing of high denomination bank notes, where solutions
require international cooperation and joint action.
The reach of the High-Level Outcome is therefore not reflected in the Recommenda-
tions themselves, limiting the probability that effective implementation of the Recom-
mendations will result in the protection of financial systems and the broader economy.
‘(C)ONTRIBUTE TO SAFETY AND SECURITY’

The drafters of the High-Level Outcome envisaged that the protection of financial
systems and the broader economy against the threats of money laundering and the
financing of terrorism and proliferation will contribute to safety and security. At first
blush the assumption that underlies that outcome appears uncontroversial. Will safety
and security however necessarily benefit from the protection of financial systems and
the broader economy against these threats?
The answer to a large extent depends on how ‘protection’ is understood in this
context. An indication is found in the second Intermediate Outcome that envisages the
following: ‘Proceeds of crime and funds in support of terrorism are prevented from
entering the financial and other sectors or are detected and reported by these sectors.’
The dilemma is that there is a tension between the strategies of keeping criminal
money out of the system or allowing it into the system to facilitate its identification,
tracking, documentation for law enforcement purposes and eventual seizure and
forfeiture. FATF has generally preferred the former, and this preference is also evident
in the risk-based approach that it embraced.34 The possibility of proceeds of crime or
terrorist financing entering the system is viewed as a risk to the system rather than an
opportunity to strengthen law enforcement through improved surveillance. This means
that the current AML/CFT system is largely exclusionary and designed to keep
undesirable customers and undesirable funds out of the system, rather than inclusionary
and aimed at channelling as many of the financial flows as possible through the
regulated system.35
Exclusion may enhance safety and security where laundering becomes so difficult
that criminals and would-be criminals lose their appetite for crime and turn honest.
There is little indication however that exclusion will not simply aid criminal displace-
ment of money laundering activity.36 Where such displacement results in the channeling
of criminal funds into less visible and less controlled activity, for example trade-based
money laundering, or into the informal or grey economy, the FATF’s exclusion strategy
may actually weaken law enforcement, thereby undermining safety and security. While
34
Louis de Koker, ‘The 2012 Revised FATF Recommendations: Assessing and Mitigating
Mobile Money Integrity Risks within the New Standards Framework’ (2012) 8 Washington
Journal of Law, Technology and Arts 165, 175.
35
Louis de Koker supra at n 26, 367–368.
36
Ian Angell and Dionysios Demetis, ‘Systems Thinking about Anti-Money Laundering:
Considering the Greek Case’ (2005) 8(3) Journal of Money Laundering Control 271, 277.
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the FATF recognizes this danger in relation to low risk financially excluded customers,
it still embraces the exclusionary strategy in relation to higher risk customers – those
whose transactions are often of particular interest to law enforcement.37
There are also more fundamental questions regarding the link between the counter
money laundering strategy of the FATF and the High-Level Outcome. The early
financial crime countermeasures rely heavily on assumptions of causality. Under-
pinning much of the countermeasure strategy is the assumption that the ‘anticipation of
conviction and punishment reduces the loss from offences and thus increases social
welfare by discouraging some offenders’.38 A second assumption is that ‘going after the
money’ provides both a deterrent and punishment for organised criminal groups.39
Taking this further is the linking of money laundering control to the underlying
predicate offence where the ‘ultimate goal of the AML regime is to deter criminals
from laundering monies, and thereby deter them from committing predicate crimes in
the first place’.40 Ultimately this leads to a ‘plausible assumption that as the cost of
laundering goes up, the profits from crime are reduced. If the goal of crime is to
achieve profits, then the inclination is reduced.’41 Collectively these assumptions
underpin most of the FATF standards. The ability to test their validity is unfortunately
reduced by a lack of reliable data, for example data on the scale of the criminal
problem and on criminal behaviour in different countries around the world.
The challenges regarding quantification of proceeds of crime illustrates the data
dilemma. Generally cited IMF statistics arising from a report in the 1990s suggested
that 2–5 per cent of global gross domestic product (GDP) was laundered yearly.42 The
FATF itself tried to measure the value of money laundering at the turn of the century,
but this initiative did not produce tangible results.43 Attempts to quantify the proceeds
of crime are not only complicated by the absence of reliable data but also by the lack
37
Financial Action Task Force, FATF Guidance: Anti-Money Laundering and Terrorist
Financing Measures and Financial Inclusion (FATF, 2011, revised 2013); Financial Action Task
Force, ‘FATF Clarifies Risk-Based Approach: Case-by-Case, Not Wholesale De-risking’ State-
ment (Paris, 23 October 2014) <http://www.fatf-gafi.org/documents/news/rba-and-de-
risking.html>. See also Financial Action Task Force, ‘Drivers for “De-risking” Go Beyond
Anti-Money Laundering / Terrorist Financing’ Statement (Brisbane, 26 June 2015) <http://
www.fatf-gafi.org/topics/fatfrecommendations/documents/derisking-goes-beyond-amlcft.html>.
38
Gary Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76(2) Journal of
Political Economy 169, 204.
39
Ethan Nadelmann, ‘Unlaundering Dirty Money Abroad: U.S. Foreign Policy and Financial
Secrecy Jurisdictions’ (1986) 18(1) University of Miami Inter-American Law Review 33, 34;
Jeffrey Quillen, ‘The International Attack on Money Laundering: European Initiatives’ (1991)
Duke Journal of Comparative and International Law 213–240.
40
Donato Masciandaro, Előd Takáts and Brigitte Unger, Black Finance (Edward Elgar,
2007) 202.
41
Mariano-Florentino Cuellar, ‘The Tenuous Relationship between the Fight against Money
Laundering and the Disruption of Criminal Finance’ (2002) 93(2–3) Journal of Criminal Law
and Criminology 311, 385.
42
Vito Tanzi, Money Laundering and the International Finance System (IMF Working Paper
96/55, 1996).
43
United Nations Office on Drugs and Crime, Estimating Illicit Financial Flows Resulting
from Drug Trafficking and Other Transnational Organized Crimes (2011) 19.
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of a shared theoretical understanding of the AML/CFT framework and its impact on

crime. Various models have been designed since to estimate proceeds of crime, but
estimates remain controversial.44 When these challenges are successfully met it is not
clear how useful the data will be to track the impact of AML/CFT measures on crime.
Many factors – including increasing statutory criminalisation and the impact of
decriminalisation (for example in relation to marijuana) – influence proceeds of crime
patterns, making it very difficult to isolate and assess the impact of the AML/CFT
system.
While there are assumptions and tensions inherent in the High-Level Outcome that
the FATF has defined for AML/CFT systems, there are also some noticeable absences.
No questions are for example being posed regarding the efficiency of the AML/CFT
systems and controls that have been implemented.
EFFICIENCY AND UNINTENDED CONSEQUENCES

The effectiveness enquiry assesses whether an intended objective was achieved and not
whether it was achieved in the most efficient way possible, that is, in ways that
maximise the benefit and minimise the costs (financial and social) of the system. The
FATF is not unaware of the relevance of efficiency. Recommendation 33 for example
requires countries ‘to maintain comprehensive statistics on matters relevant to the
effectiveness and efficiency of their AML/CFT systems’.45
It is submitted that the absence of an appropriate efficiency assessment may be due
to the FATF’s general sensitivity to arguments relating to the costs of implementation
of AML/CFT measures. In the past such costs were often raised by countries and
institutions that were reluctant to implement appropriate controls. In this debate the
FATF generally resorted to pointing out reputational and financial risks involved in
associating with criminal funds and international political risks for countries that
undermined global AML/CFT efforts. The FATF’s black and grey-listing of countries,
its focus on increased regulatory enforcement of AML/CFT compliance obligations and
on an increasing number of criminal prosecutions of money laundering and terrorist
44
See for example Peter Reuter and Edwin M. Truman, Chasing Dirty Money: The Fight
against Money Laundering (Institute for International Economics, 2004); Brigitte Unger, The
Scale and Impacts of Money Laundering (Edward Elgar, 2007) ch 3; John Walker and Brigitte
Unger, ‘Measuring Global Money Laundering: “The Walker Gravity Model”’ (2009) 5(2) Review
of Law and Economics 821.
45
According to the Recommendation these statistics should include statistics on the
suspicious transactions received and disseminated; on money laundering and terrorist financing
investigations, prosecutions and convictions; on property frozen, seized and confiscated; and on
mutual legal assistance or other international requests for cooperation. Despite the use of
‘efficiency’ in Recommendation 33 the examples of statistics that countries are required to keep
appear more focused on effectiveness than efficiency. The list for example does not include
public and private costs of the AML/CFT system. The FATF is however also focused on the
efficiency of its internal organisational and working methods to enhance effectiveness and
efficiency. See for example Financial Action Task Force, Objectives for FATF XXV (2013–2014):
Paper by the Incoming President (2013) 1.
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financing offences increased the risks faced by such countries and institutions. In that
context the cost arguments became less sustainable. These arguments are furthermore
complicated by difficulties with estimating financial and other costs accurately.46
Despite these difficulties financial efficiency should not be removed from the analysis.
Neither should social costs be ignored. For many developing countries with limited
resources, money that is spent on AML/CFT to support global crime combating efforts
may be diverted from social investment and infrastructure expenditure even though the
crime and terrorist risks faced by the country itself may be low.
An enquiry that is only focused on effectiveness may not consider the cost of
over-compliant behaviour as long as the intended outcomes are achieved. A case in
point is the FATF reliance on reporting by financial institutions and DNFBPs of
suspicious transactions. They are required to report suspicious transactions to the
financial intelligence unit.47 It is costly to train employees to identify suspicious
transactions correctly. Even with the appropriate training, institutions lack access to
criminal intelligence that is needed to identify the relevant transactions. Law enforce-
ment may have such intelligence but it is often too sensitive to allow them to share that
with institutions. This decreases the odds of institutions identifying and reporting
relevant transactions. Concerned about regulatory penalties should they fail to identify
a transaction correctly, institutions tend to over-comply48 and report complex and
extraordinary transactions that may not actually involve any criminal funds. This in turn
increases the impact of the reporting obligations on privacy of citizens, leading to the
reporting of a large number of confidential transactions that are actually legitimate.
This flood of useless transaction data may drown financial intelligence units and
decrease their ability to identify and respond to reports of actual criminal transactions.
AML/CFT controls may also have economic impacts, for example by raising cost
barriers for new entrants to the regulated market. Financial institutions and DNFBPs
are required to have appropriate compliance systems and resources to mitigate money
laundering and terrorist financing risks. While existing institutions have been able to
grow their compliance framework as AML/CFT rules expanded, new entrants must
budget to establish a comprehensive system upfront. These cost barriers are increasing
in height as the system develops, and may increasingly impact on competitiveness in
the market.
Financial exclusion is a major social cost. For close on two decades the FATF was
not particularly receptive to arguments that its exclusionary AML/CFT strategy also led
to the exclusion of socially vulnerable people who are not able to prove their identities
to regulated institutions.49 This attitude softened, and in 2011 the FATF issued a
guidance paper (revised in 2013) guiding countries and institutions on ways to align
46
Hans Geiger and Oliver Wuensch, ‘The Fight against Money Laundering: An Economic
Analysis of a Cost–Benefit Paradoxon’ (2007) 10(1) Journal of Money Laundering Control 91;
Milind Sathye, ‘Estimating the Cost of Compliance of AML/CTF for Financial Institutions in
Australia’ 2008 15(4) Journal of Financial Crime 347.
47
Financial Action Task Force supra at n 31, Recommendation 20.
48
Louis de Koker and John Symington, ‘Conservative Corporate Compliance: Reflections
on a Study of Compliance Responses by South African Banks’ (2014) 30(1) Law in Context 228.
49
Louis de Koker supra at n 26, 367–368.
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AML/CFT and financial inclusion.50 It also adopted more appropriate standards

regarding simplified due diligence in lower risk cases and exemptions where risks are
proved to be low.51 These measures are however optional, unlike enhanced risk
measures which are compulsory where risks are assessed as high. In addition, the FATF
has not actively intervened in the systemic closing of accounts of certain businesses and
organisations by financial institutions that fear AML/CFT enforcement risk or that
determine that the risks and compliance costs outweigh the financial benefit to be
gained from maintaining the business relationships. The trend started with correspond-
ent accounts and money service businesses in the early 2000s,52 and with Operation
Choke Point53 was encouraged to extend in the United States to a broader range of
businesses deemed undesirable by the United States Department of Justice. In October
2014 the FATF issued a statement expressing concern about wholescale account
closures by banks, acknowledging that it may increase financial exclusion integrity
risks.54 It stated that the account closures can be the result of various drivers, such as
concerns about profitability, prudential requirements, anxiety after the global financial
crisis, and reputational risk and that it is a misconception to characterise de-risking
exclusively as an AML/CFT issue. The FATF called on financial institutions not to
engage in the wholesale closure of accounts of entire classes of customers but rather to
assess the risks that each customer poses. It also decided to monitor the actions of
banks and to obtain more information about the scale and impact of the problem. Such
statements and calls, although welcomed, have not proved effective to prevent such
account closures or to encourage terminated relationships to be resumed.
It is important to monitor the financial and social costs of AML/CFT as they may
tend to increase over time while the benefit decreases. The ability to identify money
laundering and terrorist financing may also deteriorate as criminals become adept at
avoiding the AML/CFT controls.55 A system may reflect a level of effectiveness but
that level should always be contextualised with reference to the efficiency with which
the outcome is achieved.
50
51
Financial Action Task Force supra at n 31, Recommendation 10, read with its interpret-
ative note.
52
Hennie Bester, Doubell Chamberlain, Louis de Koker, Christine Hougaard, Ryan Short,
Anja Smith and Richard Walker, Implementing FATF Standards in Developing Countries and
Financial Inclusion: Findings and Guidelines (FIRST Initiative, World Bank, 2008) 158–162;
Dahabshiil Transfer Services Ltd v Barclays Bank plc and Harada Ltd and another v Barclays
Bank plc [2013] EWHC 3379 (Ch).
53
See Iain Murray, Operation Choke Point: What It Is and Why It Matters (Competitive
Enterprise Institute, 2014).
54
55
Charles Freeland, ‘How Can Sound Customer Due Diligence Rules Help Prevent the
Misuse of Financial Institutions in the Financing of Terrorism?’ (2002) 4(2) European Journal of
Law Reform 291, 298; Donato Masciandaro, Előd Takáts and Brigitte Unger supra at n 340, 32.
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CONCLUSION
The shift of the effectiveness focus from the FATF as global standard-setter to the
impact of the national AML/CFT system on national crime and crime risk is
commendable. While aspects of the current effectiveness framework can be questioned,
it should be viewed as the first step in a process that will mature over the next years.
The results of the enquiry will inform improvements to the conceptual framework and
should over time also inform the revision of the AML/CFT standards to improve their
effectiveness and, it is hoped, also their efficiency.
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43. AML: maintaining the balance between controlling

serious crime and human rights
M. Michelle Gallant
Anti-money laundering (AML) regulation is arguably a great protector of rights: the

right to be free from the corrosive influence of serious crime, the rights of citizens to
the return of property illegally appropriated by dictators, the freedom to rely on the
financial system without fear that criminal earnings might induce its collapse or the
right of a society to taxation revenues that might otherwise flee jurisdictional
boundaries under the guise of laundered funds. In offering a measure of resistance to
forces that would undermine civil society, the AML strategy champions the broad
shared right to a reasonably stable social order.
Axiomatically, to protect the parameters of civil society,AML regulation must, in its own
right, adhere to established principles of justice. To suppress serious crime by dismissing
rights, fractures the ideal of a civil society and makes those who insist on pursuing the
strategy indistinguishable from the very evils they so vehemently desire to control.
Canvassing a range of jurisdictions, this chapter explores three recurrent themes of
tension between the regulation of criminal finance and rights. The first theme explores
conflicts provoked by the reporting requirements of AML law and concepts of privacy
or confidentiality. The second deals with interferences that emerge from the merging of
the criminal and the civil law, a feature that chiefly relates to the confiscation or
forfeiture elements of AML regulation. The third section investigates conflicts between
the regulation of terrorist finance and rights. The conclusion urges a cautionary
approach to the AML strategy given uncertainty as to its achievements.
1. RIGHTS TO PRIVACY OR CONFIDENTIALITY

AML regulation aims to enhance the transparency of financial transactions, to shed
greater light on the trajectory of funds. This permits the discernment patterns indicative
of links to crime and facilitates timely state intervention. Financial reporting norms,
client identification requirements and the maintenance of records, key attributes of
the regulatory apparatus, increase the visibility of financial activity, generate much
needed financial information and create trails that can be followed, processed and
investigated.
An increase in transparency necessarily intrudes upon privacy. With AML regulation,
information that would otherwise remain within the confines of private relationships
becomes subject to external scrutiny. Financial facilitators collect detailed information
about their clients, sometimes share their suspicions with authorities and otherwise
cause aspects of confidentiality to be lost.
532
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AML: balance between controlling serious crime and human rights 533
The retreat of privacy clashes with the duty of confidentiality owed by financial
facilitators to their customers, the classic duty to keep financial affairs secret.1 While
this privacy norm has a venerable history, it has arguably gently and quietly withered
through years of AML regulation.2
A more pronounced tension between AML regulation and rights occurs in the context
of lawyers. Most jurisdictions acknowledge that the relationship between members of
the legal profession and their clients merits some degree of special recognition.3 The
relationship is sacrosanct in a way that differs from other relationships, devolving
principally from the function that lawyers occupy in a justice system. Unlike other
professionals, lawyers are central to the mechanism of social order, integral parts of the
system through which justice is mediated and determined. They are simultaneously
advocates for individual clients and advocates for the legal apparatus itself, owing
duties to both clients and to the broad machinery of justice. The private character of
their relationships warrants greater deference, the confidences between lawyers and
their clients being paramount to a well-organized society.
AML regulation interferes with the privileged nature of that relationship. Requiring
that lawyers collect information about their clients to possibly relay to the state or
requiring that they report suspicions about the nature of their clients activities abrogates
confidentiality. Lawyers in the United States have resisted regulation given concern that
intrusive disclosures violate the sanctity of the attorney–client relationship.4 Other
jurisdictions, perhaps with reluctance, have brought lawyers directly into the ranks of
money laundering prevention.
Uneasiness exists over the balance between attacks on the financial dimension of
crime and the privileged nature of legal relations. An initial Canadian attempt to impose
AML regulation on lawyers failed.5 A subsequent attempt was blocked by a determin-
ation that some elements of AML law interfere with the independence of legal
1
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 (CA).
2
Some refer to the complete demise of the duty of confidentiality: Michael Levi,
‘Regulating Money Laundering: The Death of Bank Secrecy in the UK’ [1991] Br J Criminology
109; Organisation for Economic Co-operation and Development, The Era of Bank Secrecy Is
Over: The G20/OECD Process Is Delivering Results, 26 October 2011. Others suggest the duty
continues to exhibit modest signs of life: Tara Walsh, ‘The Banker’s Duty of Confidentiality:
Dead or Alive?’ [2010] Edinburgh Student LR 1.
3
See generally, Daniel Fischel, ‘Lawyers and Confidentiality’ [1998] U Chicago L R 1;
James Moliterno and George Harris, Global Issues in Legal Ethics (Thomson West, 2007)
82–93; David Greenwald and Marc Russenberger, Privilege and Confidentiality: An Inter-
national Handbook (Bloomsbury Professional, 2012).
4
American Bar Association, ‘Gatekeeper Regulations on Lawyers’ <http://www.american
bar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_
profession/bank_secrecy_act.html> accessed 5 April 2013. Recent initiatives suggest the United
States’ Senate anticipates bringing lawyers under formal financial reporting rules. The American
Bar Association has created, and continues to advocate for, a voluntary code of best practices for
legal counsel in the context of money laundering prevention.
5
Law Society of British Columbia v Canada [2001] 207 DLR 4th 726; Federation of Law
Societies of Canada v Canada (Attorney General) 6 December 2001 (delivered orally in
chambers); Federation of Law Societies of Canada v Canada (Attorney General) [2002] 207
DLR 4th 740; Federation of Law Societies of Canada and the Law Society of Saskatchewan
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counsel.6 Requirements that legal counsel in France report suspicious financial activity,
arguably the most contentious debate, were not found to violate privacy protections
contained in the European Convention on Human Rights.7 The special quality of
communications with lawyers was acknowledged: ‘… Article 8 protects the confiden-
tiality of all “correspondence” between individuals, it affords strengthened protection to
exchanges between lawyers and their clients. This is justified by the fact that lawyers
are assigned a fundamental role in a democratic society, that of defending litigants.’8
However, the degree of interference was justifiable, necessary and not disproportion-
ate to the underlying aim of shackling serious crime.
2. CRIMINAL LEGAL RIGHTS

A second theme of rights-based concerns evoked by AML regulation might be
categorized as the displacement of criminal legal rights. In its quest to suppress serious
crime, global AML standards authorize modifications to the rules that would ordinarily
accompany an assault on criminal activity.9 Traditionally, a higher order of rights-based
considerations governs laws that apply to criminal matters in contrast to laws that
govern civil or administrative matters. The idea, of course, is that when serious
consequences risk descending upon an individual, the state must comply with elevated
standards of procedural and substantive justice. While the precise content of standards
varies widely amongst states, there is general agreement that criminal matters mandate
more stringent legal protections than matters that are of a civil character.
Criminal legal rights are not uniquely displaced by the creation of specific AML
offences. Similar to any other criminal offence, AML offences tend to operate in
accordance with the conventional legal rules that apply to any criminal legal process.
AML law can tend to distort or extend the conventional element of mens rea, the guilty
mind, by creating offences that rely on blurred distinctions between suspicion,
knowledge or the willing, or unwilling, engagement in money laundering.10 Distortions
[2002] SKQB No 153; Federation of Law Societies of Canada v Canada (Attorney General)
[2002] NSR 2nd 53. See also, M M Gallant, ‘Canada, Crime Control and Co-opting Legal
Counsel: Canvassing the Confidentiality Crisis’ [2003] J Financial Crime 308.
6
Federation of Law Societies of Canada v Canada (Attorney General) [2013] BCCA 147.
The Court determined that the independence of the legal profession was a constitutionally
protected right violated by the AML regime. However, the decision is on appeal to the Supreme
Court of Canada.
7
Michaud v France App No 12323/11 (ECHR, 12 December 2012).
8
Ibid paragraph 118.
9
See, United Nations Convention against Transnational Organized Crime, Article 12 (7),
which provides that states consider ‘the possibility of requiring that an offender demonstrate the
lawful origin of alleged proceeds of crime or other property liable to confiscation …’; Financial
Action Task Force, FATF Recommendations (FATF, 2012). Recommendation 4 provides that
countries consider, in the context of confiscation proceedings, requiring that an offender
demonstrate the lawful origins of the property liable to confiscation.
10
See generally, Janet Ulph, Commercial Fraud: Civil Liability, Human Rights and Money
Laundering (OUP, 2006) 131–152; Robin Booth, Simon Farrell, Guy Bastable and Nicholas Yeo,
Money Laundering Law and Regulation: A Practical Guide (OUP, 2011) 53–74.
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shift the balance of the rights equation, making it easier to impose criminal liability at
the expense of any rights.
More delicate rights considerations arise from laws that apply post-conviction, laws
triggered by a criminal conviction for a money laundering offence or some other
serious crime. Aimed at ensuring that AML fully tackles the financial element of crime,
the thrust of post-conviction rules is to expand the scope of assets liable to confiscation
or forfeiture. Some jurisdictions may realize that expansion by the explicit endorsement
of the civil standard of proof as the standard that governs the confiscation process.11
The potential scope may be increased by reliance on a series of presumptions about the
origins of resources, presumptions that are triggered by the prior conviction.12 In other
jurisdictions, the expansion of liability to confiscation may be expressed as enhanced
reliance on prima facie evidence.13
There is some acknowledgement that post-conviction confiscation may not
adequately respect rights. When AML confiscation regimes render the taking of assets
disproportionate to the underlying offence, potentially capturing some measure of
lawfully acquired property interests, the regime may fail to satisfy the rule of law.14
The taking may violate constitutional norms if it is excessive.15 If the confiscation of
assets can convert into a term of imprisonment, it may trigger the application of a
higher order of rights.16
More worrisome questions about the proper balance between regulating criminal
finance and the rule of law emerge from the contemporary tendency of AML law to
rely on non-conviction based models forfeiture.17 Non-conviction based forfeiture
anticipates the taking of property for an alleged connection to crime in the absence of
any prior criminal conviction. More than merely modifying the rules of a particular
process to facilitate the taking of property post-conviction, non-conviction based
takings dispense with any criminal legal rules. In species, property is liable to be forfeit
for its relation to criminal activity although the criminal allegations need not be proven
in accordance with the dictates that govern the criminal legal process. The models
11
South African confiscation law explicitly rejects any application of any civil legal
attributes to confiscation proceedings. While many national regimes provide for the governance
of the civil standard of proof, the South African regime is much more unequivocal in identifying
confiscation as a civil proceeding. In setting out the framework for confiscation, South African
law specifically provides that confiscation is a civil proceeding, specifically incorporates the
rules of evidence applicable to civil proceedings, pointedly precludes the application of any
criminal rules of evidence, and clearly rejects any rules of construction that would apply in
criminal proceedings: Prevention of Organized Crime Act 121 of 1998 (SA), article 13.
12
Proceeds of Crime Act 2002 (UK) article 10.
13
Prevention of Organized Crime Act 121 of 1988, article 22.
14
R v Waya [2012] UKSC 51.
15
United States v Bajakajian (1998) 524 US 321 (criminal forfeiture); Alexander v United
States (1993) 509 US 062.
16
Welch v UK (1995) 20 EHRR 247.
17
The first hints of global endorsement of the non-conviction based strategy occurred in
2012: Financial Action Task Force, The FATF Recommendations, February 2012, Recommenda-
tion 4. International conventions related to tainted finance do not speak directly to reliance on
non-conviction based confiscation. The revised FATF recommendations mark the first formal
global endorsement. Individual states introduced the strategy much earlier.
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purport to operate within the confines of the civil legal justice mechanisms. As such,
non-conviction based takings mark a radical shift from the criminal law to the civil law,
from criminal proceedings to civil actions.
Post-conviction regulation of criminal finance is widely endorsed. The non-
conviction approach is less common.18 The United States leads in this area, having
operationalized non-conviction based models in the early 1970s. Called forfeiture, or
civil forfeiture, US law permits the civil taking of laundered moneys, sometimes known
as the forfeiture of the proceeds of crime.19 Early versions of US law allowed that
taking to occur upon an extremely low threshold of proof, the equivalent to that
required for the issuance of warrants.20 Legislative changes, in part responsive to
rights-based considerations, altered that threshold to enable assets linked to crime to be
forfeit upon proof to the higher civil standard of a balance of probabilities. A
non-conviction based Australian AML law presents perhaps the most extreme version
of a civil legal model. The law permits the making of unexplained wealth orders.21 The
regime provides that once the state has seized property for alleged connection to crime,
the burden of proof then lies with a property claimant to establish legitimate title.
Under this framework, the civil forfeiture law appears to assume the correctness of the
state’s claim unless the claimant can prove otherwise. This differs widely from the
established nature of civil legal governance. Conventionally, civil actions demand that
anyone who seeks to disrupt the status quo, seeks to disrupt any existing propriety
relationships, carries the initial legal burden to prove their case to the governing civil
standard. This Australian model countenances the placing of that burden on the
claimant and has yet to be tested for its congruence with rights-based norms.22
In discerning whether the US model conforms to constitutional norms, civil
forfeiture has been found to be consistent with the protection against double jeopardy,
classically the protection of the right not to be accused and tried twice for the same
offence.23 There is no doubt that underlying facts of civil forfeiture proceedings relate
to allegations of criminal, as opposed to civil, wrongdoing. AML forfeiture laws, in the
context of the United States and elsewhere, do not contemplate a taking of property
18
Examples of non-conviction based forfeiture include Proceeds of Crime Act 2002 (UK),
Part 5; Prevention of Organized Crime Act 121 of 1998 (SA) Chapter 6; Criminal Property
Forfeiture Act, 2004 (Manitoba).
19
American federal law contains multiple forfeiture provisions related to earnings tainted by
crime; see, Charles Doyle, Crime and Forfeiture, Congressional Research Service Report for
Congress, May 2013, 3–13.
20
The low threshold of proof was one of many criticisms of civil forfeiture regulation. See,
Tamara Piety, ‘Scorched Earth: How the Expansion of Civil Forfeiture Doctrine Has Laid Waste
to Due Process’ (1991) 45 U Miami L R 911; Amy Ronner, ‘Prometheus Unbound: Accepting a
Mythless Concept of Civil In Rem Forfeiture with Double Jeopardy Protection’ (1996) Buffalo L
R 655.
21
Proceeds of Crime Act 2002 (Australia) Part 2-6. Unexplained wealth is the difference
between a person’s wealth and wealth that is lawfully acquired.
22
For a compelling critic, see Anthony Gray, ‘Forfeiture Provisions and the Criminal/Civil
Divide’ (2012) 15 New Crim L R 32 and Anthony Gray, ‘The Compatibility of Unexplained
Wealth Provisions and “Civil” Forfeiture Regimes with Kable’ (2012) 12 QUT L Justice J 18.
23
One Lot Emerald Cut Stones v United States (1972) 409 US 232; United States v One
Assortment of Firearms (1984) 465 US 354; United States v Ursery (1996) 518 US 267.
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consequent upon allegations of conventional civil liability such as breach of some

contractual undertaking. Forfeiture law applies in the context of allegations of criminal
wrongdoing, not tortious or contractual wrongdoing. Despite the underlying criminal
character of the alleged wrong, the similarities of the underlying factual context, and
the prior ruminations in the setting of a criminal prosecution, the subsequent civil
forfeiture action was not barred by the constitutional prohibition against double
jeopardy.
In a similar vein, in denying the application of criminal legal protections to civil
forfeiture actions, jurisprudence from the United Kingdom holds that governance under
the civil standard of proof is consistent with rights.24 Criminal allegations were not
sufficient to displace the civil character of the action. The Supreme Court of Canada, in
speaking to the proper character of civil forfeiture, reached a similar conclusion
although the Court did not engage in the rights-based analysis.25
Somewhat more reassuring in relation to the balance between rights and non-
conviction based forfeiture are determinations that civil forfeiture action cannot be
excessive or otherwise disproportionate. The US constitutional protection against
excessive fines applies to AML forfeitures.26 In addition to enabling the taking of the
proceeds of crime, the US legal model permits the taking of the instruments of crime,
usually understood as the things used in the commission of offences. In that context,
the US action violates constitutional norms in the absence of some proportionate
relationship between the forfeitable property and the underlying alleged criminal
offences. Notably, the protection against excessive fines is not, per se, a criminal legal
right since the prohibition applies to criminal and to civil matters alike.
South Africa has also acknowledged that certain aspects of forfeiture regulation fall
foul of rights-based norms when they are excessive, or disproportionate. To keep the
instrumentalities provisions of South African forfeiture law within constitutional
bounds, the regulatory regime proves sufficiently criminal in character to warrant a
narrow construction.27 In narrowly construing the legislation regime, some reasonably
direct and substantial connection between the taking and the underlying criminal
activity is required.
Lending complexity to the discourse on the tension between AML law’s forfeiture
provisions and rights is the question of what a particular legal regime actually captures.
Instrumentalities provisions are problematic because of their ill-defined scope, the fact
that they usually fail to require some element of proportionality between the underlying
offences and the scope of the taking. A similar tension occurs when legislative regimes
rely on the cumbersome language of the ‘proceeds of crime’. Often self-referentially
defined as ‘the proceeds of crime’, or sometimes ‘assets wrongfully acquired’, the
scope of definitions admits no distinction between the profits of crime and the proceeds
24
Gale and Another v Serious Organized Crime Agency [2011] UKSC 49. The situation may
be entirely different when shifting of standards of proof, or other changes to the rules of classic
criminal proceedings, are relevant to a conviction rather than to the confiscation process:
Sekanina v Austria (1993) 17 EHRR 221; Rushti v Austria (2001) 33 EHRR 56.
25
Chatterjee v Ontario (Attorney General) [2009] 1 SCR 624.
26
Austin v US (1993) 509 US 602.
27
National Director of Public Prosecution v RO Cook Properties [2004] A All SA 491
(SCA).
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of crime. Presumptively, any assault on criminal assets does not contemplate any
forfeiture of property that is of lawful origin. The object, after all, is to forfeit money
derived from criminal activity. Few have heeded any distinctions between the proceeds
of crime and the profits of crime.28 The pervasiveness of the language of the proceeds
of crime greatly risks forfeiture of property that, given that the forfeiture may include
legitimate earnings or legitimately acquired property, fails to respect rights.29
Whether in the context of criminal confiscation or non-conviction forfeitures, AML
regulation obviously interferes with property rights. AML law targets assets. It permits
the temporary seizure and the permanent forfeiture of property. Claims that regulation
unduly interferes with individual rights to property ring rather hollow.30 Rights to
property are never absolute. Most democratic societies permit the ceding of rights to
property when the abrogation is reasonable and justified by some other compelling
public interest. In the context of collisions between property rights and the control of
serious crime, the former is apt to yield. Provided the forfeiture process affords some
measure of due process, some right to be heard or opportunity to contest the taking, the
legitimate public interest in controlling serious crime trumps rights to property.
3. RIGHTS IN THE CONTEXT OF TERRORISM

In its own right, and apart from AML law’s assault on criminal finance, the crime of
terrorism raises a host of rights-based considerations.31 Common modern themes
include strains to the rule of law evoked by reliance on evidence that is not fully
disclosed, the provision of legal counsel and reasonable and unimpeded access to
prisoners, and the legitimate boundaries of interrogation techniques. In the narrower
setting of AML regulation and the pursuit of terrorist finance, regulation intersects
with, and exacerbates, the concerns of privacy and problems inherent in discerning the
legal boundaries between the criminal and the civil law.32
AML regulation emerged in response to profitable serious crime. Its principal
orientation is towards moneys garnered from crime and the re-integration of that money
into the underlying crimes. The revenues of other serious criminal engagements may
fuel terrorist crime. In this respect, terrorist finance fits into the broader regulatory
28
In at least one context, the US Supreme Court held that the term ‘proceeds’ referred to the
net profits of money laundering offences: United States v Santos (2008) 553 US 507.
29
Many regimes do offer a measure of protection for innocent property owners, individuals
whose property may, without their knowledge, have been co-opted into criminal pursuits. For
example, section 17 of the Criminal Forfeiture of Property Act, CCSM c. CC 306 (Manitoba),
provides for orders to protect the interests of property owners, or others having some interest in
property liable to forfeiture, provided they have done all that could reasonably be done in the
circumstances to prevent that property from being used to engage in unlawful activity.
30
Saccoccia v Austria [2008] ECHR 1734.
31
See generally, Aniceto MasFerrer and Clive Walker, Counter-Terrorism, Human Rights
and the Rule of Law: Crossing Legal Boundaries in Defense of the State (Edward Elgar, 2013).
32
In particular, see Christina Eckles, ‘EU Counter-Terrorist Sanctions: The Questionable
Success Story of Criminal Law in Disguise’ in Colin King and Clive Walker (eds), Dirty Assets:
Emerging Issues in the Regulation of Criminal and Terrorist Assets (Ashgate, 2014).
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framework and is amenable to control through the detection, interception and forfeiture
of illegal earnings that would otherwise be invested in the terrorist activity. Terrorism is
not, however, a profit-oriented crime. Earnings of completely lawful origins can be
placed at its disposal. Equally, the resources may be modest, a few hundred dollars
used to purchase the materials for bomb-making coupled with the cost of rail tickets.
Reorienting a regulatory system principally aimed at finding larger sums of money
derived from crime to suit the particularities of terrorist finance is an awkward task.33
To confront the particularities of terrorist finance, a strand of rights-based concern is
reliance on what might be referred to as forms of ‘associational’ liability.34 With
terrorist finance, the assets allegedly targeted for terrorist activity may not, in and of
themselves, hint at their criminal properties. Rather, the hint of criminality may derive
from their association with certain individuals or their association with particular
entities. Modern terrorist finance laws can attach liability to the interception and
temporary or permanent forfeiture on the basis of association with a terrorism cause
without the need to establish some element of a guilty mind, or upon lower, and very
low, evidential thresholds.35 Problems of secrecy, or reliance on undisclosed evidence,
accentuate these difficulties.
Intervention by the United Nations Security Council (UNSC) arguably tipped the
balance precariously towards the wholescale retreat of the rule of law. While the bulk
of AML regulation has its origins in international conventions, the UNSC, in the wake
of September 11, 2001, uniquely and perhaps understandably sought to unilaterally
forge the contents of domestic terrorist finance laws.36 The outcome was the intercep-
tion and seizure of assets allegedly linked to terrorism with no capacity, under national
law, to challenge that taking. Formal consistency with the UNSC edit would deny any
opportunity to contest a decidedly negative consequence, effectively truncating any
sense of a functional rule of law. Fortunately, this kind of taking was repeatedly found
33
There is controversy over the fusing of the AML strategy with terrorist finance: Ibrahim
Warde, The Price of Fear: The Truth Behind the Financial War on Terror (University of
California Press, 2007) 47.
34
Different scholars refer to liability, guilt or some other legal consequence devolving from
associations, however tenuous, with some aspect of terrorism: see, Laura Donohue, ‘Anti-
Terrorist Finance in the United Kingdom and United States’ (2006) 27 Mich J Int’l L 303, 410;
Kent Roach, ‘Must We Trade Rights for Security? The Choice between Smart, Harsh, or
Proportionate Security Strategies in Canada and Britain’ (2006) 27 Cardozo L R 2152,
2173–2185.
35
Ibid Donohue, 406–409.
36
The UNSC action was unprecedented since this organ usually only applies directly to the
actions of individual states. It does not ordinarily purport to dictate the contents of national laws:
see Andrea Bianchi, ‘Assessing the Effectiveness of the UN Security Council’s Anti-Terrorism
Measures: The Quest for Legitimacy and Cohesion’ (2006) 17 Euro J Inter L 881; Gilbert
Guillaume, ‘Terrorism and International Law’ (2004) 53 Int Comp L Q 537; Michelle Gallant,
‘Funds, Rights and Terror: Her Majesty’s Treasury v Mohammed Jabar Ahmed and Others’
(2010) 21(3) King’s L J 569.
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not to accord with fundamental principles of law.37 To maintain the balance between
confronting terrorism and the rule of law, some basic element of procedural justice was
due.
Pursuing terrorism also precariously tips the balance in another way. The introduc-
tion of terrorism into the mix of serious crimes to which the AML strategy applies
alters any risk-based appraisal of the balance between regulation and rights. In
balancing constraints on rights and the pressing societal interest in suppressing terror,
the scale of potential injury factors into the analysis. Although the risk of a single
incident may be low, the results of a single incident may be catastrophic. Drug
trafficking, corruption and tax evasion may very well be serious crimes whose control
requires some modest modification to conventional legal norms. Given its catastrophic
potential, however, terrorism alters the framework of the rule of law analysis. The
degree of risk justifies limitless intrusions into fundamental rights.
4. MAINTAINING THE BALANCE: THE PROBLEM OF

‘SUCCESS’
Disagreement may exist as to whether the ebb and flow of legal challenges to AML
regulation achieves the correct balance between controlling serious criminal activity
and respect for fundamental principles of justice. In a civil society founded upon the
rule of law, clearly attention to rights needs to inform the development and enforcement
of AML law.
Any investigation of the balance between rights and AML regulation must also take
some account of the underlying context of what the AML strategy itself achieves. This
needs to shape the analysis of whether AML regulation accords with conventional
understandings of rights. Rights may be abrogated by competing public interest but it
must be assured that the public interest is, in some measurable manner, furthered by the
strategy.
The success of AML regulation in suppressing serious crime is a difficult matter to
determine. The discourse is littered with claims about the amounts of money regulation
has managed to intercept and confiscate. While the numbers can be impressive, they
say little about whether the strategy controls the underlying crimes. It might be
assumed that removing the resources from any activity necessarily causes its attrition.
Impressive figures conflict with claims that the practice of money laundering continues
to grow.38 The case for more intrusive laws, for fuller global harmonization of AML
laws, for bringing more and more financial actors, entities and monetary networks into
37
Her Majesty’s Treasury v Mohammed Jabar Ahmed and Others [2010] UKSC 2. This
decision occurs as part of a series of challenges involving domestic measures taken pursuant to
the UNSC resolution: Kadi v Council [2009] AC 1225; R v HM Treasury and Other Actions
[2008] UKHL 26; Case T-338/02 SEGI and Others v Council [2004] ECR II-1647; Abousfian
Abdelrazik v Minister of Foreign Affairs and the Attorney General of Canada [2009] FC 580.
38
Liliya Gelemerova, The Anti-Money Laundering System in the Context of Globalization: A
Panopticon Built on Quicksand (Wolf Legal Publishers, 2011) 230–243; Donohue [n 34]
405–406.
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the edifice of controls derives its strength from the fact that money laundering, despite
years of intervention, continues to constitute a significant serious problem.39
Apart from the scale of alleged illegal assets brought into the state treasury, the
achievements of AML regulation are a grossly understudied area of inquiry. Methodo-
logical difficulties inherent in measuring achievement as a function of crime control,
rather than revenue generation, are profound. Clearly there are benefits in detecting,
intercepting and forfeiting money linked to crime. If rights need to cede in that effort,
certainly they should cede to the public interest in crime control rather than any
state-driven interest in revenue collection.
39
Sharman argues that AML regulation continues to expand because it has become a norm
of behaviour, the thing that ‘good’ states do, rather than because the strategy succeeds in
controlling crime: Jason Sharman, The Money Laundry: Regulating Criminal Finance in the
Global Economy (Cornell University Press, 2011) 131–164.
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44. The regulation of the financing of terrorism

Fletcher N. Baldwin
INTRODUCTION
The entrepreneurship of internet technology has given birth to a lush domain. The
fertile technology ground has attracted and cultivates multiple forms, shapes, and sizes
of deviant behaviors and the accompanying laundering facilities to fund the illegal and
nonconforming activities. Technology has provided an enhanced environment for the
development of illicit activities, particularly the activities of the sale of arms, the sale of
drugs and the training of terrorists.
The upscale mall in Nairobi, the train station in China, the twin towers in New York
City, the subway in London – terror knows no borders. It recognizes no statutes or
international agreements. There is no functioning golden rule. The terrorists assume the
trappings of phantoms. The lack of a well-described, clearly defined opponent without
a public schedule makes the defense against terror exceedingly difficult. As a result
terrorists are leaving a profound and indelible mark on the global economy and the
global psychology.
Terror and terrorists are impacting the world economy. They are destabilizing the
global psychological climate. Terrorists need funds. The funds needed for their
frightening enterprises are intimately connected with banks and financial institutions,
with hawala and the underground exchanges.
The illicit funds are deposited into accounts. Creative and skilled money launderers
have discovered and designed numerous ways to legitimize their funds, to launder their
funds. The financial institutions attempt to disassociate themselves from the money
launderers, to identify themselves as innocent owners without knowledge of the
criminal activities from which the funds are derived. Certainly the banks deserve the
opportunity to prove that funds received were legitimate and were not involved in
criminal activity. It is necessary to discover the determined identity of the launderers.
The ability and the political will to restrict the funds available for illegal activities, be
it drugs or arms or trafficking or terror will be paralleled by a decrease in the illegal
activities.
FORFEITURE/CONFISCATION
The government of the United States has awarded itself the ability to forfeit funds
suspected of being involved in or connected to financial crimes, including from the
correspondent accounts of foreign banks. The courts have addressed, and continue to
address, in the affirmative the question of whether banks must forfeit funds when the
funds can be and are traced to illicit activities.
542
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The regulation of the financing of terrorism 543
Any deposit of funds by a foreign bank into an interbank account in the United
States can be targeted. The funds can be forfeited to the government of the United
States.1 It does not matter that the crime took place on foreign soil and the funds were
deposited into foreign banks’ accounts. It does not matter that the foreign banks have
no knowledge of any illegal activities of the banks’ customers.2 The foreign bank from
which the funds were forfeited has no standing in a United States court to contest the
forfeiture.3 In many instances the foreign bank will be foreclosed from defending itself
against the seizure of funds.4 If the foreign bank is a correspondent bank, the foreign
bank has little or no recourse.
The practice of forfeiture has a long history. Forfeiture is a divesture of property
without compensation. Violators were not allowed to keep the fruits of their crime or
the breach of their contracts. Neither were the instrumentalities allowed to remain with
the violator.5 The use of forfeiture was a defense or punishment for crimes – a common
law conviction of felonies and treason.6 The estate of a convicted felon was extin-
guished; a person convicted of a felony forfeited his chattels to the Crown; his lands
reverted by escheat to his lord. Any person convicted of treason forfeited all real and
personal property to the Crown.7
The funding of terrorist activities is a burgeoning industry. The use of forfeiture is
viewed as a partial solution and, hence, continues to be in use. Under present forfeiture
laws the government is authorized to seize funds that are alleged to be the proceeds of
a crime or are connected in some way to a crime. Enacting the use of forfeiture is an
attempt to curb money laundering and prevent criminals from protecting and safeguard-
ing their illegal funds by placing the funds in countries which have either minimum
money laundering regulations or no money laundering controls. Forfeiture statutes
allow the government to initiate a civil in rem proceeding against the property itself.
The property is determined to be the wrongdoer.8
1
C. Anne Pogue, ‘If It Weren’t for the Flip-Side – Can the USA Patriot Act Help the U.S.
Pursue Drug Dealers and Terrorists Overseas without Overstepping Constitutional Boundaries at
Home?’ 14 Cornell J.L. & Pub. Pol’y 477, 493–495 (2005) (discussing the practical difficulties
that arise with the application of the Patriot Act).
2
United States v. Union Bank for Sav. & Inv. (Jordan), 487 F.3d 8, 15–16 (1st Cir. 2007).
3
Id. at 16.
4
Id.
5
John Madinger and Sydney A. Zalopany, Money Laundering: A Guide for Criminal
Investigations 61 (CRC Press 1999).
6
Mark Pieth and Gemma Ailofi, A Comparative Guide to Anti-Money Laundering: A
Critical Analysis of Systems in Singapore, Switzerland, the UK and the USA, 289–291 (Edward
Elgar 2004).
7
Id.
8
See Otto G. Obermaier and Robert G. Morvillo, White Collar Crime: Business and
Regulatory Offenses, 6A.01, at 6A-4 (Law Journal Press, 2 Vols. Rel. 47/13 2002). See also F.
Baldwin and T. DiPerna, ‘The Rule of Law: An Essential Component of the Financial War
against Organized Crime and Terrorism in the Americas,’ 14 Journal of Financial Crime 405
(Emerald, London 2007).
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However, the launderers have developed expertise in the search for loopholes and
proficiency in innovative and creative ways to legitimize the funds. The launderers have
numerous practices and procedures that prevent their assets from being seized.9
AN ACT TO DETER AND PUNISH TERRORISTS ACTS IN THE

UNITED STATES AND AROUND THE WORLD TO ENHANCE LAW
ENFORCEMENT INVESTIGATORY TOOLS, AND FOR OTHER
PURPOSES: THE PATRIOT ACT
The terrorist acts of September 11, 2011 disrupted the nation’s financial and psycho-
logical integrity and stability. Immediate legislation was demanded. The resulting
legislation is known as the Patriot Act. The Patriot Act significantly expanded the
authority of the law enforcement agencies of the United States. The legislation codified
the forfeiture law.10
The Patriot Act has continued to be appropriate and necessary. It consists of a series
of laws that authorize civil and criminal forfeiture of assets of persons and/or property
derived from or used to commit terrorist acts, foreign drug crimes, and foreign crimes
used as predicates for money laundering offenses. Title III addresses international
money laundering and the financing of terrorism. It sets forth the guidelines to
prosecute such actions.11
Title III of the Patriot Act is divided into three subtitles: A, B, and C:
(A) heightens the requirements that international financial institutions must undertake
in order to reverse the effects of money laundering;
(B) increases the record keeping and reporting requirements of financial institutions
in order to increase communication between law enforcement and financial
institutions;
(C) focuses on the smuggling of currency and counterfeit funds.12 Congress adhered
to the belief that many foreign banks provided significant assistance to the money
launderers.13
From its investigations and findings,14 Congress concluded that the efforts of law
enforcement to detect and prevent money laundering were hindered by outmoded and
9
Title III of the USA Patriot Act.
10
18 U.S.C. 1956(c)(7)(b). Section 1956(c)(7)(b) contains the list of foreign crimes that can
be used as predicates for a money laundering offense: public corruption and all crimes of
violence. Thus, the laundering of the proceeds of any offense and the transfer of any funds into
or out of the United States with the intent to promote any such offense is violation of the law.
11
Title III of the USA Patriot Act.
12
Id.
13
Title III of the USA Patriot Act, section 302(a)(2) (‘money laundering, and the defects in
financial transparency on which money launderers rely, are critical to the financing of global
terrorism and the provision of funds for terrorist attacks’).
14
USA Patriot Act, Title III, section 302 (5) & (6).
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inadequate statutory provisions. Investigations, prosecutions, and forfeitures were

handicapped, especially in cases in which the laundering and the terror involved foreign
persons, foreign banks, or foreign countries.15 Any attempt to regulate and control
global money laundering requires procedural tools and weapons specifically designed
and aimed toward establishing countermeasures worldwide.16
As part of the Patriot Act, on October 24, 2001, Congress added an additional
provision to the federal civil forfeiture statute 18 U.S.C. 981(k).17 This statute, as a
procedural tool, formulated rules for forfeiture from interbank accounts held by foreign
banks at banks in the United States. Statue 18 U.S.C. 981(k) states:
For purpose of a forfeiture under this section … , if funds are deposited into an account at a
foreign financial institution, and that foreign financial institution … has an interbank account
in the United States with a covered financial institution … , the funds shall be deemed to
have been deposited into the interbank account in the United States, and any restraining
order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the
covered financial institution, and funds in the interbank account, up to the value of the funds
deposited into the account at the foreign institution … may be restrained, seized, or
arrested.18
Interbank, also called correspondent, accounts are utilized by foreign banks to facilitate
transactions in jurisdictions where the banks do not have a physical presence.19 Many
foreign banks have an increasing need to acquire U.S. currency; hence, the use of such
interbank accounts in the United States has become imperative.20 Many foreign banks
conduct virtually all external transactions to the bank through their United States
interbank accounts.21 As a result, interbank accounts continue to be the money
launderers’ choice. There is no corresponding need to directly establish an account.
Prior to the enactment of the Patriot Act and section 981(k), the U.S. government
could not readily acquire forfeiture of laundered funds in the interbank accounts of
foreign banks.22 The foreign bank was considered to be the owner of all funds in its
interbank account. The foreign bank was entitled to assert an innocent owner defense to
an attempted forfeiture.23 In nearly all cases, the bank would be determined to be
15
USA Patriot Act, Title III, section 302 (9).
16
USA Patriot Act, Title III, section 302 (9).
17
18 U.S.C. 981(k)(4)(A), 984(c)(2)(B). The statute defines an interbank account to be an
account held by one financial institution at another financial institution primarily for the purpose
of facilitating customer transactions.
18
18 U.S.C. 981(k)(1)(A).
19
USA Patriot Act section 319(a), 115 Stat. at 311.12.
20
See generally Minority Staff of S. Permanent Subcomm. on Investigations, 107th Cong.,
Report: Correspondent Banking: A Gateway for Money Laundering, 11–14 (Comm. Print 2001).
21
United States v. Union Bank for Savings & Inv. (Jordan) supra note 3 at 11–13 (1st Cir.
2007), USA Patriot Act, Title III, section 302(a)(6). (Corresponding banking facilities are one of
the banking mechanisms susceptible in some circumstances to manipulation by foreign banks to
permit the laundering of funds by hiding the identity of real parties in interest to financial
transactions.)
22
Id. at 41–42.
23
Id.
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innocent of any criminal wrongdoing and the forfeiture of funds would fail.24 With the
establishment of section 981(k), the government’s civil forfeiture power was expanded
in two significant ways:
1. The law provides that any restraining order, seizure warrant, or arrest warrant in
rem against the funds deposited at the foreign bank may be served on a U.S. bank
holding an interbank account for the foreign bank. The funds in the interbank
account may be restrained, seized, or arrested up to the value of the funds
deposited at the foreign bank.25 Most significantly, the deposit of forfeitable funds
at a foreign bank, rather than the continued existence of forfeitable funds, will
trigger the forfeiture of an equivalent amount of funds from the foreign bank’s
interbank account at a U.S. bank.26 Most significantly, the deposit of forfeitable
funds at a foreign bank, rather than the continued existence of forfeitable funds,
will trigger the forfeiture of an equivalent amount of funds from the foreign
bank’s interbank account at a U.S. bank.27
2. The owner of the funds in an interbank account may contest the forfeiture of
funds.28 However, the foreign depositor, and not the foreign bank that holds the
account, is considered to be the owner of the funds.29 Section 981(k)(4)(b)
defines the owner as the person who owned the funds at the time such funds are
deposited into the foreign financial institution. This section expressly excludes the
foreign financial institution or any other financial institution which may have
acted as an intermediary in the transfer of funds into the interbank account.30 The
foreign bank is not considered to be the owner of the funds unless (a) the basis
for the forfeiture action is wrongdoing committed by the foreign bank or (b) it
establishes, by a preponderance of the evidence, that it had discharged all or part
of its obligation to the depositor of the funds before the seizure occurred.31
24
Id.
25
18 U.S.C. 981(k)(I)(A). (‘For the purpose of a forfeiture under this section or under the
Controlled Substances Act … if funds are deposited into an account at a foreign financial
institution … , and that foreign financial institution … has an interbank account in the United
States with a covered financial institution … , the funds shall be deemed to have been deposited
into the interbank account in the United States, and any restraining order, seizure warrant, or
arrest warrant in rem regarding the funds may be served on the covered financial institutions,
and funds in the interbank account, up to the value of the funds deposited into the account at the
foreign financial institution … may be restrained, seized, or arrested.’)
26
United States v. Union Bank for Sav. & Inv. (Jordan), supra note 2 at 15.
27
Id.
28
Id. (Section 984 provides for the forfeiture of ‘any identical property found in the same
place or account as,’ inter alia, forfeitable ‘funds deposited in an account in a financial
institution,’ 18 U.S.C. 984(a), so long the forfeiture action is commenced within one year of the
underlying offense.)
29
18 U.S.C. 981(k)(3).
30
18 U.S.C. 981(k)(4)(B). (‘Except as provided in clause (ii), the term “owner” – (I) means
the person who was the owner as that term is defined in section 983(d)(6) of the funds that were
deposited into the foreign financial institution … or any financial institution acting as an
intermediary in the transfer of the funds into the interbank account.)
31
Id.
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A foreign bank may not recover any funds seized from its interbank account unless the
aggregate balance in all the accounts of its depositor at the time of seizure is less than
the amount of forfeiture funds originally deposited by the depositor at the foreign
bank.32 Any fluctuations in the amount held by the depositor at the foreign bank as a
result of periodic withdrawals and additional deposits from other sources will not affect
the ability of the United States to seize funds from the foreign bank’s interbank
account. The U.S. government is entitled to seize funds up to the amount equivalent to
what the foreign bank owes to the depositor at the time of the seizure.
In the Union Bank of Jordan,33 the United States Court of Appeal for the First
Circuit affirmed the theory and belief that the Patriot Act legislation has a direct
extraterritorial impact upon foreign banks.34
CYBER TECHNOLOGIES
A primary consequence of the 2001 United Nations Security Council Resolution 137335
was to oblige universal compliance with the main provisions of the 1999 United
Nations International Convention for the Suppression of the Financing of Terrorism.36
Resolution 1373 required all member states to ‘freeze without delay funds and other
financial assets or economic resources of persons who commit, or attempt to commit,
terrorist acts’.37 Prior to the twin towers attack the international community had paid
little attention to any counterterrorism agenda.38 After 9/11 the international community
began with haste to focus on preventing the financing of terrorism. Reducing the threat
32
33
Julian A. Malins, QC: ‘Now the interesting thing about parallel jurisdictions is that they
often decide cases in different ways. If you want a decision which is favorable to a bank, try
England, not the U.S. If you want a decision favorable to an insurance company, try the U.S. and
not England. Why? In England, the banks are extremely generous to and accommodating of
lawyers. As a result, when those lawyers become judges, they are most favorably inclined to
banks. With insurance companies, it is the opposite. English insurers never pay and are dreadful
to their policyholders. As a result, when English lawyers get to become judges and try insurance
cases, the insurance company is in trouble. In the U.S., the situation is exactly reversed. The
U.S. banks are ruthless and horrid, so U.S. judges are always against the bank. But U.S. insurers
and so the judges, when an insurer does actually fight a case, tend to be sympathetic. So, when
acting for the bank, cite English cases and when acting for insurers, cite U.S. cases!’
34
United States v. Union Bank for Sav. & Inv. (Jordan), supra note 2 at 11. See also: F.
Baldwin, ‘The Rule of Law, Terrorism and Countermeasures including the USA Patriot Act
2001,’ 16 Fla. Jo. In’l L 1 (2003).
35
S.C. Res. 1373, U.N. Doc. S/RES/1373 (Sept. 28, 2001).
36
International Convention for the Suppression of the Financing of Terrorism, adopted Dec.
9, 1999, 39 I.L.M., 270, 2178 U.N.T.S. 38349.
37
Press Release, Security Council, SC/7158, ‘Security Council Unanimously Adopts Wide-
Ranging Anti-Terrorism Resolution,’ U.N. Doc. SC 7158 (Sept. 28, 2001).
38
See generally, e.g., ‘George Tenet: At the Center of the Storm CIA’ (2007), interview by
Scott Pelley with George Tenet, 60 Minutes (CBS television broadcast, Apr. 29, 2007), available
at http://www.cbsnews.com/stories/2007/04/25/60minutes/main2728375.html (last visited Jan. 5,
2012).
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of future terrorist attacks assumed priority. Preventive measures against financing terror
in collaboration with the existing money laundering preventative measures have
become the accepted and observed global standards. Countries focused on the
attempted control of the funds of criminals, particularly terrorists, in their goal of
reducing crimes.39
WHAT IS THE IMPACT OF THE PATRIOT ACT ON THE FOREIGN

BANKS?
Foreign banks are faced with a dilemma. Title III grants comprehensive powers to the
U.S. government to prescribe special measures against any foreign financial institution
without any concern for jurisdiction consideration.40 In Union Bank the foreign bank
could not seek recourse from the brothers based on the customer agreements and
guarantees.41 These agreements provided that the brothers would be responsible for all
liabilities which may result from depositing checks in foreign currency in case such
checks are ‘proved to be invalid, counterfeited, or unacceptable for cashing due to any
reason whatsoever’.42 The Bank of New York presented the checks to the issuing banks
for payment. None of the issuing banks sought to reverse payments.43 All applicable
statutory and regulatory time periods for a reversal expired. The credit on the foreign
banks’ interbank account was allowed to become final.44 Neither the customer service
agreements nor the applicable banking laws provided any basis for Union Bank to
recover funds based on the seizures.45 The brothers were determined to be entitled to
the funds.
The cost may be too great for some banks and some countries. Foreign banks may
find themselves, like Union Bank, having to pay out of their own pocket for the
customer’s participation in money laundering and criminal offenses. There would be
little or no possibility of the banks’ recovery. Perhaps it is in the best interest of the
foreign bank to withdraw its business from the United States and instead to increase
business connections with those jurisdictions that are less regulated. The withdrawal
would, however, tend to place the world at the risk of increased terror, to threaten the
global security.
Limiting contact with the financial system of the United States is not practical.
Banks are regulated by the banking laws of the jurisdiction, laws which they are
obliged to uphold. Foreign banks must decide if the difficulty of recovering any U.S.
39
FATF, ‘Money Laundering FAQ,’ available at http://www.fatf-gafi.org/document/29/
03343.en_32250379_32235720_33659613_1_1_1_1.00.html (‘[T]argeting the money laundering
aspect of criminal activity and depriving the criminal of his ill-gotten gains means hitting him
where he is vulnerable. Without a usable profit, the criminal activity will not continue’) (last
visited Dec. 2, 2011).
40
41
Id. at 12–13.
42
Id.
43
Id.
44
Id.
45
Id.
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seizure from their customers calls for the implementation of additional security
measures. The great risk of seizure requires foreign banks to initiate anti-money
laundering programs. The money laundering programs required may be, and often are,
more demanding than the programs of their own jurisdiction. Foreign banking laws
may impose a mandated duty to pay depositors. The laws now limit the ability of
foreign banks to reduce the risk of forfeiture under U.S. law. Importantly, section
391(a) of the Patriot Act provides that after consultation with the U.S. Secretary of
the Treasury, the U.S. Attorney General may terminate a forfeiture proceeding. The
termination would be based on a conflict of law between the United States and the
foreign bank’s home jurisdiction.46 This provision would only apply if the termination
is in the interest of U.S. justice and provided that U.S. national interest is not harmed.47
An alternative solution may lie in the hands of the home country of the foreign bank.
All governments could work together in ensuring that money launderers are punished
and the prosperous industry of international crime is eradicated. The foreign bank’s
home country must seek to eradicate money laundering. The foreign government would
need to initiate a collaborative relationship with the U.S. government, allowing for U.S.
banking laws to be enforced in their country. In addition the home country would
provide protection for its banks whose funds are subject to seizure by waiving all
liability of the bank to foreign depositors in cases of U.S. seized funds to ensure that
the depositor of laundered funds suffers the consequences.
CONCLUSION
Technology has facilitated such extensive global advancement in the funding of crimes,
be it the sale of drugs, the sale of arms, trafficking of children and women or the
production of terror, that state intervention is a necessity.48 It is no longer feasible to
argue that electronic commerce should be allowed to operate unregulated.49 The crimes
and the consequences are global. The responsibility falls upon the individual country to
intervene and impose the necessary criminal sanctions to combat terrorism. The foreign
banks must take advantage of contractual laws in their home jurisdictions and protect
themselves by contract.50 All available options for passing on the loss to the foreign
depositor through forfeiture and alternative measures need to be explored.
46
18 U.S.C. 981(k)(1)(B).
47
Id.
48
S. V. Joga Rao, Law of Cyber Crimes and Information Technology Law, 10 (Wadhwa
Nagpur 2004) and Peter Bergen, Holy War, Inc. (The Free Press 2001).
49
See generally Robert Shaw, ‘Should the Internet be Regulated,’ 2(4) IFO Institute for
Economic Research at the University of Munich 42 (October 2000), available at http://
www.ifo.de/doccidl/forum401-pc1.pdf (last visited Dec. 4, 2011).
50
Cf. Landers v. Heritage Bank, 188 Ga. App. 785, S.E. 2d 353, 355 (Ga. Ct. App. 1988)
(considering whether a bank customer’s ‘signature card [was] effective’ to permit the bank to
debit the customer’s account based on a debit to the bank’s own account); cf. also Freese v.
Regions Bank, N.A., No. A06A2154, 284 Ga. App. 717, 644 S.E. 2d 549, 2007 Ga. App. Lexis
398, at *8 (Ga. Ct. App. Mar. 30, 2007) (noting as a general principle that ‘[t]he UCC permits
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One must ask whether a compliant bank, innocent of wrongdoing, should suffer
sanctions in order to provide the U.S. government with the additional tools needed to
curb international financial crimes.
The United States is committed to pursuing those who provide the funding for
terrorist activities. The pursuit has not significantly limited the threats to the global
economic infrastructure and to the safety and stability of the world community. As
banks have been required to know their customers, countries must take serious steps to
know the fraudsters, those phantom terrorists and funders. Regulators and governments
must join forces and share communications to address the continuing threats.51 With
increased communication, the continuing restrictions on funds, and the forced coming
out of the terrorists, the threats of terror and the terrorists may decline.52
It is important that the U.S. government provides assistance to those countries
needing to close loopholes and those needing to write and implement money laundering
legislation. Governments know their terrorists, their tactics, and their funding sources.
Governments work together, especially in the development of technology expertise and
the protection of records. Governments proceed with caution where legislation might
become a key issue of the regulation drafting.53
parties to a contract of deposit to agree between themselves as to their duties and the legal
consequences which flow therefrom’).
51
After completing a 60-day comprehensive policy review, President Obama appointed a
cyber-security coordinator. The Patriot Act provides the United States one additional weapon
against terrorists in the international community, including terrorism financing through legal and
popular virtual markets and gaming environments. It is with the aid of analysis of most current
typologies, setbacks, and alternatives like those described here that the cyber-security coordina-
tor’s task will be a bit easier, but at what cost to the rule of law?
52
Icelandic Government Information Centre, Icelandic PM Says the British Invocation of
Anti-Terrorism Laws Is a Hostile Measure, www.iceland.org (Oct. 9, 2008), available at
http:www.iceland.org/info/iceland-crisis/timeline/nr/6411 (last visited Jan. 2, 2012).
53
C. Lewis, ‘Don’t Overlook Human Rights Risks when Negotiating and Drafting Inter-
national Commercial Transaction Agreements,’ 42(3) Section of International Law American Bar
Assoc. (2013).
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PART VIII
ENFORCEMENT AND CONTROL
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45. The traditional criminal justice system: its efficacy

in dealing with financial and economically
motivated crime
David Fitzpatrick
INTRODUCTION
By the traditional criminal justice system the following is adopted as a simple
description: the criminal justice system in England and Wales at the day of writing, in
its substantive, procedural and evidential components. By financial and economically
motivated crime, it is presumed that the crimes go beyond simple theft and robbery and
simple instances of deception employed to dishonestly appropriate property or services,
for example, passing a dud cheque. If efficacy is measured by its deterrent effect then
the system plainly fails, given the extent to which fraud of some kind is encountered in
the United Kingdom’s economy.1 If efficacy is measured by the system’s ability to
deliver swift, timely justice to the victim, again it is failing, as will be seen below.
There are several reasons why the system cannot deliver the product with which it
would satisfy society. To identify and explain the problems this chapter is divided into
two parts: Part One, a simplified history of the common law as it has developed to deal
with fraud; Part Two, the way ahead, a review of what may be done to improve the
system.
The Fraud Zoo
Unless the wrongdoer employs a simple and direct misappropriation of property, he

will need to employ deception of some kind upon the victim. Deception practised to
dishonestly appropriate economic assets from the victim is commonly characterised as
“fraud”, a word without the need of a precise definition. Fraud is usually only so
described if the offence is not petty, and the term is also employed for crimes that are
repeated, or are the result of a degree of planning or a scheme. Practitioners and
academics recognise many different types of fraud, but still fraud within the simple
description just given – investment fraud, banking fraud, insurance fraud, tax fraud,
social security fraud and cyber fraud – come to mind without completing the
taxonomy.2
1
The National Fraud Authority’s publication, the Annual Fraud Indicator, published in June
2013, estimated the fraud loss to the United Kingdom at £73 billion per annum.
2
See the chapter headings in Arlidge and Parry on Fraud, by A Arlidge, A Milne and P
Sprenger, fourth edition, Sweet & Maxwell, 2013.
553
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This chapter will focus upon fraud committed outside any specific regulated
environment. In the United Kingdom it is likely that any fraud committed within a
regulated environment will, initially at least, be dealt with by the specific regulator,
which will probably employ any investigative tools available in that regulated sphere.
The regulator may prosecute, if that is determined to be the proper solution, using
crimes applicable to that regulated activity, which are so designed for ease of proof.
The actus reus and mens rea may be more widely cast than within the traditional
criminal law.3
PART ONE
Fraud in England and Wales
The common law of England and Wales dealt swiftly and surely with simple economic
crimes. What is now described as theft, robbery or forgery were felonies, and a
convicted felon faced the possibility of the death penalty. Fraud, as described above,
was not a crime: if a person was deceived into parting with his money more fool he.
This is somewhat surprising, but it should be understood that commerce, in the early
middle ages and until the middle of the 19th century, was underpinned by the use of the
bond, a written promise to pay a fixed sum in the event of a failure to perform the
terms set out on the bond, which was signed by the promisor and witnessed. The
common law courts enforced such bonds efficiently and the debtor faced prison if he
could not meet the judgment for the common action for debt on the bond.4
The common law, sure and swift, was also harsh to the point of savagery. It had one
redeeming feature: all serious crime, all felonies, would be prosecuted before a jury,
where the prosecution carried the burden of proving its case beyond reasonable doubt,
unanimously, in the minds of twelve men. The system survived in its essentials until the
reforms of the Victorian era. It retained several rugged and simple features well into
modern times: it was only after an enactment in 1898 that the accused was permitted to
give evidence in his own defence.5
Procedurally, the modern criminal justice system started with the Metropolitan Police
Act 1839, and with it the creation of a disciplined, professional body of investigators.
The law relating to the conduct of interviews and how investigators should act to secure
admissions or confessions that would be accepted by the court was confused for some
time and led eventually to the Judges’ Rules, in 1912, revised in 1965.6 The whole
process of investigation was brought within a comprehensive, principled system by the
3
Taking investment fraud as an example, beyond the Theft Act 1968, Part 7 of the Financial
Services Act 2012 creates a set of offences of wider scope than for dealing with simple
misappropriation.
4
See An Introduction to English Legal History, by JH Parker, fourth edition, Butterworths,
2002, at pages 323 to 327.
5
See the Criminal Evidence Act 1898, section 1(1).
6
The Rules were issued by the judges of the King’s Bench to give the English police
guidance after the Home Secretary had requested such guidance.
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The traditional criminal justice system: its efficacy 555
Police and Criminal Evidence Act 1983 (PACE) and the detailed codes made
thereunder, which remain in place today.
Comprehensive legal assistance was not provided to those without funds until 1949,
and thereafter legal aid became available to provide any accused with the means to
obtain a solicitor upon his arrest and counsel to represent him at trial for any serious
offence, that is, in cases tried before the Assizes and Quarter Sessions, which became
the Crown Court in 1972.7 Until the Criminal Justice and Public Order Act 1994 came
into force, upon arrest, the best advice a suspect could receive was to say nothing,
unless he possessed conveniently available evidence to demonstrate that he was
innocent. Before the 1994 Act the accused, at trial, could put the Crown to strict proof
without fear of judicial comment upon, or the jury being invited to draw any adverse
inference from, his failure to answer questions upon interview under caution and
refraining from giving evidence.8
Regarding the substantive criminal as it contemplated dishonesty, all types of theft,
including much fraud as described, was bundled together in the Larceny Acts,
culminating in the 1916 Act, which simplified what had existed before. A reasoned and
comprehensive code was eventually adopted with the Theft Act of 1968.9 That Act
however failed to provide the means to deal with dishonest activity carried on over a
period of time, which activity could be encompassed by one charge.10 Such means
existed with the common law offence of conspiracy to defraud.
The criminal justice system had thus developed in the modern era in a manner which
was considerably fairer to the accused, taken overall, in procedural, evidential and
substantive features. As the accused’s right to silence was maintained from arrest to
verdict, his lawyers did not need great forensic skill to defend a man without a positive
defence. Upon conviction even for a serious fraud the accused did not face a
particularly harsh penalty and, to round matters off, recovery of the proceeds of the
accused crime would be possible in the criminal courts only in the very simplest of
cases.11
It is a truism worth repeating that there is no such thing as a simple fraud. Anyone
with a mind to scheme in a dishonest fashion can be expected to apply a little thought
to distance himself from the victim, physically and evidentially. The perpetrator would
7
The Poor Prisoners Defence Act 1907 had made a limited provision for legal assistance to
the poor. The Legal Aid and Advice Act 1949 provided people unable to pay with free legal aid.
The Crown Court was established under the Courts Act 1971, replacing the Courts of Assize and
Quarter Sessions.
8
The Criminal Justice and Public Order Act 1994 received Royal assent on 3 November
1994.
9
All offences under the 1968 Act (other than for taking a vehicle without consent) require
proof of “dishonesty”: there was no corresponding mens rea under the various larceny Acts,
where the requisite intention varied from crime to crime.
10
This is a consequence of the need to avoid duplicity in the drafting of a charge: see the
Indictment Rules 1971, which forbid an allegation to be made of more than one offence in any
one count on the indictment.
11
The court has power to make restitution orders under section 148 of the Power of the
Criminal Courts Act (Sentencing) 2000. Such orders should only be made in the plainest of
cases.
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be likely to use a company as a cover for his identity and as an evidential hurdle for the
prosecution to overcome. Correspondingly, anything other than a simple fraud is
difficult and time consuming to investigate and to prove in a court of law to a jury of
average intelligence.
It became apparent in the last quarter of the 20th century that there were grave
problems with the fraud trial process.12 Some of the difficulties were judicial creations.
Appellate courts and law reformers failed to keep in mind an obvious criterion by
which their rulings needed to be tested: could a jury understand the refinements that the
judiciary and reformers placed upon the law? It is also questionable whether the
authors of any of the substantive, procedural and evidential changes that have been
rolled out in the last 40 years fully recognised the capabilities and resources of those
who would have to work within the system.13
Two examples are offered of judicial decisions, the consequence of which were not
fully realised, which have given rise to difficulty. In 1966, the House of Lords, in Tesco
Supermarkets Ltd v Nattrass, adopted the principle of identification, whereby a
corporation could not be convicted of an offence of any moral turpitude, including
dishonesty, for acts of its officers or employees committed in the course of their duties
or employment other than where it could be shown that such acts were committed with
the consent or connivance of the corporation’s controlling mind. In practice it will be
rare for the prosecutor to find proof at board level of dishonesty.14 In 1982, in the
Queen v Ghosh, the House of Lords endorsed a definition of dishonesty that may be
beyond the understanding of juries:
In determining whether the prosecution has proved the defendant has acted dishonestly the
jury must first of all decide whether according to the ordinary standards of reasonable and
honest people what was done was dishonest. If it was not dishonest by these standards, that
is an end to the matter and the prosecution fails. If it was dishonest by those standards then
the jury must consider whether the defendant himself must have realised that what he was
doing was by these standards dishonest.15
It is difficult to apply this principle to commercial situations with which the common
man is not familiar.
In 1968, in the Court of Appeal, Lord Denning set out the law relating to disclosure:
the prosecution should provide the defence with the previous convictions of the
witnesses the Crown proposed to call and the names and addresses of witnesses it did
not propose to call, but who had been interviewed beforehand.16 Disclosure could be
accomplished in most cases by a simple exchange of letters. The following 30 years
12
Consultation followed, leading to The Fraud Trials Committee Report, the “Roskill
Report”, which was published in January 1986.
13
The system appears to demand that the fraud prosecutor make good bricks with little
straw. Under the Criminal Procedure Rules, under the active management of the trial judge given
by rule 3.5, the prosecutor may be forced to trim the prosecution case to suit, lighten the
indictment and/or reduce the number of witnesses.
14
[1972] AC 153.
15
[1982] QB 1053 at 1064.
16
Dallison v Caffrey [1965] 1 QB 378.
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saw the authorities struggle with Irish republican terrorism, using electronic surveil-
lance and covert investigation, and where investigators employed advanced scientific
forensic techniques for the first time. The rules of this new game were not clear and
could not be easily accommodated by the usual disclosure. In a series of decisions that
culminated in the Queen v Keane, the judiciary created a new jurisprudence.17 It was
necessary to disclose any material that might weaken the prosecution case or might
strengthen the defence, however remote the possibility of such effect. The conse-
quences of any serious failure to disclose was the quashing of a conviction. The impact
of the enlarged disclosure obligations was considerable and rapidly felt. A great part of
the investigative resource was sucked in. Fraud trials were particularly badly affected,
and this was before the electronic revolution gave rise to massive data storage on so
many devices encountered in a typical commercial fraud investigation.
Two major changes were needed, and as a matter of some urgency: some means of
narrowing the issues in a fraud trial were necessary and there was a related need to rein
in the disclosure process. Section 2 of the Criminal Justice Act 1987 gave the Serious
Fraud Office, the SFO, the newly created prosecuting authority concerned with the
most serious frauds, the power to call upon any person to produce specified material,
furnish information and/or to submit to interview.18 The provision anticipated an
interview of the suspect under compulsion, but which could not be used as original
evidence by the prosecutor. It might be referred to at trial if the interviewee gave
evidence which contradicted what he had said in the interview. Section 2 did not long
survive as a useful tool. It fell foul of human rights obligations in the European Court
of Human Rights.19 There followed two enactments which have gone some distance
towards providing the means to surface the issues in dispute before trial and curtailing
unwarranted disclosure. The Criminal Justice and Public Order Act 1994 set aside the
accused’s right to silence.20 Section 34 of the Act permits the judge at trial to comment
upon, and the jury to draw adverse inference from, the failure of the accused, when he
was interviewed or charged after being cautioned, to mention any fact relied upon by
the defence which the accused, in the circumstances existing at the time, could
reasonably have been expected to mention. Section 35 of the Act permits the judge to
comment upon, and the jury to draw an adverse inference from, the failure of the
defendant to give evidence at trial. The Criminal Procedure and Investigations Act
1996, Part II, empowered the Secretary of State to prepare codes of practice covering
criminal investigations in England and Wales. Thus was introduced the Criminal
Procedure Rules, whereby trial management, including a detailed pre-trial process, and
criminal procedure generally, would be the subject of court control, including the
17
[1994] 1 WLR 746.
18
This was the effect of section 2(8). Otherwise, the subject of a section 2 notice faced
criminal sanction if he failed to furnish the information, documents or submit to interview. Such
an interview might be conducted even after a person had been charged, see the Queen v Director
of the SFO ex parte Smith [1993] AC 1.
19
See Saunders v the UK (1997) EHCR 313 and the Attorney General’s guidance that
followed, which precluded the use of the record of interview in evidence.
20
The “right to silence” is a misnomer. It comprises a number of immunities, which apply in
different situations. See Lord Musthill in the Queen v Director of the SFO ex parte Smith [1993]
AC 27 at pages 30 to 31.
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process of disclosure.21 The process anticipates that, before trial, issues between the
prosecution and defence will be clearly identified, as a part of which process the
defence are obliged to file a written statement of defence, describing any dispute with
the prosecution evidence, the basis of such dispute and the underlying reasoning.22
The pendulum has continued to swing away from the defendant. The Fraud Act 2006
saw the introduction of simple, flexible fraud offences.23 They are also inchoate, in that
they do not require the demonstration of any deception in the mind of the victim.24 As
a safety first, the common law offence of conspiracy to defraud has been retained,
despite the difficulties that continue to attend upon its use.
PART TWO
The Way Ahead
A symptom of the continuing shortcomings of the criminal justice system in its

response to serious fraud may be the absence of any fraud prosecution in the United
Kingdom that comes out of the banking crisis precipitated by the sub-prime scandal in
the United States.25 The Director of the SFO has acknowledged that there have been no
prosecutions of bankers as a direct result of the sub-prime crisis. His answer is that his
office follows evidence and that insufficient has been available for them to proceed.
The history of major fraud prosecution in England and Wales over the last 30 years
presents a battlefield littered with failed prosecutions.26 Somehow, English investigators
and prosecutors have proved unable to consistently bring to court successful prosecu-
tions in major cases. In contrast, across the Atlantic, United States’ prosecutors have
21
Section 3 of the Criminal Procedure and Investigations Act 1996, “CPIA 1996”, describes
the statutory disclosure test, as the Act has been subsequently amended. The prosecutor is under
a duty to disclose “to the accused any prosecution material which has not been previously
disclosed to the accused and which might reasonably be considered capable of undermining the
case for the prosecution or of assisting the defence”. It is worth noting that this obligation does
not apply to neutral material, nor to material which might strengthen the Crown case.
22
This is a remarkable change. Under section 5 of the CPIA 1996 the defence must serve a
defence statement within 14 days of the prosecution completing its initial disclosure.
23
The three basic fraud offences set out in sections 1 to 4 cover a wide range of activity:
false representations, failure to disclose information, and an abuse of position.
24
For offences of obtaining property or pecuniary advantage by deception under the Theft
Act 1968 it was necessary for the prosecutor to lead evidence of the effect of the deception on
the mind of the victim, which may be difficult.
25
This was confirmed by the Director of the Serious Fraud Office, David Green QC, when
he was interviewed on the radio programme Law in Action by Joshua Rosenberg, BBC Radio
Four, 8 March 2014.
26
The Blue Arrows trial is regarded by commentators as the start of the decline. It was a
“costly disaster” in 1992 and is said to have led to a loss of confidence in the Serious Fraud
Office which even today daunts prosecutors. See Corporate Crime, by Shelley Horan, Blooms-
bury Professional, 2011, paragraphs 8.08 to 8.11 and the Queen v Cohen (1992) 142 NLJ 1267.
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brought to book frauds involving major players in the financial services industry.27 It is
notable that the United Kingdom has been reluctant to adopt those measures which
appear to give American prosecutors their edge.
The United States’ prosecution process, compared to its English counterpart, is truly
fearsome. The power under the hood comes in no small part from the offence
provisions known as RICO.28 Conviction of a RICO offence (which will be available in
any fraud perpetrated by more than one person through a series of related acts) means,
for a middle-aged professional, the equivalent of a life sentence. The threat of such a
prosecution readily generates prosecution witnesses who will plead to a lesser
alternative charge to become part of the prosecution case. The defendant in the United
States is under the same pressure to plead guilty, at least to a lesser offence, as part of
a comprehensive plea bargain, including any related civil claim and restitution. Another
highly significant factor in the United States is that corporations are, in most
circumstances of fraud, vicariously liable for criminal acts committed by their officers
or employees acting in the course of their employment.29 Thus, corporations have every
incentive to plead and cooperate to the full, implicating their former controllers, when
they are found to have committed an offence.
Powers of investigation are not the answer in the United States: the compelled
deponent takes an “immunity bath”.30 Less dramatic, but of no little importance, are the
tools to secure the testimony of a witness. In the United States the investigator has legal
tools which are unavailable to the English police. It is a serious offence to tell a
deliberate lie to a police officer or federal agent investigating a crime.31 The
endorsement on the pro-forma English witness statement presently employed offers
what is an empty threat.32 In practice, a witness can readily “withdraw” from his
obligation to give testimony to the matters described therein. Prosecutors in England
and Wales are, quite naturally, slow to call a witness they know has “gone bent”. There
27
In the 1980s the Office of the United States Attorney in New York achieved notable
success in prosecuting major figures in the financial services industry for offences of dishonesty,
including Ivan Boesky, the leading arbitrageur, and the inventor of the junk bond, Michael
Milken.
28
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as
“RICO”, Chapter 96 Title 18 of the United States Code.
29
This is an oversimplification: whether a corporation may be convicted of an offence
requiring proof of knowledge varies throughout the United States’ jurisdictions at state and
federal level. See United States v Bank of New England (1987) 821 F2d 844. See also Corporate
Criminal Liability (2002) 79(2) American Criminal Law Review.
30
See paragraphs 10.1 to 10.07 of Grand Jury Practice, by Howard Goldstein, Law Journal
Press, 2013.
31
The federal criminal provision which contemplates the making of false statements is
section 1001 of Title 18 of the United States court. It is widely employed and may catch a
denial. It carries a penalty of up to five years’ imprisonment. There are similar provisions in state
laws, and a wide jurisprudence of offences of obstructing justice.
32
Section 89 of the Criminal Justice Act 1967. It is an offence to wilfully make a statement
material to proceedings that a person knows to be false or does not believe to be true, which
carries a penalty of up to two years’ imprisonment. If a reluctant witness is called it is not
difficult to deliberately avoid, evade or confuse. As a last resort it is sometimes alleged that the
witness was somehow intimidated by the taker into falsehood.
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is no means of buttressing testimony beforehand, as there is in the United States, where

the witness may be taken before an investigating grand jury. An American investigator
also has provision to arrest and detain individuals who are material witnesses who
might otherwise abscond.33
After their success using telephone taps against organised crime in the United States,
investigators have increasingly used electronic surveillance in major commercial crime
investigations.34 In England and Wales telephone interception may be employed, but
only to gather intelligence.35 Use of such devices to make a case allows the investigator
to be proactive. In England and Wales such a situation is rare: the police and the
Serious Fraud Office typically act on complaint. Given the impact that is already being
felt from cybercrime in the United Kingdom, it is difficult to see how the use of
telephone interception as an investigative tool to produce admissible evidence can be
resisted.
Any renewed commitment to act against fraud must ensure the adoption of a
sentencing regime where lengthy prison sentences flow from involvement in serious
fraud involving large sums. Sentences for fraud in England and Wales should be
consistent and within the guidelines that have been determined by the Sentencing
Council.36 Whatever tariff is determined from time to time it is a nominal tariff. The
parole and release system will often markedly reduce the period of incarceration for a
person sentenced in respect of any serious financial crime. If the means to evidence is
denied, as explained, or sentences are short, where is the answer to be found? The
Director of the SFO, when taxed on the matter of why effective prosecutions for fraud
were not being consistently achieved in the United Kingdom, pointed to a possible
solution. If section 7 of the Bribery Act 2010 were amended to include financial crimes
committed by the officers, agents or employees of a British company in the course of
their duties or employment, the company would be liable, as is the situation in the
making or offering of bribes. The company could avoid liability if it could demonstrate
that it had taken all reasonable steps to deter or prevent such activity.37 This must be an
ingredient of future reform: companies would police themselves, as with bribery and as
with the prevention of money laundering.
33
The federal material witness provision is the offence created in Title 18 USC 3144. It is
employed as a power to detain material witnesses to ensure their testimony before a criminal
trial or a grand jury. There are state provisions which are equivalent.
34
See Forbes Magazine 5/21/13: “Once reserved for drug crimes wiretapping takes centre
stage in white-collar prosecutions”, an article which details the employment of wiretaps in
insider dealing investigations, in particular, the investigation of the Wall Street dealer Raj
Rajaratnam.
35
See the Regulation of Investigatory Powers Act 2000, commonly referred to as “RIPA”.
Note that it is forbidden to refer to telephone interception in evidence.
36
See the website of the Sentencing Council, www.sentencingcouncil.org.uk. On January
2014 it published sentencing guidelines for corporate fraud as part of an exercise which finally
published guidelines for all types of fraud in May 2014.
37
Law in Action, BBC Radio 4, 8 March 2014.
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At the same time, the Director of the SFO commented favourably on the availability
to the prosecution of the “Deferred Prosecution Agreement”, a tool which had only just
become available, and again following similar American practice.38 A company might
avoid prosecution for wrongdoing if it had discovered this as having been carried out
by its officers or employees, but only where the company fully acquainted the
authorities with what had happened, cooperated fully in any investigation and made
sufficient restitution. The Director stressed that such agreements were useful, but they
were not a panacea.
Given the difficulties associated with prosecuting fraud and the potential for such
investigations for sucking in resources there must be a good argument for abandoning
criminal prosecution as the primary doctrine and concentrating at the outset on the civil
recovery of the proceeds of wrongdoing. This course of action has been possible since
the enactment of the Proceeds of Crime Act 2002. It is possible to pursue the proceeds
of criminal activity in the absence of a prosecution on a civil basis, with a
correspondingly lower standard of proof, on the balance of probabilities.39 Procedur-
ally, such recovery is also far less demanding than the criminal process, such as the
drafting of an indictment to meet extensive and continuous wrongdoing. Such a civil
action does not require rigorous particulars, nor the clear identification of the criminal
activity out of which the monies have flowed.40 The jurisprudence continues to
develop. What restricts the evolution of civil recovery as a major feature of society’s
response to fraud is constitutional, the degree to which it can be permitted as a first
choice, as an alternative to prosecution.41
The Chief Justice has renewed calls for serious fraud to be tried before a judge alone
or with professional assessors.42 Given the experience of Hong Kong, trial of fraud by
a judge sitting alone does not remove all the problems, but it does make the trial shorter
and more manageable.43 It is the length of the trial that continues to cause concern;
juries may forget evidence or possibly become truculent. The law permits trial by a
judge alone in England and Wales, but only in circumstances where it is reasonable to
fear that a jury would be interfered with.44 Change will be difficult to achieve. The Bar
has done an excellent job of persuading the public in England and Wales of the benefits
38
Ibid.
39
See Part 5 of the Proceeds of Crime Act 2002, “POCA”.
40
But no other civil claimant has such wide investigatory powers, even available before
action. See Part 8 of POCA.
41
The wide discretion to use POCA given to the National Crime Agency is curbed by
guidelines issued by the Attorney General: see Asset Recovery: Prosecutors Guidelines,
published in 2009.
42
The Lord Chief Justice put this forward in his speech to Justice on 3 March 2014. See
Chief Justice helps politicians grasp hot potato, The Guardian, 4 March 2014.
43
The District Court in Hong Kong offers trial with judge alone. Its sentencing powers are
limited to seven years’ imprisonment, which corresponds to frauds involving tens of millions of
US$. Massive frauds are dealt with within the High Court sitting with a jury. Hong Kong has all
of the United Kingdom’s problems and more, as there have been no reforms regarding disclosure
or the right to silence.
44
See section 44 of the Criminal Justice Act 2003.
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of jury trial and the evils of any alternative. Austerity may compel the Bar to a common
sense view. Surely, the judge and a small number of professionally qualified lay
assessors should be enough to ensure that a fair and just determination is arrived at,
particularly if they are required to give reasons for their determinations which can be
scrutinised by an appeal court?
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46. The management of complex fraud cases

David Kirk
Ever since Lord Roskill published his Fraud Trials Committee report in 1986 there has
been a lively debate about the best methods of managing the investigation, prosecution
and trial of complex fraud cases. The Criminal Justice Act 1987 adopted some of the
recommendations of the Roskill report, including the setting up, in 1988, of the Serious
Fraud Office (‘SFO’) which could both investigate and prosecute. It was given a range
of powers distinct from other law enforcement, including assertive investigatory tools,
transfer provisions and preparatory hearings.1 Other recommendations, principally a
Fraud Trials Tribunal to try complex fraud cases in place of a jury, were put on hold.2
The significance of the joint investigation and prosecution powers granted to the SFO
must be seen in the context of the structure adopted in setting up the Crown
Prosecution Service (‘CPS’) two years previously,3 the cornerstone of which was a
strict separation of powers between police and prosecutor. Other fraud prosecutors,
notably the Financial Conduct Authority (‘FCA’) and the Competition and Markets
Authority (‘CMA’), also have investigation and prosecution powers, while the fraud
prosecutions conducted by the Central Fraud Group in the CPS maintain the separation
of powers which underscores the formation of the CPS. The advantages and disadvan-
tages of the respective systems have given rise to some comment from time to time, but
it is fair to say that the differences have not created significant legal problems over the
years. In 2010 there was discussion at the instigation of the Home Office about setting
up a single fraud prosecutor within the CPS which would prosecute all significant fraud
cases, with the police conducting the investigations, in place of what was referred to as
‘the alphabet soup’ of fraud prosecutors. This plan was abandoned, but remains an
option for future legislation.4
In this Chapter, I will outline some of the main issues that impact on the effective
management of the investigation and prosecution of complex fraud cases, against the
background of the different structures of UK fraud law enforcement. The headline
practical issues include: planning a case strategy; evidence management (evidence
gathering, document management); disclosure; witness and suspect interviews; confis-
cation and compensation; decision time (evidence review, legal review, prosecution/
charging decision); alternative case resolution: making decisions about pursuing
1
Sections 2, 4 and 7 of the 1987 Act.
2
Section 43 Criminal Justice Act 2003 contains a provision for the prosecution to elect for
the trial of a fraud case to be conducted without a jury. Although the provision reached the
statute book, it has failed to get the required affirmative resolution from both Houses of
Parliament that would implement it.
3
The Prosecution of Offences Act 1985.
4
See, for example, a Fraud Advisory Panel paper: ‘Roskill Revisited: is there a case for a
unified fraud prosecution office?’ M Raphael, J Benstead, E Porter and R Stow. March 2010.
563
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alternative remedies;5 judicial management (court listing, engaging with the trial judge
at plea and case management, and other preliminary/preparatory, hearings). The
over-arching case management issue, however, if a trial is the only option, is trying to
pour a quart into a pint pot: constructing a case out of the mountains of available
material in a complex fraud allegation that the trial judge will accept is manageable and
capable of being tried by a jury. Achieving a manageable trial, which reflects the true
criminality of the conduct alleged, includes all the guilty parties, and at the same time
provides full scope for asset recovery, has long been the Holy Grail of fraud
prosecutors.
CASE STRATEGY
Effective case management starts with detailed strategic planning. As soon as decisions
have been taken about which charges are likely to be pursued, against whom, and the
evidence that will be necessary to prove them, time limits must be set out, budgets
agreed and resources allocated. In addition:
+ Early consideration must be given to where the documentary evidence is likely to

be, and, if it is out of the jurisdiction, early engagement with overseas law
enforcement will be important, as this evidence takes time to acquire in
admissible form. Obtaining evidence from the targets of the enquiry can be
achieved in various ways, from formal requests (for example, notices under
section 2 Criminal Justice Act 1987 or section 165 Financial Services and
Markets Act 2000) to full-scale raids of business and domestic premises. A
strategy for this process must be mapped out.
+ Decisions need to be taken about sharing information with other authorities,
nationally and internationally, and deciding who should be the lead investigator
and prosecutor. Are other authorities already working on the case? Who should
take precedence?
+ Assuming that the decision is taken that you are the lead investigator, it is useful
to consider what other authorities may be in a position to provide probative
material, intelligence or experience. International bodies like Eurojust can
coordinate enquiries in other European jurisdictions. The Economic Crime
Command, a Division of the National Crime Agency, seeks to act in a coordin-
ating role in some fraud enquiries, appointing a lead investigator, supported by
secondees from other agencies, and providing an intelligence hub.
+ Where are the targets of the enquiry? If one or more are in other jurisdictions,
how practical will it be to secure their attendance at a trial?
+ Are any serious health issues known about? Although these tend to emerge during
the course of the overt stages of an enquiry (typically at interview, pre-trial
hearings and trial), there are occasions when the state of health of an individual is
known about, and should be taken into account.
5
Including Deferred Prosecution Agreements, civil asset recovery, civil claims and regula-
tory sanctions.
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The management of complex fraud cases 565
+ Can any legal difficulties be foreseen that should be subject to detailed legal
advice at an early stage?
+ Should independent Counsel be retained immediately, so as to advise on strategy
and legal issues?
Having reviewed such issues, consideration needs to be given to whether the case can
be presented in a single trial, or whether a series of trials will be necessary. What needs
to be proved, and against whom, to present a coherent account of the activity that is
alleged to be criminal? This question should be approached from the perspective that
the shorter the case, the fewer the resources that will need to be devoted to it by the
prosecution, the defence and the court. There is also less risk that the case will fail
through sheer complexity.
Inevitably, as the case evolves, it will change shape and focus, and therefore there
must be regular scrutiny of the case strategy.
Being able to persuade the trial judge at the plea and case management hearing stage
that the case team has planned the case with trial management issues as a major
consideration from the outset is a critical element in the presentation of the case to the
court. Therefore, a decision log must be kept of the major decisions, not only for
internal consumption, but also to demonstrate to the court the fact that issues have been
given proper consideration at all stages.
EVIDENCE MANAGEMENT
(1) Evidence Selection
One aspect of all complex fraud enquiries is the sheer volume of material that can be
gathered. First, therefore, the case team must decide how far the process of collecting
evidence can be restricted. It is important to avoid being burdened by a mass of
material that is, in reality, surplus to requirements, and which will consume resources
in scheduling, analysis and disclosure. Very clear planning is necessary to identify the
essential search sites, and what to uplift from them. The timing of this exercise is also
critical: strike too soon in the investigation, and the significance of some material may
not be appreciated. Leave it too late and evidence may have been destroyed.
Drafting the search warrant requires a level of evidence to support the reasonable
suspicion that a crime has been committed by the accused and that there is likely to be
relevant material at the addresses, so as to comply with the relevant legislation.6 This
means that the investigation must have progressed to a considerable extent before a
warrant can be applied for, unless there is clear and compelling evidence of, for
example, continuing criminal activity or an intent to destroy evidence.
Following the serious criticism by the Divisional Court of the SFO’s search warrant
applications against the Tchenguiz brothers7 during the investigation of the collapse of
6
Section 8 of the Police and Criminal Evidence Act 1984 (‘PACE’); section 2(5) of the
Criminal Justice Act 1987; section 176 Financial Services and Markets Act 2000.
7
Tchenguiz v Serious Fraud Office and others CO/4236/2011: Thomas LJ and Silber J.
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Kaupthing Bank, there has been considerable focus by prosecutors on what constitutes
reasonable suspicion, in particular in the context of where the information relied on
was sourced. In addition, judges are now required to give reasons for their decision to
grant a warrant, and there is more emphasis on the good practice of keeping a full note
of the ex parte application for the warrant.
Ensuring that only relevant and necessary material is seized is, however, easier said
than done. The temptation is to worry that if an investigator does not seek and collect
a sufficiently wide spectrum of material something vital will be missed. It may, in
addition, be difficult to be sure, at an early stage of an enquiry, whether certain
evidence, or venues, will be relevant. There is also the problem that the prosecutor may
find that he or she is obliged to pursue ‘a reasonable line of enquiry’,8 and therefore
simply deciding that he or she is going to ignore part of the available evidence that
does not appear to be relevant to the enquiry may not work.
An additional consideration is that, where material is requisitioned from an innocent
third party, that third party might complain that the exercise of gathering all the
material together is too disproportionate, and expensive, to be justified. Where the
requesting party has some degree of influence over the recipient of the notice, as, for
example, the FCA will have over a regulated firm, the situation may be manageable,
but where no such control exists, and, in particular, where the third party is in another
jurisdiction, problems may ensue.
Material that needs to be accessed from third parties in other jurisdictions will need
to be requested through Letters of Request under Mutual Legal Assistance Treaties. The
turnaround time for these requests can exceed a year, and careful planning, and
significant expertise, has to be deployed in ensuring a useful outcome.
All competent investigators in well-run investigations will therefore seek to identify
the relevant evidence with as much precision as possible. Again, the picture will change
as the case evolves, but early decisions will have a profound impact on the outcome of
the proceedings.
(2) Evidence Assessment
Second, once material has been gathered, how can it be effectively assessed? Much of
it will be in digital format, which will be transferred to the investigators’ own systems.
Some will be in hard copy form, and it will be scanned on to the system. Some will be
audio, from recorded lines or other sources, and this may need to be transcribed. All
this material will then require detailed analysis, generally by using highly sophisticated
software, carefully chosen search terms, and a lot of hard work. There are dozens of
software packages, and hundreds of businesses, offering to undertake these tasks, at
considerable expense. Every law enforcement authority will of course have acquired a
document management system, at considerable expense, and will rely on it for all the
routine analysis of the terabytes of digital material acquired during the enquiry.
While such systems perform incredible feats, there can be problems. It is not unusual
for the system used by an investigator to crash or malfunction at some point during the
8
See paragraph 3.5 of the Code of Practice issued pursuant to section 23(1) of the Criminal
Procedure and Investigations Act 1996.
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investigation, and this may cause concerns about the integrity of the material stored on
the system. The process of uploading the material on to the system can lead to files
being corrupted, either by human error or system failure. The length of time taken to
upload material can cause delays to an enquiry.
One vital part of the analysis performed by the system will be to identify potentially
privileged material, and to segregate it, where there is a genuine concern about the
existence of such material, for inspection by independent counsel.
Investigators frequently encounter encoded digital media. Coding has become
increasingly effective, mainly because it has been developed for use by the forces of
law and order. Unlocking a password protected laptop presents few problems for an
averagely skilled technician, but an Iron Key USB stick is a greater challenge.
It may be necessary to acquire records from, for example, telecoms or internet
providers. The formal application process can take a considerable amount of time to
complete, and therefore by the time this, often vital, material is available, the enquiry is
likely to be well-advanced. There will follow a period of careful analysis, which may
necessitate further applications. Access to this material is carefully monitored by
regulators, and is sometimes resisted by the suppliers, and special care has to be taken
to ensure proper compliance with the regulations. This includes skilled drafting of
applications, including the provision of detailed reasons for the application rather than
standard form rubric, scrutiny and approval by designated officers, and regular
oversight at a more senior level within the law enforcement agency, so as to ensure that
there is full compliance with the provisions of the Regulation of Investigatory Powers
Act 2000.
DISCLOSURE
This is not the place to go into any analysis of the disclosure regime, as set out in the
Criminal Procedure and Investigations Act 1996, the Code of Practice, the Attorney
General’s Guidelines and the Criminal Procedure Rules 2013.9 Suffice to say that for
most prosecutors, disclosure is a major headache which uses huge resources, and which
far too often leads to the premature collapse of a case. Disclosure manuals have been
drafted and adopted by all the major prosecutors, and the CPS version, which is viewed
as definitive, can be accessed on-line.
Because disclosure is such a risk, and a burden, it goes without saying that a detailed
disclosure plan must be developed and followed. At the same time a detailed record of
all material examined must be kept and a decision log must be maintained by all
investigators and prosecutors working on the exercise.
Many prosecutors in complex fraud cases now use disclosure management docu-
ments (under the Disclosure Case Management Initiative10), as well as a range of
sophisticated check and balance systems. The disclosure management document will be
9
Other guidance includes: ‘Control and Management of Heavy Fraud and Other Complex
Criminal Cases’ (2005); ‘Disclosure: A Protocol for the Control and Management of Unused
Material in the Crown Court’ (2006); and the CPS Disclosure Manual (2005).
10
Launched by the Senior Presiding Judge on 3 June 2013.
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served on the defence and the court, setting out the methodology and reasoning of the
disclosure exercise that has been undertaken. When the court and the defence have had
an opportunity to consider the document they can comment on it, and often the Crown
will make changes to the document to accommodate reasonable requests. These will
typically involve such matters as the search terms to be applied to analysis of digital
material, and the date spread for a review of, for example, e-mail traffic. Contested
issues can be resolved by the court following an application under section 8 of the 1996
Act.
The 1996 Act also requires a defendant to submit a defence statement,11 which
should set out any disclosure requests that the defence can identify after they have
considered the primary disclosure supplied by the prosecution.
By these means the genuine disclosure issues should become apparent to all sides,
and there should be no surprises during the run up to, and the course of, the trial. This
statement, however, will provoke a hollow laugh from many prosecutors whose cases
have been prematurely halted on a disclosure point.
WITNESSES AND SUSPECTS

The importance of skilled interviewing techniques cannot be overstated. Taking a good
witness statement or conducting an effective interview of a suspect calls for, in addition
to skill, a thorough knowledge of the facts and law, as well as the intuition to pursue
unexpected detail.
An investigation will often start with taking a statement from a complainant, a
whistle-blower or a victim of fraud. That statement will be critical in setting the agenda
for much of the rest of the enquiry, and for setting the tone of the ensuing trial.12 It will
be important to gather all the relevant documentation from these witnesses at the outset,
to ensure that it is not destroyed or lost, and to give an early opportunity to plan what
further evidence must be obtained.
There may also be a suspect who is prepared to enter into an agreement under the
provisions of Chapter 2 of Part 2 of the Serious Organised Crime and Police Act 2005.
Thorough consideration of all the ramifications of this process, as well as expert
guidance in the handling of the potential assisting offender, will be essential.
A plan must then be made setting out what further witness evidence is needed. This
may be formal, for example, Companies House and banking records. It will include
evidence of searches and arrests, as well statements exhibiting documentary and other
evidence. It may be corroboration. It may be further evidence of loss.
There may be a need for expert evidence, in which case the search for an appropriate
expert or experts should start sooner rather than later.
Careful management of witnesses is an important part of case management: they
must be kept informed throughout the pre-trial period of likely trial dates and the date
on which they will be called to give evidence. They must also be assessed for
11
Section 5(5) of the 1996 Act.
12
Although a whistle-blower will usually be protected by confidentiality, their information
will establish the important lines of enquiry.
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vulnerability, and where, for example, a witness is an elderly victim of an investment

fraud, a thorough explanation of the evidence-giving process, together with travel plans
and location of the court, should be provided. Witnesses must also be advised about
issues surrounding the trial process, including that they must not collude with other
witnesses, and that they must not speak to jurors. It is common practice to use the
services of a witness liaison officer to oversee these important matters.
The substantive interviewing of suspects will be delayed until the evidence is almost
complete. The SFO can interview a suspect under the provisions of section 2 of the
Criminal Justice Act 1987, which require the suspect to answer questions. However, the
answers given to such compulsory questioning cannot be used in evidence, and
therefore, save at a very early stage of an investigation, section 2 powers are not used
when interviewing a suspect. This interview will be conducted under the provisions of
PACE, and therefore under caution, and tape-recorded.
Prior to the interview a disclosure bundle will be served on the accused and his or
her lawyers, and this bundle needs very careful selection. It should contain all the
significant documents in the case, which will be put to the suspect in the course of the
interview. Since the suspect will have had time to consider the contents of the bundle,
he or she will have less room for complaint about being surprised by the content of a
document.
When the interview is complete it will be transcribed and checked. Because this is a
resource intensive process, the interviewer should always bear in mind the necessity of
ensuring that the interview is as focused as possible, with a clear, and concise,
interview plan based around the disclosed documents. However, it is equally important
to be prepared to ask follow-up questions arising from the responses and explanations
provided.
PROCEEDS OF CRIME
Asset recovery has been dealt with in other chapters. In this chapter some practical
issues will be briefly discussed.
All investigators and prosecutors will have asset forfeiture at the forefront of their
minds throughout the investigation and trial. Not only is it a government priority to
seize the proceeds of crime, and also clearly in the public interest that victims should
be compensated for loss suffered through criminal activity, but, in addition, law
enforcers will be well aware that they can receive a share of assets recovered through
confiscation under the Proceeds of Crime Act 2002.13 That share amounts, if you are
both investigator and prosecutor, to about 38 per cent of recovered funds. The Court
Service also gets a slice, with the remainder going to the consolidated fund. Tracing of
assets is therefore a top priority from the outset of an investigation.
Where funds and assets are identified during an investigation, a Restraint Order may
be applied for in order to secure them for confiscation or compensation.14 The Order is
often served at the time of initial arrest, and before charges are preferred. It may be the
13
The ‘Asset Recovery Incentivisation Scheme’.
14
Section 40ff. of the Proceeds of Crime Act 2002
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case that such an Order will be in force for some months, or even years, before the
trial. The respondent may, at any time, seek to discharge or vary the Order on the
ground that there has been undue delay in continuing the proceedings,15 or that ‘within
a reasonable time proceedings for the offence are not started’.16
Once a Restraint Order has been granted and served, the respondent may not use or
dispose of his or her restrained assets beyond any amounts specified in the Order, or
agreed with the prosecution. Restrained funds may not be used to pay the legal
expenses of the criminal trial. For the prosecutor, managing a Restraint Order can be
time-consuming where the respondent has to rely on the allowance made for his or her
living expenses in the Order, or by agreement following the service of the Order. In
some cases the value of the assets exceeds the amount restrained, and the respondent
may use his or her surplus assets without any restraint. Applications may be made in
foreign jurisdictions for assets identified in those jurisdictions to be restrained.
While recovering and identifying funds for the purposes of POCA is important, there
is another important reason for tracing funds – the fraud investigator’s watch-word is
‘follow the money’, and evidence of where funds end up is often critical in proving a
case against a defendant. Linking the funds to the accused is important evidence, and
where there have been serious efforts to engage in complex movement of funds, the
prejudicial effect of this evidence often helps to secure a conviction. Moreover, money
laundering offences, carrying a maximum of 14 years’ imprisonment, can also be added
to the indictment.17
PROSECUTION DECISIONS
However well a case has been managed during the investigation, and even if everything
has gone to plan, it is vital to review, as independently as possible, the evidence and the
legal position in the light of the results of the enquiries. This review must be carried out
with the Code for Crown Prosecutors in mind: is there sufficient evidence? Is a
prosecution in the public interest?
A CPS case will be reviewed completely independently of the police investigation,
and the CPS has the final decision about charging suspects. However, in any complex
fraud case it is likely that a CPS lawyer will have been advising the investigators, often
with independent counsel, from an early stage, and therefore they will have had a
considerable input into the planning and strategy of the case.
SFO lawyers will be even closer to the investigation, being part of a unified
organisation. The same applies to the FCA and the CMA. Whether such proximity to
the investigators is a good thing is a matter for debate: the advantages include that the
legal issues in the case can be kept under review at all times, and the case will not (in
theory at least) stray from these limits. One disadvantage is that it is much more
difficult to give dispassionate advice about the charging decision when the lawyer is so
closely aligned to the decisions that have been made throughout the investigation.
15
Section 40(7) POCA.
16
Section 42(7) POCA.
17
The maximum sentence for Fraud Act 2006 offences is ten years.
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When a decision is taken to charge, consideration must be given to issues such as

whether to arrest or issue a summons, whether to seek a remand in custody (highly
unusual) and what bail conditions to apply for. These might include passport surrender,
residence at a particular address and surety or security. This may be the point where a
Restraint Order is applied for (see above).
ALTERNATIVE CASE RESOLUTION

There are alternatives to a criminal trial in serious fraud cases, and these include the
newly introduced18 Deferred Prosecution Agreements (DPAs) imported from the US. At
the time of writing no DPAs have been deployed by the SFO and the CPS, and
therefore it is difficult to know how they will be used. There is a draft Code of
Conduct.19
US experience over the last ten years has been that prosecutors have used them fairly
extensively,20 but that there has been some criticism of them.21 UK DPAs will differ
from their US counterparts in the degree of judicial management of the process. The
UK legislation includes many references to early intervention and continuing mon-
itoring by a judge.
In brief outline, DPAs can only be used against corporates or partnerships, not
individuals.22 Where a DPA is agreed between the prosecution, the defence and
the court, an indictment will be preferred and then suspended. At the conclusion of the
term of the DPA the proceedings are discontinued. The agreement will record the
penalties (a fine and costs),23 an admission and publicity, but there will be no criminal
conviction. The corporate entity must work with (and pay for) a monitor for a specified
period to check its compliance with the terms of the DPA. If the corporate commits
further offences or is otherwise in breach of the agreement during the specified period,
the DPA can be suspended and the indictment can be prosecuted.
Decisions about whether to engage in DPA negotiations with a corporate entity
accused of complex fraud will be taken in the very early stages of an investigation,
although it may take time to reach a final decision, which will take account of the
provisions of the Code of Conduct.
There are other alternative outcomes, including civil asset recovery: Part 5 of POCA
2002 provides for a process of asset recovery through civil proceedings of property
‘obtained through unlawful conduct’.
18
February 2014. Schedule 17 Crime and Courts Act 2014.
19
Published by the CPS and the SFO in June 2013, and a new Part 12 of the Criminal
Procedure Rules (24 February 2014). The Code is required under paragraph 6.
20
In nearly 300 cases.
21
See, for example: “Why have no high level executives been prosecuted in connection with
the financial crisis?” by US District Judge Jed S Rakoff, 21 November 2013.
22
Paragraph 4 of the Schedule.
23
Other agreed penalties might include disgorgement of profits, compensation for victims
and a charitable donation – paragraph 5(5).
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JUDICIAL MANAGEMENT
As soon as a complex fraud case is transferred to the Crown Court the prosecutor
should inform the presiding judge about the facts and features of the case so that he or
she can decide how to allocate it. This initial information is an important part of the
trial process, and in addition to a statement of the facts, it should contain a concise
account of the issues that are likely to be encountered, including the length of trial,
number of defendants, severance possibilities, mitigating and aggravating features of
the facts, and likely pleas.
When a judge is allocated to the case he or she will ideally preside at the first
post-transfer hearing, and at all subsequent pre-trial hearings. The judge will set a
timetable for the various stages of the pre-trial process, dealing with such matters as
disclosure, severance, legal argument and trial date.
The judge will have trial manageability, particularly in the context of jury issues, at
the top of the agenda. Current thinking24 is that four or five defendants and a trial of 12
weeks is the maximum that can be dealt with in a manageable trial, save in the most
extreme circumstances, and pressure will be exerted on the prosecution to reduce its
case to those limits by severance and/or pruning the indictment.
24
At least at Southwark Crown Court, the main fraud trials court centre in London.
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47. Defending individuals charged with white collar

crimes – challenges and strategies
Kathryn Arnot Drummond
INTRODUCTION
The advocate is not obliged to conduct a case in accordance with whatever the client, or when
the advocate is a barrister, the solicitor, instructs him. Save for well established principles,
like the defendant’s personal responsibility to enter his own plea, and make his own decision
whether to give evidence, the advocate alone remains responsible for the forensic decisions
and strategy.1
Case reports may tell us the outcome of the trial and any arguments taken but can
rarely tell us the strategy decided upon and executed by the defendant and his legal
counsel. On the rare occasions when the Court of Appeal does comment on the strategy
evidently executed by a legal defence team, it is often to express a negative view of it
or to refuse a ground of appeal brought by a defendant who has been convicted and
now regrets the particular strategy which he and his barrister agreed upon.
What is strategy and how is it learned? When a junior criminal defence barrister in
England or Wales begins their training at Law School, they are taught to read the
prosecution’s evidence, identify legal and evidential challenges, take the defendant’s
instructions and put forward his defence by highlighting that which supports his version
of events whilst undermining that which does not. This is not strategy, it is merely basic
case preparation.
In addition to the basic preparation of the case, a successful advocate will always
develop a clear strategy for the case as a whole. Taking a step back he will appreciate
the wider, more significant issues whilst treating legal arguments over the admissibility
of evidence and points of law as battles to be lost and won. The judicial bench will be
considered a no mans land until claimed by the most worthy side, and the defendant,
like the King in a chess game, must be ring fenced and protected at all costs.
It is not enough, however, to have one strategy for a case. A defence team must be
able to adapt the original strategy as the case evolves through, for example, the service
of new evidence or the loss of a defence witness, and so on.
The aim of this brief chapter is to outline the tools required to develop a strategy for
defending individuals charged with white collar crimes whilst highlighting some of the
challenging decisions commonly faced by defence barristers in England and Wales.
1
R v Farooqi 2014 1 Cr App R 8.
573
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PREPARATION
A barrister cannot claim to have a case strategy if he has not read into the case,
established the issues, familiarised himself with all the material in the case and spotted
the potential weaknesses which must be overcome to secure a conviction. In large
financial crime cases, it is often said that the devil is in the detail: a lesson hard learned
by lawyers who have cut corners to their client’s peril.
Before counsel can begin to read and analyse 30,000 pages of evidence, he must
establish the issues with the defendant.
Contrary to popular belief, the issues are often simple in financial crimes. Is it
conceded that a financial crime has been committed as alleged or at all? If so, is the
defence lack of dishonesty or lack of knowledge of a financial crime? Does the client
assert that another party is at fault and that he or she was tricked into innocent
participation? And so on.
Of course, the detail of the financial crime and piecing together of the jigsaw of
evidence and disclosure will be a significantly more complex task. Remembering the
simple core issues and using them to make up the skeleton of an advocate’s closing
speech will ensure that the case remains accessible to a jury despite the complexities
within the evidence.
WITNESSES
Financial crime allegations usually lead to significant numbers of both witnesses of
fact, such as complainants who have suffered loss, and professional witnesses who have
investigated and exhibited evidence. Unique to financial crime allegations, there may
also be ‘guilty witnesses’ such as a person who was party to dishonest conduct but, for
reasons of their own, contacted the authorities as a whistleblower or gave evidence
against former colleagues in exchange for immunity. These witnesses must be treated
with caution. It may be that aggressive cross examination before a jury will make them
appear to be equally or more guilty than the defendant which may lead to the jury
distrusting the prosecution and acquitting the defendant. Alternatively, the jury may
dislike yet believe the witnesses and convict the defendant on the basis that they are all
as bad as each other. Attacking the credibility of prosecution witnesses cannot,
therefore, be the only aim of a defence strategy in such cases.
PRELIMINARY HEARINGS
Case strategy should not be decided on the eve of trial. It should be established at the
earliest possible stage to ensure that counsel can request the appropriate disclosure and
instruct any necessary experts for the defence. Furthermore, strategy ought to be
established early so that the barrister who attends the preliminary hearing does not say
too much about his client’s defence before full advice on the evidence and potential
legal challenges has been given.
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Defending individuals charged with white collar crimes 575
In England and Wales, a case which is to be tried in the Crown Court before a judge
and jury is required to have a Plea and Case Management Hearing.2 Ideally, the
prosecution will have drafted a clear indictment of the charges and served all of the
evidence on which it seeks to rely by this time. The defence will have served a defence
statement clearly setting out the defence and resulting contentious issues. Legal
arguments such as those relating to bad character, hearsay evidence, challenges to the
admissibility of the evidence including the need for expert evidence are set out along
with the list of witnesses whose evidence will be tested by cross examination at trial.
A general principle of practice requires that the prosecution adduce all evidentiary
matter it intends to rely upon as probative of the defendant’s guilt before it closes its
case. Whether any evidence could be introduced later in the trial is a decision for the
trial judge’s discretion.3 This means that the prosecution may serve evidence once the
trial has begun and continually serve notices of further evidence until the time has
come for the defence case to begin. It is always a risk therefore to positively assert
detailed aspects of a defence case where evidence is outstanding. A common example
is when the prosecution have not yet served telephone evidence. This will include a
forensic analysis of the defendant’s phone and phones of any other relevant party. The
analysis will show which persons the defendant is regularly in contact with and may
include any incriminating text messages sent or received by the defendant. The phone
data will also paint a picture of the defendant’s physical whereabouts at relevant times
through cell site information. By way of illustration, defendant X is sure that he was at
home all day on the 7 July 2014 and that he has never met the alleged victim. When the
forensic analysis of his phone is served, it may reveal that he was not at home on the
7 July 2014 (or at least his phone was not) and that he received 12 text messages from
the alleged victim. At an early hearing it is always the decision of counsel whether to
advise his client that it is in his best interests to merely give an outline of his defence
so he can be advised on the strength of the evidence yet to be served. By taking this
cautious approach, counsel is not presuming that his client is lying or guilty of the
crime alleged rather he is allowing for the possibility that the defendant may be
confused about dates or people in the months or years after the relevant period or
exaggerating his defence because he is scared of being convicted of an offence. In
financial crime cases, this is particularly relevant to strategy as the allegation is likely
to relate to a lengthy period of time and specific meetings, telephone calls and other
points of contact which the defendant may easily misremember. Furthermore, there is a
higher likelihood of relevant disclosure which would assist the defendant such as
minutes of conferences, work diaries or email chains.
DISCLOSURE
Just as counsel must be fully aware of the detail within the evidence so he must not
forget about the unused material or disclosure in the case.
2
Criminal Procedure Rules 2013, Part 3.
3
R v Rice 1963 1 QB 857, 47 Cr App R 79 CCA.
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In 2010, the first contested cartel prosecution was brought by the Office of Fair
Trading (OFT) in R v George, Crawley and Others (the BA case). The case collapsed
when the defence identified thousands of documents which ought to have been
disclosed under the prosecution’s disclosure obligations but had not been.
In the BA case, Virgin had blown the whistle on allegedly anti-competitive behaviour
which it said had taken place between its employees and those at British Airways (BA).
Virgin subsequently secured immunity from the OFT in relation to both civil penalties
and criminal prosecution for the individuals involved. Four BA employees were
charged with the cartel offence.4 It was only after the trial had begun that approxi-
mately 70,000 emails which Virgin had led the OFT to believe had been corrupted or
damaged were established to be recoverable and disclosable. There was focus on a
particular email which showed that the decision by Virgin to increase the passenger fuel
surcharge was made before phone conversations between the two airlines which the
prosecution had alleged involved an anti-competitive agreement. As the trial had
commenced, the prosecution took the view it was too late to seek an adjournment to
properly extinguish its disclosure obligations and therefore offered no evidence against
the four accused. The case was both expensive and embarrassing for the OFT who
commented in their press release at the time that the collapse of the case was the result
of ‘an oversight, which occurred at a time when the UK criminal cartel regime was still
relatively new and the OFT’s approach to the handling of leniency applications in the
context of parallel criminal and civil investigations was still evolving’.5 Arguably, there
is no other case which so clearly shows the importance of understanding the
prosecution’s disclosure obligations or the need for the defence to assure itself they
have been met.
The prosecution’s disclosure obligation is set out as follows: ‘The prosecutor must –
disclose to the accused any prosecution material which has not previously been
disclosed to the accused and which might reasonably be considered capable of
undermining the case for the prosecution against the accused or of assisting the case for
the accused.’6
Of course, it is critical for counsel to be fully aware of the issues in the case before
he analyses the disclosed material so that he can see what material has not been
disclosed as well as what material has. This will ensure that a timely request for
disclosure is made as part of the defence statement or, if not then forthcoming, in a
later formal application.7
LEGAL ARGUMENTS
Having identified the issues, taken instructions from the defendant, scheduled the
evidence, identified complex lines of cross examination of witnesses and analysed the
4
s.188 Enterprise Act 2002
5
OFT press release 47/10, 10 May 2010 – no longer available since the abolition of the
OFT.
6
s.3 Criminal Procedure and Investigations Act 1996.
7
s.8 Criminal Procedure and Investigations Act 1996.
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disclosure, counsel will now have a clear idea of any legal arguments for the defence.
It is a strategic decision for counsel to decide which legal points should be taken and
which should be left alone.
There is often evidence which counsel considers should not be admissible for a
myriad of reasons – its provenance or content may lead to a challenge that ‘having
regard to all the circumstances, including the circumstances in which the evidence was
obtained, the admission of the evidence would have such an adverse effect on the
fairness of the proceedings that the court ought not to admit it’.8 The likely areas of
concern are often police conduct of the case including search, caution, identification
procedures, purported expert evidence and interview where there may be breaches of
the police Codes of Practice leading to the material being potentially inadmissible.9
There may also be bad character or hearsay evidence and any confessions to consider
along with any niche legal points.
There are plenty of safeguards in place within the criminal justice system to ensure
that the jury hear all the evidence whilst protecting the defendant from faults in the
system, and the common remedy to admissibility challenges brought under s.78 Police
and Criminal Evidence Act 1984 is a judicial direction to the jury at the close of the
trial addressing the weight the evidence should be given in all of the circumstances.
It may be the best strategy to fight every point but it may alternatively be better to
forgo a tenuous admissibility challenge in favour of highlighting the tenuous nature of
the prosecution’s case in cross examination before a jury.
ABUSE OF PROCESS
Separate consideration must always be given to whether it would be an abuse of the
court’s process to try any defendant. Abuse of process is a vast topic of itself and many
excellent texts have been written about it.10 There are two general categories of case in
which the court will stay proceedings as an abuse of its process: (i) where it will be
impossible to give the defendant a fair trial; and (ii) where a stay is necessary to protect
the integrity of the criminal justice system.11
It may be impossible to give the defendant a fair trial in cases where the prosecution
has been brought after a significant delay, meaning the evidence cannot be challenged.
Unsurprisingly this argument is most common in historic sex abuse cases, but it has
been utilised in a complex fraud case in which 8000 items of disclosure, sought by the
defence for over a year despite two adjournments, had still not been provided by the
prosecution up to a few days before the trial was due to begin. The only remedy to
ensure the defendant had a fair trial was a third adjournment which the judge
8
s.78 Police and Criminal Evidence Act 1984.
9
Police and Criminal Evidence Act 1984 Codes A, B, D, E, F, G and H.
10
For example, Abuse of Process, 2nd Edition by Colin Wells (Jordan Publishing 2011).
11
Chapter 4, paragraph 75, Archbold Criminal Proceedings 2014; R v Maxwell 2011 2 Cr
App R 31.
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considered would have been inappropriate. The proper course was to stay proceedings
as an abuse of process.12
A stay may be necessary under the second limb that it would be ‘unfair to try the
defendant’ when fairness to the accused, although not irrelevant, is overridden by the
primary importance of the court to protect the integrity of the criminal justice system.
Two well known examples of this would be, first, the rule against double jeopardy
where it is unfair for a defendant to be punished twice for an offence arising out of the
same or substantially the same set of facts. This may be relevant in financial crimes
where an individual has been tried for the same offence in a foreign jurisdiction.
Second, entrapment by the authorities. The courts have long considered that it is not
acceptable that the state through its agents should lure its citizens into the commission
of offences before prosecuting them for the same actions.13
The second limb of abuse may also be utilised where the prosecution has reneged on
a promise that he or she would not be prosecuted. The critical consideration is whether
the defendant, on being made any promise by the prosecution, acted to his detriment.
Of course, counsel will have to consider how long the defendant was left to believe that
he would not be prosecuted and any prejudice to him from his co-operation whilst
under that belief.
In financial crime cases, it is also worth considering who is in effective control of a
prosecution. Is a bank, for example, the complainant and ‘prosecutor’? In such cases
where the complainant is a powerful entity there is a heavy burden on it to make
available full and frank disclosure to the prosecution including privileged material so
that it can be made available to the defence. Any concerns over this may compromise
the integrity of proceedings. Referring back to the BA case, it would have been open to
the defence to consider an abuse of process argument had the prosecution continued
with the case against the four BA individuals on the basis that Virgin had not properly
made the 70,000 documents available to the prosecution.
THE TRIAL
Twelve members of the public are watching everything that happens in the courtroom
and potentially see some things that happen outside the courtroom if the defendant is
on bail. They see the way in which the defendant behaves at the back of court, how the
judge treats counsel, how the prosecutor and defence counsel interact, let alone the
evidence of every witness and item of documentary evidence. English barristers
sometimes refer to the jury as a twelve headed beast because when one juror sees
something which he considers to be important, he will tell the others. Furthermore, it is
naïve to believe that those twelve people are not making judgements about each and
every little thing they see.
The aim of a great barrister is to persuade the jury that, on hearing all of the
evidence, they cannot be sure of the guilt of the defendant. That much is a given. A
subtle part of the process of persuading the jury is influencing what they see and hear
12
R v Olivier, unreported, 27 September 2007, CA 2007 EWCA Crim 3483.
13
R v Latif and Shahzad 1996 2 Cr App R 92 HL.
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through the trial process other than the evidence. This is known as ‘changing the
temperature of the courtroom’.
In a very serious case, it may be the best strategy to show respect and deference to
the offence and victim (such as murder or defrauding the vulnerable). Alternatively, in
a case in which the complainants present as greedy it may be that counsel will attempt
to lighten the mood either with appropriate humour or a more casual manner of
speaking to the judge. Of course, this is a high-risk strategy in so far as it can go very
wrong if done badly. If the jury consider that the jokes are not funny or appropriate
they may dislike the barrister and, by extension, his client’s defence. If the judge
suspects that the barrister is trying to make light of the alleged offence and does not
agree that the offence should be viewed as such, he may comment on counsel’s manner
in the presence of the jury thus alerting them to the strategy and ultimately under-
mining it.
Successfully changing the temperature of the courtroom is done by experienced
advocates who, on weighing up the likely response they will get from certain behaviour
or actions, tread carefully and with subtlety whilst changing how the jury perceive
proceedings.
THE GIFT
More controversial than jury observation, some counsel take the view that in nearly
every case, the prosecutor will make an unintentional ‘gift’ to the defence. This is likely
to be a mistake such as a misrepresentation of the weight to be given to a piece of
evidence or something said which could be turned around and used in retaliation by the
defence. By way of example, in a case in which a woman was charged with seriously
assaulting her sister, the prosecutor did exactly this. The sister had a number of
previous convictions for offences of dishonesty; however, the defendant also had
previous convictions. The defence did not apply for the jury to be made aware of the
sister’s character because the prosecution would have rightly been given leave to
adduce the defendant’s character. Just before the prosecutor finished her closing speech
at the end of the trial she commented that the sister was a woman who had ‘never been
in trouble with the law’. It was, of course, a misleading statement. The defence made
an application for this misleading impression to be put right and the judge directed that
the prosecutor should inform the jury of the sister’s previous convictions in full. The
jury acquitted the defendant. It can only be speculated upon how much of an impact
this late information had on the jury in light of the fact they had seen and heard all of
the evidence, but it was another string to the defence bow.
Similar but less extreme, in a serious drugs case, the prosecutor said in his opening
speech, ‘the evidence is such that you will be sure he was present on that date’. The
evidence was called and was not as strong as the prosecutor had presumed it would be.
In his closing speech he stated ‘whether or not he was present on that date you must be
sure that he was involved’. In defence counsel’s closing speech the two statements were
repeated to highlight the ‘changing of the goalposts’ of the prosecution and demonstrate
that the jury could not even be sure of what they were supposed to be sure about. The
jury acquitted in under ten minutes.
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HOW TO DEAL WITH CHARACTER

The approach taken by a defence team in relation to how to portray the defendant’s past
character is one of the greatest challenges in a case. This is because the barrister must
advise his client on whether the defendant’s character will affect the minds of the jury
and how, the best presentation of the character evidence to minimise the damage or, in
a case where there is positive character evidence which could be used but will lead to
prosecution rebuttal material outweighing the benefits of the character evidence,
whether it should be avoided.
There are three types of client: those of good character (or effective good character14)
who have no previous convictions, those of bad character who have previous convic-
tions for irrelevant offences and those who are of bad character who have previous
convictions for like offences. The first category is easy to deal with. It will be one of
defence counsel’s strongest points that the defendant has no previous convictions and
he will be entitled to a full good character direction from the judge in summing up at
the end of the trial. The second category of defendant is slightly more tricky. If the jury
hears nothing of the defendant’s character they may be suspicious about whether he has
committed a serious crime in the past. This will be most obvious if there are
co-defendants whose good character is being presented to the jury. Defence counsel
would therefore want to consider choosing to admit the convictions (the prosecution are
unlikely to have a successful application to adduce them if they are irrelevant) and
eliciting an explanation from either the defendant in evidence or some other source
such as a police summary through the officer in the case. However, under what light
will they cast the defendant? Three convictions for road traffic offences are very
different to supplying class A drugs, rape or domestic violence. Ultimately this is a
judgement call for the advocate and defendant.
The final category is the one in which there will be the most work for the advocate.
If the defendant has previous relevant convictions, the prosecution will certainly apply
under the bad character provisions15 to adduce them as evidence of the defendant’s
propensity to commit the type of offence charged and/or undermine the credibility of
the defendant’s account in interview or evidence. The advocate’s first reaction will no
doubt be to strongly oppose this application with a fiercely drafted argument; however,
there are times when the previous convictions may assist the defence. For example, in
the case of a man who has been disqualified for being a company director and says that
he has since acted legitimately as a company secretary. If he is alleged to have been
acting as a shadow director he may assert that the reason he is said by his co-accused
to be involved is because of their knowledge of his disqualification and their hopes that
he will take the blame for their actions. In other words, his previous conviction will
demonstrate that he is the ‘likely suspect’ and explain why the investigation has been
aimed at him despite his actual innocence.
14
A defendant of effective good character is a person who has minor irrelevant or historic
previous offences such that the court can treat him as a person of good character.
15
s.100 Criminal Justice Act 2003.
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It is rare for the defence strategy in relation to character to give rise to a successful
point of appeal against conviction. In R v Adams,16 the Court of Appeal stated:
In our judgment the strategy adopted by the appellant’s legal advisers at trial was a
reasonable one. It succeeded in defeating the prosecution attempt to put in the appellant’s
character. We are also of the opinion that there is no reason to suppose that if the defence had
put in the evidence which we have concluded they ought to have done, it would have made it
more likely that the prosecution would have been able to put in the appellant’s character or
introduce evidence in rebuttal.
THE RIGHT TO SILENCE AT TRIAL

Nothing ruins a good defence like a defendant, or so the saying goes. Whereas once
there was an unadulterated right to silence (your client could say no comment in
interview, put forward no defence statement and put the Crown to proof in trial by not
putting a positive case or giving evidence), there are now various inferences to be
aware of.
The prosecution will make the point that a defendant who did not mention in
interview a fact which he later relies upon at trial did so because he had no reasonable
answer to give. It will invite the jury to draw any such inferences from the failure as
appear proper.17 If he made no comment in interview but later gives live evidence, the
prosecution will assert that the only explanation for his late defence is that it has been
concocted to rebut the evidence. If he gives a no comment interview and does not give
evidence, the prosecution will assert the defendant has no answer to the charge.18
At the end of the case, before the jury retire, the judge will direct the jury that if they
consider there is a case to answer against the defendant and that the only sensible
explanation for his silence in trial is that he has no answer to give then they may draw
an inference against him.19
From the defence perspective, if the defendant has given an explanation in interview
but not given evidence or, conversely, if he gave a no comment interview but gave live
evidence then counsel may suggest to the jury in his closing speech that the defendant
has given an answer to the charge. Alternatively, if he has remained silent throughout,
counsel may be arguing that there is no case to answer as the evidence is too weak for
the jury to be sure of the defendant’s guilt and that the jury should therefore disregard
the inference.
Whether defence counsel advises the defendant to give evidence or not, remembering
it is ultimately the defendant’s decision and one which is central to his case, counsel
must always try to put himself in the jury’s shoes. In this particular case, with this
defendant and this evidence, how would the jury view the decision to sit in silence as
terrible crimes are alleged? Conversely, by giving evidence and subjecting himself to
16
R v Adams 2007 1 Cr App R 34.
17
s.34 Criminal Justice and Public Order Act 1994.
18
s.35 Criminal Justice and Public Order Act 1994.
19
Crown Court Bench Book 2010, page 283 onwards.
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cross examination by the prosecution, will the defendant strengthen or weaken his own
defence?
CLOSING SPEECHES
The final chance for defence counsel to address the jury before the judge summarises
the facts and directs the jury on the law is his closing speech. Counsel’s job is first and
foremost to persuade the jury. The barrister who speaks for the longest duration and
who reminds the jury of every piece of evidence is unlikely to be the barrister who
persuades the jury most successfully. Two more subtle approaches are, first, to
anticipate and highlight judicial directions favourable to the defendant, for example, a
good character direction or direction that the prosecution expert evidence has been
undermined and should be given less weight. Second, counsel may like to find one
point to ‘hang the defence on’. English barristers are familiar with the famous phrase
from the US case against OJ Simpson in which defence attorney, Johnnie Cochran, told
the jury that in relation to the glove ‘if it doesn’t fit, you must acquit’. This one simple
expression was the hook to hang the defence on and the jury acquitted.
Lawyers often disagree when deciding the best approach to present a particular
defence, but if they act in the defendant’s best interests, clearly advise the defendant on
his different options in terms of case strategy and ensure he is satisfied with the chosen
approach, then they are on the right path to develop a successful strategy.
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48. Protecting the whistleblower

Anona Armstrong and Ronald D. Francis
INTRODUCTION
Why is it that when we hear the term ‘whistleblower’ we are caught with mixed
emotions? Is the whistleblower someone to admire? To be protected? Or someone
being a nuisance? What is it about the term that stimulates this reaction? What does the
term mean and what are the connotations that it raises? This chapter describes the
origins of the meaning of whistleblower, some of the issues that raise those emotions,
what legislation has been adopted to address how whistleblowers can be protected and
concludes by arguing that the real protection for the whistleblower lies in building
organisations that support systems that prevent crime and values that support an ethical
culture.
More than one origin is claimed for the term ‘whistleblower’. One account has its
origin in the practice of English police officers who would blow their whistle when
they noticed the commission of a crime. The whistle would alert other law enforcement
officers and the general public of danger. Its contemporary use has been attributed to
Ralph Nader who, in a 1971 conference presentation and subsequently in book form,1
applied the term to the person who disclosed information about defects in the
automobile industry.
Since then, whistleblowing has regularly been applied in the news media to reports
of wrongdoing, mostly of illegal, immoral or illegitimate practices. They provide many
of our more sensational news stories. There are many examples. In recent times,
the general public has been engrossed with the Julian Assange and Wikileaks saga, the
Murdoch press and The News of the World phone hacking and more recently the
disclosure by US Defence Department member, Edward Snowden, of the surveillance
of the general public by the US Government.
Despite the espoused good intentions of the whistleblowers in disclosing wrong-
doing, they do not always receive the rewards or approbation that they may have
expected. Assange is currently confined to the Ecuadorian embassy in the UK. The
News of the World no longer exists and the journalist whistleblower, who blew the
whistle, took his own life. Snowden is currently hiding somewhere in Moscow and
seeking asylum in a number of countries.
Most whistleblower reports are from internal sources. Many are directed towards
government mismanagement. In one example from Victoria, Australia, in 2008, the
Victorian State Ombudsman received a complaint about matters raised in Parliament by
a Member of Parliament (MP) regarding a Local Government Council (Brimbank) and
allegations of ‘threats, bribery, intimidation, misuse of Council funds, mismanagement,
1
Nader, R., Petkas, P.J. and Blackwell, K. 1972. Whistle Blowing. New York, Grossman.
583
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improper behaviour and councillors’ failure to govern’. The Ombudsman’s investigation

resulted in the suspension of the Council. Similarly, current investigations by the
Independent Commission against Corruption in New South Wales (NSW) into bribes
and corruption have led to several resignations by MPs from both sides of politics.
Whistleblowers are not always welcome. They are often seen as ‘snitches’ or
troublemakers and consequently become the target of reprisal from co-workers. This is
reflected in a recent headline, ‘Messenger becomes focus of suspicion’, in the
Australian newspaper,2 which added the subheading: ‘The royal commission into union
corruption shows it pays for a whistleblower to be squeaky clean’. The article describes
the whistleblowing by a union official who accused the chief executive of misusing
union funds for personal expenses. Prime Minister Tony Abbott praised Kathy Jackson
for her courage in exposing a corrupt boys club among union officials who subse-
quently were convicted of large-scale fraud. The ‘blowback’ for Jackson was painful.
Allies of the CEO in the union verbally abused her calling her things such as ‘traitor’,
‘Labor rat’ and much worse. Jackson claimed the Labor Party compiled a ‘dirt file’ to
smear her name in the media. Further allegations about her use of union funds appeared
on social media. A shovel left at her front door was a message that she was digging her
own grave. Jackson suffered a mental breakdown and is now facing a civil claim by one
of the convicted union officials alleging her misuse of funds.
In the above cases the investigations were a response to whistleblowing by people
who worked for their organisations. Whistleblowing by people external to an organ-
isation occurs less often. Examples are the Royal Commissions into child abuse that
have been held in most countries in recent years. In Australia, a Royal Commission was
triggered when Detective Chief Police Inspector (DCI) Peter Fox, a 30 year veteran
with the New South Wales (NSW) police force, denounced the child sexual abuse by
Catholic priests in New South Wales and alleged a cover-up by the Catholic Church.
DCI Fox claimed that he had been investigating complaints from victims when he was
removed from the investigation, asked to hand over all the information he received and
told to stop investigating the alleged abuse by the priests. Subsequently he went to the
press and as a result the Australian Government established a Royal Commission of
Inquiry into child abuse. When giving evidence to the Commission, his senior officer
told the inquiry that allegations made by Peter Fox ‘are outrageous’.3 Since then Fox
has resigned from the police force and is now unemployed. Although DCI Fox was
publicly termed a whistleblower, when his reports of alleged misconduct appeared to be
ignored by his superiors, and he went to the media, he was no longer protected by the
Whistleblower Protection Act. His experience is not unique among whistleblowers.
Most whistleblowers assume that their whistleblowing will be welcomed but this is
often not the case. In a recent paper4 the authors compared and contrasted the good
intentions and the practical consequences of deciding to blow the whistle. A whistle-
blower’s personal account of his experience indicated that he was committed to his
2
Norington, B. 2014. Messenger becomes focus of suspicion. The Weekend Australian,
Inquirer, 28–29 June, p. 15.
3
ABC News Updated Thu Jul 4, 2013 5:51pm AEST.
4
Francis, R.D. and Armstrong, A. 2011. Corruption and whistleblowing in international
human aid agencies. Journal of Financial Crime 18(4), 319–335.
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Protecting the whistleblower 585
organisation and was most distressed by the way he was treated when he blew the
whistle (sidelined and ignored and finally having no choice but to leave). In fact,
whistleblowers are often left frustrated, humiliated or ostracised at great personal cost.
His experience was not unique.
Research shows that employees who have blown the whistle are usually loyal to an
organisation and would rather have a wrongdoing corrected by raising the issue with
their organisation rather than cause a scandal by blowing the whistle.5 Many people
will not blow the whistle for fear of a negative reaction – everything from loss of
relationships at work, loss of their job or loss of contracts if the whistleblower is an
outside contractor. The old truism of ‘shooting the messenger’ bringing bad news
appears to be still dominant in most workplaces.
Whistleblowers may not be protected if they disclose information to the media. Nor
are journalists immune to prosecution if they are found to have access to information
that is not in the public domain.6 It is also difficult to draw a line between ‘leaking’, for
example, Ministerial leaks of confidential information to journalists, and disclosure of
government information by a whistleblower. The former may be rarely challenged, but
the latter is the only one protected. Currently, before the Federal Parliament in Australia
is new legislation under which spies who leak sensitive information will face new
penalties of up to ten years’ jail.
In Egypt, the recent convictions of journalists for reporting events that challenged
public authority point to new threats to those who disclose information even when it is
in the public domain. Governments in most western countries are introducing ‘data
retention’ legislation that will require records of internet communications to be retained
by providers to help intelligence and law enforcement agencies to carry out investiga-
tions and prosecutions. In the UK, information such as the time and destination of
phone calls, text messages, emails and Skype calls must be retained for up to a year. In
Australia, legislation currently before Parliament is seeking a two-year retention
period.7
The rapid distribution of secret public sector information has been made possible by
access by the general public to the new sophisticated information technology used in
communications (ITC) and social media. Twitter, Youtube, and so on, have changed the
means of whistleblowing so that there are some questions raised about, on the one
hand, whether legislation across the globe is keeping up with the changes and about, on
the other hand, how whistleblowers should be protected and whistleblowing should be
managed.
5
Vandekekchhove, W. and Tshuridu, E.E. 2010. Risky rescues and the duty to blow the
whistle. Journal of Business Ethics 97(3), 365–380.
6
Dorling, P. 2012. Secrets, lies and perils of a whistleblower. The Age, 18 February, p. 14.
7
Wroe, D. and Massola, J. 2014. Internet data to be stored under new crime, spying laws.
The Age, 16 July, p. 3.
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DEFINITION OF A WHISTLEBLOWER
As early as 1981, the US Merit Systems Protection Board defined whistleblowers as
employees who report illegal or wasteful activities within government operations. Over
20 years later, in 2003, under the governance standards set by Standards Australia
International,8 a whistleblower was a person, being a director, manager, employee or
contractor of an entity, who, whether anonymously or not, attempts to make or wishes
to make a report in connection with reportable conduct and where the whistleblower
wishes to avail themselves of protection against reprisal for having made the report.
Here, the issues of anonymity and protection were raised.
A broad definition of whistleblowing used in studies in the US9 refers to wrongdoing
in terms of perceived illegal, immoral or illegitimate practices under the control of
employers, and included errors of both commission and omission. This ignored any
motivation for wrongdoing but included wrongdoing that was not only illegal but
viewed as immoral or illegitimate.
Latimer and Brown’s10 studies of whistleblowing greatly influenced the legislation
introduced in Australia. They limited the scope of whistleblowing to disclosures within
the power of employers to take action. It was comprehensively defined as the disclosure
by organisational members (former or current) of illegal, immoral or illegitimate
practices under the control of their employers to persons or organisations that may be
able to take some action.
Perhaps because of the negative connotations attached to the term ‘whistleblowing’,
the term used in legislation in Australia and the UK to refer to whistleblowing was
‘public disclosures’ and to those who report misdoings was ‘disclosers’. In the US the
term used is ‘relator’ referring to the person who relates the complaint.
The Australian Government’s PID Act11 refers to the reporting of information that is
of public interest and which alleges a breach of the Australian Public Service (APS)
Code of Conduct by an employee or employees within an agency. The APS Code of
Conduct states:
+ An APS employee must act with honesty and integrity in the course of APS
employment.
+ An APS employee must maintain appropriate confidentiality about dealings that
the employee has with any Minister or Minister’s member of staff.
+ An APS employee must at all times behave in a way that upholds the APS values
and good reputation of the APS.
8
Standards Australia International 2003. Whistleblower Protection Programs for Entities.
Corporate Governance Australian Standard AS 8004-2003. Sydney, Standards Australia Inter-
national.
9
Near, J.P. and Miceli, M.P. 1985. Organizational dissidence: The case of whistleblowing.
Journal of Business Ethics 4(1), 1–6.
10
Latimer, P. and Brown, A.J. 2008. Whistleblower laws: International best practice.
University of New South Wales Law Journal 31(3), 796–797.
11
Australian Government. Public Interest Disclosure Act 2013, http://www.comlaw.gov.au/
Details/C2013A00133.
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APS values are: (a) that the APS is apolitical, performing its functions in an impartial
and professional manner, and (b) that it has the highest ethical standards.
WHISTLEBLOWING LEGISLATION IN AUSTRALIA

Protection for whistleblowers has been introduced in Public Disclosures Acts by all
Australian States12 and the Commonwealth since the 1990s.13 On 15 January 2014 the
APS whistleblowing scheme was replaced by the PID Act, an Act to facilitate
disclosure and investigation of wrongdoing and maladministration in the Common-
wealth public sector, and for other purposes. In the PID Act whistleblowing refers to
the reporting of information which alleges a breach of the APS Code of Conduct by an
employee or employees within an agency. The Act lists ten categories of disclosable
conduct (Table 48.1). Section 16 of the Public Service Act 1999 (PS Act) provides
legislative protection for whistleblowers within the APS. The 2013 Act extends this to
acts, omissions, matters and things outside Australia.
What Are Public Disclosures?
The PID Act refers to disclosures (Table 48.1) made by a person who is, or has been,
a public official to an authorised internal recipient or supervisor, to a legal practictioner,
or to anybody if (a) the disclosure has not been adequately dealt with or (b) there is
substantial and imminent danger to health or safety. The provisions of the sub-sections
go from (A) to (I) iii, and need to be considered in their entirety. A disclosure may be
made directly to the Inspector-General of Intelligence and Security (IGIS, in relation to
an intelligence matter) or to the Commonwealth Ombudsman (in relation to other
government agencies), or to an investigative agency prescribed in rules made under the
PID Act. In limited circumstances, an external disclosure outside government, or an
emergency disclosure in the case of substantial and imminent danger, is permitted. The
exception is intelligence information or information that poses a risk to security and
defence.
The stated objective of the Act is: to promote the integrity and accountability of the
Commonwealth public sector, to encourage public disclosures, to protect the people
making the disclosures and to ensure that the matters are properly investigated. A
further restriction on whistleblowers is that conduct is not disclosable under the Act if
it relates only to actions taken or decisions made by:
+ politicians
+ private individuals or companies
+ courts or tribunals
12
See, for example, Armstrong, A. and Francis, R.D. 2014. Legislating to protect the
whistleblower: The Victorian experience. Australian Journal of Corporate Law 29(1), 101–111.
13
Armstrong, A.F. and Francis, R.D. 2010. Whistleblowing. Paper presented to the workshop
Whistleblowing, 28th International Symposium on Economic Crime, Jesus College, University
of Cambridge, September 2010.
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+ state or local governments

+ government ministers or the Speaker of the House of Representatives; or the
President of the Senate.
Table 48.1 Types of disclosable conduct addressed by the Australian Public Interest
Disclosure Act 2013
Types of disclosable conduct

Conduct that:
1. contravenes a law of the Commonwealth, a State or a Territory;
2. in a foreign country, contravenes a law;
3. perverts the course of justice or any corruption of any kind;
4. constitutes maladministration;
5. is an abuse of public trust;
6. is a fabrication, falsification, plagiarism, or deception in relation to scientific
research;
7. wastes public money or property;
8. is a danger to health or safety;
9. results in danger to the environment;
10. is prescribed by the PID rules.
Source: Australian PID Act.
To Whom is a Disclosure Made?
A discloser may disclose information to his/her supervisor (who is then obliged under
section 60A to give the information to an authorised officer) or an authorised officer of
the agency to which the person belongs or formerly belonged, the Ombudsman, or an
investigative agency. The disclosure provisions do not affect an APS employee’s right
to complain to the Commonwealth Ombudsman about actions taken or decisions made
by an agency.
For intelligence and defence matters the disclosure is referred to an authorised officer
who is the principal officer of the agency, or to a public official who is appointed by
the principal officer of the agency as an authorised officer for the purposes of this Act.
The principal officer of the allocated agency must investigate the disclosure and prepare
a report, within a set time and in accordance with the requirements of the Act. When a
disclosure complies with the legislation, protection is available to the discloser.
WHY DO WE NEED WHISTLEBLOWING?

At a time when the monitoring of individual performance has never been greater,
people could well ask why do we need whistleblowing legislation. One reason is the
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importance of combating corruption as part of the corporate governance agenda. While

anti-fraud and anti-corruption laws and guidelines are issued in most countries and also
advocated by international agencies such as the Organisation for Economic
Co-operation and Development (OECD),14 surveys of corruption show that the inci-
dence of corruption is high and increasing annually.15 Furthermore, the rise of
corruption is significantly heightened when reports of wrongdoing are not supported by
protection.16
The failure of many large corporate entities contributed to the Asian financial crisis
during the 1980s and later to the Global Financial Crisis in 2008. The documentation of
their failures has shown that these were in many cases due to illegal and unethical
practices. Their disclosure was usually brought about by internal whistleblowers, such
as Sharron Watkins, who disclosed the fraud and misbehaviour at Enron.17 This has
stimulated those regulating the financial markets and international bodies such as the
OECD to call for new corporate governance practices and legislation to make the
corporate sector more accountable, and to reduce the conflicts of interest between
agencies and their staff in the financial sector.
This appears to be a downside to whistleblowing. Despite that, one has to note that
blowing the whistle is one of the major ways of exposing corruption (see Table 48.2).
It is interesting to note that Transparency International18 has, as one of its major
precepts, that corruption flourishes in secrecy, to which the antidote is transparency.
One of the major benefits of whistleblowing is the contribution it makes to both
reducing costs and improving service outcomes.19
There are some protections for private sector whistleblowers, for example in the
Sarbanes-Oxley Act in the US and the Corporations Law in Australia, but there appears
to be little legislation for the protection of whistleblowers that is specific to the private
sector. The aim of legislation, in most cases, has been to protect the integrity of the
public sector.
The public sector is an important part of a nation’s economy and influences public
and social values. Ethical structures and practices in the public sector are important
indicators of the stability of democratic government. The disclosure of secret commis-
sions and inappropriate gifts caused the recent political upheavals, and loss of
government, the premier and credibility, in the NSW State Government. In contrast,
14
OECD 2009. Recommendation for Further Combating Bribery of Foreign Public Officials
in International Business Transactions. Working Group on Bribery in International Business
Transactions,
15
KPMG 2011. Global Anti-Bribery and Corruption Survey 2011, www.kpmg.com/…/
global-anti-bribery-corruption-survey-o-201106.asp.
16
OECD 2011. G20 Anti-Corruption Action Plan: Study on Whistleblower Protection
Frameworks, Compendium of Best Practices and Guiding Principles for Legislation. Paris,
OECD.
17
Wearing, W. 2005. Cases in Corporate Governance. London, Sage.
18
Transparency International 2007. Policy Paper: Poverty Aids and Corruption.
www.Transparency.org.content/download/20572/285905.
19
Miceli, M.P. and Near, J.P. 2013. An international comparison of the incidence of public
sector whistle-blowing and the prediction of retaliation: Australia, Norway and the US.
Australian Journal of Public Administration 72(4), 433–446.
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many public servants take considerable pride in their commitment as public servants to
values such as impartiality, fairness and ethical behaviour.
Another reason why whistleblowing legislation is necessary is that, as indicated
above, retaliation for whistleblowing has traditionally been the norm in most organ-
isations.
Table 48.2 Types of fraud disclosed by whistleblowers
Types of fraud by employees Types of fraud by directors and managers
+ Theft of plant and equipment + Misstatement of accounting

+ Theft of inventory information
+ False invoicing + Trading while insolvent
+ Theft of funds in other ways (e.g. + Overcharging for goods in invoices
lapping) + Tax evasion
+ Theft of petty cash + Money laundering
+ Misappropriation of monies received + Insider trading
+ Lending fraud + Trade practices (e.g. cartels, collusive
+ Credit card fraud tendering)
+ Theft of intellectual property + Release of confidential information
+ False accounting + Conflict of interest
+ Payment to charities and political
parties for improper purposes
+ Nepotism and cronyism (when
inadequately qualified)
+ Manipulation of the tendering process
(late, non-complying tenders and
awarding contracts that are personally
favourable)
+ Lavish gifts or entertainment
+ Facilitation payments
+ Secret commissions
The essence of good governance is accountability. This objective is served by audit

systems and controls. Audit systems identify controls in place and compliance with the
control systems. However, many instances of fraud and corruption are by those people
with the greatest knowledge of how the systems work and how the systems can be
bypassed. In such cases only disclosure by internal people will result in them being
uncovered.
It appears that recent news coverage, supported by the growth in research, has
stimulated several countries to revisit whistleblower legislation. In a global world,
whistleblowing is often directed at organisations operating across borders, and legisla-
tion is increasingly applied to companies operating internationally. In this context, it is
important that whistleblowers know what they can expect if they ‘blow the whistle’ not
only in their own country but in a country different from their own.
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ETHNICITY AND WHISTLEBLOWING

We have to recognise that in this multicultural world there are differences in perception
as to what constitutes acceptable behaviour, and also what practices are acceptable. One
is mindful of ‘Guanxi’ in China (for example), which is the connectedness of
enterprises, and relates to how business executives use personal connections to support
commerce. This is not so far from the British ‘old boy network’, and is how business is
done in many places. What is different is the governing legislation in some countries. It
also goes to the heart of such issues as ‘what is an acceptable gift?’ In some countries
gifts in commerce, unless really trivial, are considered bribes. In other places they are
marks of esteem. From this it is apparent that we need to frame rules of acceptability
that are applicable in other cultures and other jurisdictions.
RESEARCH INTO WHISTLEBLOWING

The response to whistleblower reports about wrongdoing in organisations has been
widely studied. In a study by Griffith University, Brown20 collected and analysed
survey data from 7663 public agencies. Seventy one per cent of the public had directly
observed at least one of a wide range of nominated examples of wrongdoing in their
organisations. The key findings were that less than 2 per cent of public interest
whistleblowers received support from their organisations; more than half were esti-
mated as suffering a stressful experience, including around a quarter reporting reprisals
or mistreatment. Over 60 per cent of whistleblowers and 59 per cent of their case
handlers had experienced threats, intimidation or torment. A more recent study21 by
Miceli and Near compared findings from several studies in Australia, Norway and the
US. They concluded that across the different studies fewer than half of the whistle-
blowers experienced retaliation in the different countries. If retaliation is diminishing it
may be because, in the last ten years, many countries have introduced legislation to
protect whistleblowing.
Large-scale studies of whistleblowing conducted in Australia, Norway and the US
have investigated the incidence of whistleblowing,22 how culture and economic systems
20
Brown, A.J. 2008. Public Interest Disclosure Legislation in Australia: Towards the Next
Generation. Brisbane, Griffith University, Commonwealth Ombudsman, NSW Ombudsman and
Queensland Ombudsman.
21
Miceli, M.P. and Near, J.P. 2013. An international comparison of the incidence of public
22
Miceli, M.P., Near, J.P. and Dworking, T.M. 2009. A word to the wise: How managers and
policy-makers can encourage employees to report wrongdoing. Journal of Business Ethics 86(3),
379–396; Brown, A.J. 2008. Public Interest Disclosure Legislation in Australia: Towards the
Next Generation. Brisbane, Griffith University, Commonwealth Ombudsman, NSW Ombudsman
and Queensland Ombudsman.
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may affect observation and labelling of whistleblowing,23 the whistleblower’s experi-

ence of retaliation24 and what are appropriate standards for managing whistleblowing.25
Several small-scale studies have also investigated whistleblowing in specific industries
(e.g. Zhand, Chiu and Wei’s 200926 study of banks in China).
The conclusions drawn from these studies are mixed, and as whistleblowing becomes
more prevalent, many issues require further research. Indeed, some of the conflicting
results in the above studies may reflect changing community attitudes over recent times
due to the news coverage given to the recent whistleblowing occurrences.
PROTECTION FOR WHISTLEBLOWERS

Protection for whistleblowers in Australia is provided by PID Act, and, although there
is no specific reference to whistleblowers, the Fair Work Act 2009 and some other Acts
such as the Corporations Law and the Australian Consumer Protection Law also
provide some protection. Sub-section 772(1)(e) of the Fair Work Act states that
employment cannot be terminated for ‘the filing of a complaint, or the participation in
proceedings, against an employer involving alleged violation of laws or regulations or
recourse to competent administrative authorities’.
Protection under section 10 of the PID Act includes:
(a) immunity from liability;

(b) offences and civil remedies for reprisals taken against disclosers;
(c) offences for disclosure of the identity of disclosers.
The whistleblower must also be kept informed of the response to the disclosure and
progress of an investigation.
23
Brown, A.J. and Roberts, P. 2010 The Australian legislative experience. In D. Lewis (ed.)
A Global Approach to Public Interest Disclosure Legislation, pp. 56–73. Cheltenham, UK and
Northampton, MA, Edward Elgar; Miceli, M.P., Near, J.P. and Dworking, T.M. 2008. Whistle-
blowing in Organizations. Lea’s Organization and Management Series, New York, Routledge/
Taylor & Francis; Smith, R. and Brown, A.J. 2008. The good, the bad, and the ugly:
Whistleblowing in our times. In A.J. Brown (ed.) Whistleblowing in the Australian Public
Sector: Enhancing the Theory and Practice of Internal Witness Management in Public Sector
Organizations, pp. 121–151. Canberra, ANU E-Press.
24
Miceli, M.P. and Near, J.P. 2013 An international comparison of the incidence of public
25
Armstrong, A.F. and Francis, R.D. 2013. Protecting the Whistleblower. Paper presented to
the workshop Whistleblowing, International Symposium on Economic Crime, Jesus College,
University of Cambridge, September.
26
Zhand, J., Chiu, R. and Wei, L. 2009. Decision-making process of internal whistleblowing
behaviour in China: Empirical evidence and implications. Journal of Business Ethics 88(S1),
25–41.
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Immunity from Liability
If an individual makes a public interest disclosure, the individual is not subject to any
civil, criminal or administrative liability (including disciplinary action) for making the
public interest disclosure, proceedings for defamation or termination of a contract on
the basis that a disclosure constitutes a breach of the contract. This is not the case,
however, if the person making the disclosure knowingly contravenes a designated
public disclosure restriction, and they are not protected from prosecution if they have
been involved in the illegal conduct being disclosed.
This means that the disclosure must comply with the procedures defined by the Act
and not disclose information, such as intelligence information, whose circulation is
specifically restricted.
Section 16 of the PS Act in Australia provides that a person performing functions in
or for an agency must not victimise or discriminate against an APS employee because
the employee has reported breaches (or alleged breaches) of the Code to an authorised
person, that is, a supervisor or official designated to receive complaints.
Remedies in Response to a Reprisal
The Federal Court or Federal Circuit Court may make orders for civil remedies
(including compensation, injunctions and reinstatement of employment) if a reprisal is
taken against a person (the whistleblower) because of a public interest disclosure
(including a proposed or a suspected public interest disclosure).
Table 48.3 Compensation for reprisal or threat of reprisal
Federal Court or Federal Circuit Court Legal protection and compensation

Offender: taking reprisal or threatening Penalty: imprisonment 2 years or 120
to take reprisal penalty units or both
Court response to reprisal Order requiring offender to compensate
the whistleblower for loss, damage or
injury
Order requiring employer to compensate
the whistleblower for loss, damage or
injury
Injunction restraining the reprisal
If reprisal is ‘failing to do something’ Requiring offender to do something
Compensation in the workplace Require an apology
Reinstate the whistleblower
An alternative position at the same level
Disclosure of the whistleblower’s identity Imprisonment for 6 months, 30 penalty
units or both
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Because the PS Act prohibits victimisation and discrimination by persons performing

functions ‘in or for an Agency’, contractors as well as APS employees are prohibited
from taking retaliatory action against disclosers.
A person who inflicts a reprisal or threatens to do so (Table 48.3) can be imprisoned
for two years. The courts can also issue an order requiring an offender to compensate
the whistleblower for loss, damage or injury. Compensation can be awarded by the
Federal or Federal Circuit courts against an offender (individual employee or employer
or both) for taking reprisal or threatening to do so. The Court also has wide powers to
take action against any other person who aided, abetted or was otherwise involved in
taking action against a whistleblower.
The defence against an order for compensation is that the employee or employer took
reasonable precautions, and exercised due diligence, to avoid reprisal or threat. In a
similar vein, a whistleblower may be required to pay costs if the Court is satisfied that
the whistleblower instituted the proceedings vexatiously or without reasonable cause.
Confidentiality, Anonymity and Disclosure of the Identity of Disclosers
Under the Australian Privacy Act27 a whistleblower’s identity is considered ‘personal

information’ and therefore is protected. ‘Personal information’ can only be disclosed
without the individual’s consent in certain circumstances prescribed under the Privacy
Act, such as to protect public revenue or enforce criminal law.
A person commits an offence if they identify a whistleblower or use their identifying
information (Table 48.3). The penalty is imprisonment for six months or 30 penalty
units, or both. The exceptions are if the information was previously lawfully published,
or disclosed for the purposes of the PID Act, the Ombudsman’s functions, national
security or with the consent of the whistleblower.
An agency head, the Public Service Commissioner or the Merit Protection Commis-
sioner may refer information provided by a whistleblower to another appropriate
agency, such as the Australian Federal Police, the State Police or the Commonwealth
Director of Public Prosecutions, should they consider it necessary. If this occurs, it is
likely that the substance of the whistleblower’s complaint, and so perhaps their identity,
will become public. The agency head, and Public Service or Merit Protection
Commissioner cannot direct or control how other agencies may investigate the
complaint. However, the whistleblower remains protected under section 16 of the PS
Act. The person or agency to which the personal information is disclosed shall not use
it for a purpose other than that for which it was provided.
Although disclosures can be made by an employee or a member of the public, most
disclosures are to the organisation in which a whistleblower is employed. The
disclosure must be made in private. This means that a whistleblower making a
disclosure might reasonably believe that disclosure will only be to those to whom they
are reporting or who will be investigating the reason for the disclosure. Furthermore, in
contrast to provisions in the Corporations Law applying to the private sector, a
disclosure can be anonymous, that is, a discloser need not identify themselves to the
organisation when making a disclosure to that organisation under the PID Act.
27
The Privacy Act 1988, www.oaisc.gov/au/privacy-act.
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In this, we do have to recognise that any preservation of anonymity might be

non-effective if the identity of the discloser is obvious. Although many whistleblowers
prefer to remain anonymous, and their disclosures confidential, maintaining anonymity
may not be possible when an investigation leads to legal proceedings. There is also a
risk that too much confidentiality can conflict with transparency and accountability.
Notification to Discloser
At a seminar attended by whistleblowers held in Melbourne, all, without exception,

regarded their whistleblowing as a negative experience, often because of lack of
information about the response being taken to their complaint.
The PID Act requires that the principal officer of the agency must, as soon as
reasonably practicable, inform the discloser of the action being taken, including details
of the investigation such as its estimated length. The officer must keep the discloser
informed of the progress of the investigation, prepare a report within 90 days and
provide it to the discloser. If no investigation is undertaken, the whistleblower must be
advised of the decision, why this decision was taken and other courses of action
available to them.
The principal officer of a government agency must also establish procedures for
facilitating and dealing with public interest disclosures relating to the agency. The
procedures must include (a) assessing risks that reprisals may be taken against the
persons who make those disclosures; (b) providing for confidentiality of investigative
processes; and (c) taking reasonable steps to protect public officials who belong to the
agency from detriment, or threats of detriment, relating to public interest disclosures by
those public officials. An agency’s Annual Report must include the number and kinds
of public interest disclosures received and investigations conducted by authorised
officers of the agency during the financial year and the actions taken as a consequence.
It also must include information about the number of disclosures referred to the
Ombudsman and IGIS, and an assessment of their performance.
Role of the Ombudsman
The Ombudsman’s Office has several roles. The Ombudsman determines standards for
the procedures for dealing with disclosures, gives information and assistance, keeps
records of disclosures under the PID Act and conducts investigations. Its main role is to
investigate disclosures referred to it by an agency or a discloser. Evidence of a criminal
offence may be referred to the police. Another of the Ombudsman’s duties under the
PID Act is conducting educational and awareness programmes relating to the Act.
Matters referring to intelligence or national security, being outside the Ombudsman’s
responsibilities, require the Ombudsman to consult with the IGIS.
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COMPARISON WITH UK WHISTLEBLOWING LEGISLATION

The Public Interest Disclosure Act 1998,28 which came into force in the UK in July
1999, has subsequently been amended by the Enterprise and Regulatory Reform Act
2013.29 The aims of the 2013 reforms were to reduce the unnecessary regulation,
improve the efficiency of the business sector in the UK and promote good governance
and openness in organisations. For these reasons it received broad support from the
Confederation of British Industry, the Institute of Directors and key professional
groups.30
What is a Public Disclosure in the UK?
Table 48.4 lists the types of disclosures that qualify for protection in the UK. They are
very similar to those found in the Australian Act. The differences are that the UK Act
specifies that disclosure includes information about events that are ‘likely to occur’ (a
miscarriage of justice) or a matter that is deliberately concealed. The Australian Act
disclosures that qualify for protection include any item that perverts the course of
justice or causes waste within the public sector.
The scope in both Acts extends to employees of all government entities including
health and education authorities, but specifically excludes the private sectors. The 2013
amendments to the UK Act were designed to close a loophole that allowed whistle-
blowers to blow the whistle on matters of private interest (e.g. breach of their
employment contract) and ensure it applies only to matters of public interest. Both Acts
apply to information about misconduct in the home or foreign countries. The UK Act
requires the disclosure to be ‘in the public interest’, not for personal gain and to be
‘reasonable’. In an assessment of ‘reasonable’ a court should take into account the
identity of the person to whom the disclosure is made, the seriousness of the matter,
whether it is likely to continue, whether the disclosure is a breach of confidentiality
owed to their employer, and what kind of action was taken as a result of the disclosure.
In addition to employees, The UK Act applies to a greater diversity of people than
the Australian Act. It covers workers, contractors, trainees, agency staff, homeworkers,
police officers and every professional in the National Health Service. This is more
extensive than the Australian legislation that specifically excludes political office
bearers and police from the Act.
28
Public Interest Disclosure Act 1998, www.gov.uk/pga.1998.
29
Enterprise and Regulatory Reform Act 2013, www.gov.uk/government upload-regulation-
reform-act-2013.policy.PDF; Enterprise and Regulatory Reform: A Guide, 17 October 2013.
Department for Business, Innovation and Skills. Policy Paper. BIS/13/9906.
30
Dehne, G. Guide to PIDA. Public Concern at Work, www.pcaw.org.uk/guide-to-pida.
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Table 48.4 Public disclosures qualifying for protection in the UK
Disclosures qualifying for protection

A ‘qualifying disclosure’ means any disclosure of information which, in the reasonable
belief of the worker making the disclosure, tends to show one or more of the
following:
(a) that a criminal offence has been committed, is being committed or is likely to be
committed;
(b) that a person has failed, is failing or is likely to fail to comply with any legal
obligation to which he/she is subject;
(c) that a miscarriage of justice has occurred, is occurring or is likely to occur;
(d) that the health or safety of any individual has been, is being or is likely to be
endangered;
(e) that the environment has been, is being or is likely to be damaged; or
(f) that information tending to show any matter falling within any one of the
preceding paragraphs has been, is being or is likely to be deliberately concealed.
To Whom is the Disclosure Made?
A disclosure made to an employer (be it a manager or director) will be protected if the

whistleblower has a reasonable belief the information tends to show that the mal-
practice has occurred, is occurring or is likely to occur. The disclosure can also be
made to the relevant regulator.
Wider disclosures (e.g. to the police, the media, MPs, consumers and non-prescribed
regulators) are protected if, in addition to the tests for regulatory disclosures, they are
reasonable in all the circumstances and they are not made for personal gain. A wider
disclosure must also fall within one of four broad circumstances to trigger protection.
These are that (a) the whistleblower reasonably believed he/she would be victimised if
he/she raised the matter internally or with a prescribed regulator; or (b) there was no
prescribed regulator and he/she reasonably believed the evidence was likely to be
concealed or destroyed; or (c) the concern had already been raised with the employer or
a prescribed regulator; or (d) the concern was of an exceptionally serious nature.
Additionally, for these public disclosures to be protected, an Employment Tribunal
must be satisfied that the particular disclosure was reasonable. In deciding the
reasonableness of the disclosure, the tribunal will consider all the circumstances,
including the identity of the person to whom it was made, the seriousness of the
concern, whether the risk or danger remains, and whether the disclosure breached a
duty of confidence which the employer owed a third party. Where the concern had been
raised with the employer or a prescribed regulator, the tribunal will also consider
the reasonableness of their response. Finally, if the concern had been raised with the
employer, the tribunal will consider whether any whistleblowing procedure in the
organisation was or should have been used.
Both Australian and UK Acts require the discloser to raise the matter with a
responsible authority within their organisation, or the appropriate regulator. In the UK,
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the matter can also be raised with the person who may be responsible for the
malpractice.31 The purpose is for those in authority in the organisation to be forewarned
of potential malpractice, investigate it and take such steps that will remove any
unwarranted danger. One advantage of this approach is that in addition to facilitating
early detection of malpractice, the law can more readily hold people to account for
their actions where it can be shown they had actual notice of, ignored or failed to
combat the malpractice. The early action can also reduce the costs and time in courts
for businesses. One disadvantage is that those warned of discovery may take evasive
action to get rid of the whistleblower.
PROTECTION FOR WHISTLEBLOWERS

Workers in the UK, who experience a reprisal from a co-worker or are dismissed for
whistleblowing, can go to an Employment Tribunal, or an Industrial Tribunal in
Northern Ireland, to seek compensation. Awards are uncapped and based on the losses
suffered. Where the whistleblower’s claim is for victimisation (but not dismissal) they
may also be compensated for injury to feelings. If sacked they may, within seven days,
seek interim relief so that employment continues or is deemed to continue until the full
hearing.
However, anonymity and confidentiality are not a priority. If a worker blows the
whistle anonymously, they are likely to face problems.32 This is because for a worker to
win protection the tribunal must be satisfied that the worker was victimised by their
employer, and hence the employer knew that they had blown the whistle.
Protection for Australian whistleblowers is more extensive. As described above, the
PID Act specifies that a person making a disclosure has immunity from liability, access
to courts for compensation for reprisals and severe penalties for those who make
reprisals against the discloser. The Act also aims to protect the organisation that is the
subject of a complaint by establishing responsibilities for the principal of the
organisation to manage the disclosure, the discloser and the risks to the organisation.
CONCLUSION
While both Australian and UK Acts provide increased protection for the whistle-
blowers, there are a number of issues that remain to cloud the objectivity at first
suggested by the legislation in the Acts. First, what is the appropriate response of an
organisation to a complaint? How should the complaint and the whistleblower best be
managed? For example, if a matter has been investigated by an investigating entity then
natural justice means that if a decision is to be made about their conduct this person has
the right to:
31
Sweet & Maxwell 2014. Current Law Statues, www.sweetandmaxwell.co.uk.
32
Concern at Work website, www.pcaw.org.uk.
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+ be informed about the substance of the allegations against them;

+ be given the opportunity to answer the allegations before a decision is made;
+ be informed about the substance of any adverse comment that may be included in
any report arising from an investigation; and
+ have his/her defence set out fairly in any report.
If a person has been the subject of allegations that are wrong or unsubstantiated, then it
is necessary for the employer and the investigating entity to ensure that there are no
adverse consequences for this person arising out of the disclosure or its investigation.
This is particularly crucial where information has become well known across the
organisation where the person works.
Related questions are: who should have responsibility for investigations into the
whistleblower disclosures? Should organisations be compelled to introduce whistle-
blower management structures? Should responses to whistleblower disclosures be
mandatory?
Second, are moral issues emerging from whistleblowing? Ralph Nader33 identifies
the conflict that can be experienced by the loyal employee:
The key question is, at what point should an employee resolve that allegiance to society (e.g.
the public safety) must supersede allegiance to the organization’s policies (e.g. the organ-
ization profit), and then act on that resolve by informing outsiders or legal authorities? It is a
question that involves basic issues of individual freedom, concentration of power and
information flow to the public.
Every enterprise suffers embarrassments, errors in judgement, inadequacies and biases

that everyone would prefer to keep hidden. It is when these become illegal, immoral or
dangerous that the issue of whether an employee should disclose the information
becomes pressing. This then raises the choice between exercising his/her power as a
whistleblower or remaining loyal to the organisation. Of course, loyalty to an
organisation can also mean disclosure is the best course to take in the organisation’s
interests. But, more often, the question becomes, is it worthwhile? Will the career of
my boss, who has mentored and encouraged me, be destroyed? Should I just walk away
from the organisation? Have I the courage to face up to what is the right thing to do?
There are two related issues here: are all disclosures in the public interest? And what
responsibilities do I owe for the right to freedom of speech?
According to Whistleblowers Australia,34 personal ethics and values are an important
factor for people who are whistleblowers. Both Bradley Manning and Snowden claim
that their actions were motivated by conscience and taken in order to achieve what they
perceived to be the greater good of a more transparent world. Motivation for
33
Nader, R., Petkas P.J. and Blackwell, K. 1972. Whistle Blowing. New York, Grossman.
34
Bowden, P. 2005. A Comparative Analysis of Whistleblower Protection. Australian
Association for Professional and Applied Ethics 12th Annual Conference 28–30 September
2005.
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whistleblowing is associated with righting wrongdoing and tied to loyalty to organ-

isations.35 Most whistleblowers are well intentioned and do not anticipate the un-
intended consequences of their disclosure that may come from workmates or other
colleagues viewing them as ‘snitches’ or not part of the team. Surveys showed that
most people approve of whistleblowers, but evidently whistleblowing can trigger
disapproval when the decision is closer to home.36 It remains unresolved whether a
whistleblower has a ‘right’ to blow the whistle or a moral duty to do so.37
Another moral issue is: should whistleblowers receive monetary rewards for their
disclosures? There appear to be few rewards for whistleblowers. There is a debate
about whether whistleblowers should receive a monetary reward for their whistle-
blowing. In the US, under the Fraud Enforcement Recovery Act 2009,38 if whistle-
blowers provide information that forms the basis of a successful prosecution for fraud
against the government, they can claim a percentage of the savings made as a result.
The government has recovered nearly $35 billion under the False Claims Act between
1987 (after the significant 1986 amendments) and 2012.39 One of the advantages is that
people not only have an incentive to blow the whistle, but as many lose their jobs as a
consequence, the monetary remuneration goes to compensate for some of the costs.
Others argue that while rewards can reinforce desirable behaviour, they may also
provide incentives for people to make false or frivolous allegations.
Social media is the ‘elephant in the room’. Its ready access and wide distribution are
changing the way news and all forms of information are distributed. As more and more
emphasis is given to Twitter, Facebook and other media, controls on truth and
objectivity become blurred. Legislation is yet to address how the disclosures by these
means are to be managed.
According to Munro,40 when referring to the US Government’s response to Snowden,
the ‘growing ease of whistleblowing, in part, has prompted this punitive response from
authorities, desperate to stay in control’. He goes on to talk of ‘mobbings’, described as
the efforts to isolate and attack the whistleblower, instead of addressing the actual
exposures. At a time when new communications technology and social media can
bypass traditional media and make whistleblowing easier, the number of disclosures
may grow. At the same time, it is becoming easier for authorities to trace the
35
Francis, R.D. and Armstrong, A. 2011. Corruption and whistleblowing in international
human aid agencies. Journal of Financial Crime 18(4), 319–335.
36
Brown A.J. (ed.) 2008. Whistleblowing in the Australian Public Sector: Enhancing the
Theory and Practice of Internal Witness Management in Public Sector Organizations. Canberra,
ANU E-Press.
37
Vandekekchhove, W. and Tshuridu, E.E. 2010. Risky rescues and the duty to blow the
whistle. Journal of Business Ethics 97(3), 365–380.
38
Fraud Enforcement Recovery Act 2009, www.justice.gov/civil/docs_forms/C-FRAUDS_
FCA_primer.pdf.
39
Fraud Statistics – Overview, October 1, 1987–September 30, 2012, Civil Division, U.S.
Department of Justice (24 October 2012), http://www.taf.org/DoJ-FCA-statistics-2012.pdf.
40
Munro, P. 2013. Once lionised, now the enemies of a security-obsessed State. The Age. 13
July, pp. 21–22.
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whistleblowers. In this context, whistleblowing legislation that protects the whistle-

blower will grow in importance, as will the need for organisations to manage an
appropriate response.
How do we distinguish a moral whistleblower from a real nuisance? That is a
pressing question. The simple answer is that we do not know. Until there are proper
procedures in place, and the case is heard, we will never know. What is plain is that any
legislative solution must accommodate the notion that there can be nuisances, and we
need firm rules to distinguish them.
The Australian legislation and Standards Australia International specify the import-
ance of codes of conduct to positively shape the culture of an organisation, indicate the
behaviour that is expected of staff and assist staff in solving the ethical dilemmas that
they face at work. Perhaps, if codes of conduct were more widely recognised and
adhered to, the culture within an organisation could be such that whistleblower
protection was not needed.
Despite the increase in legislation and the publicity afforded to whistleblowers,
relatively little research has been done about the types of organisational wrongdoings,
the types of whistleblower responses and the effectiveness of the legislation in
increasing efficiency and reducing misconduct.
Some issues that should be addressed by further research are: to what extent is
whistleblower protection effective in meeting its aims? Does it make a measurable
difference, for example, in reducing corruption? How can the consequences of
whistleblowing for an organisation and for individuals involved be measured? Who
should have responsibility for investigations into the whistleblower disclosures? Should
responses to whistleblower disclosures be mandatory? Should whistleblowers receive
monetary rewards for their disclosures? Are the provisions of the legislation adequate
and understood? Are the processes and procedures established and operating as
intended? What has been the impact of the legislation on the whistleblower experience?
Only monitoring and evaluation of the impact of the Acts will provide evidence of their
effectiveness.
The most pressing problem to date is how to make whistleblower legislation effective
for private enterprise. When that is done the answers to the above questions will come
into full play.
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49. Rewards for whistleblowing

Caroline Bradley
1. INTRODUCTION
Whistleblowing involves a conflict between an employee’s duties of loyalty to her
employer and her duty to uphold the law – to participate in enforcement of the law by
disclosing wrongdoing. When the disclosure involves issues of national security, as in
the case of Edward Snowden,1 governments, claiming to be guardians of the public
interest, see employee duties of confidentiality (or non-disclosure) as consistent with
the public interest.2 Wikileaks3 and Edward Snowden’s disclosures have raised general
questions about what citizens have a right to know about how their governments
behave.4 Governments may discourage or fail to encourage whistleblowing even where
it might help to improve the quality of public services.5 In these non-national security
contexts governments which fail to encourage whistleblowing are more vulnerable to
criticism. When governments have made commitments to open government and
transparency (whether by proclamation, as in the case of the US, or by treaty, as in the
case of the EU), these failures to encourage disclosures of wrongdoing and problems
are especially significant.6
1
See, e.g., William E. Scheuerman, ‘Whistleblowing as Civil Disobedience: The Case of
Edward Snowden’ Philosophy & Social Criticism (2014) published online 8 June 2014 (DOI:
10.1177/0191453714537263) (noting the US Government’s draconian response to Snowden’s
disclosures); Patrick Weil, ‘Citizenship, Passports, and the Legal Identity of Americans: Edward
Snowden and Others Have a Case in the Courts’ The Yale Law Journal Forum (23 April 2014).
2
Cf. Alan M. Katz, ‘Government Information Leaks and the First Amendment’ 64 Cal. L.
Rev. 108, 109 (1976) (‘Discussion of information leaks most often focuses on national defense
information, because national defense is the area in which the government presumably has the
greatest interest in regulating the flow of information’).
3
See, e.g., Alasdair Roberts, ‘WikiLeaks: the Illusion of Transparency’ 78 International
Review of Administrative Sciences 116 (2012); Mark Fenster, ‘Disclosure’s Effects: WikiLeaks
and Transparency’ 97 Iowa L. Rev 753 (2012).
4
For a discussion of transparency see, e.g., Albert J. Meijer, Deirdre Curtin, and Maarten
Hillebrandt, ‘Open Government: Connecting Vision and Voice’ 78 International Review of
Administrative Sciences 10 (2012).
5
See, e.g., House of Commons Committee of Public Accounts, Whistleblowing (HC 593,
1 August 2014) (noting that governments in the UK had sometimes failed to protect whistle-
blowers from victimization).
6
On problems of transparency see, e.g., Caroline Bradley, ‘Transparency Is the New
Opacity: Constructing Financial Regulation after the Crisis’ 1 Am. U. Bus. L. Rev. 7
(2011–2012).
602
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Rewards for whistleblowing 603
Whistleblowing in the private sector does not involve the same type of conflict
between different public interests.7 Arguably duties to private sector employers should
cede to the obligation to comply with the law – especially where breaches of the law
carry criminal sanctions.8 An employee who discloses insider trading, market manipu-
lation, or sanctions-busting should not be criticized for breaching duties to an employer
who, at the very least, did not work hard enough to prevent such activities. Whistle-
blowing in these contexts could help to improve compliance.9
Ensuring compliance with laws regulating economic and financial activity is a
perennial concern for policy-makers and law enforcement personnel.10 This concern
has intensified as policy-makers increasingly rely on regulated financial firms as
gatekeepers and aids to enforcement of a range of different objectives from the control
of money laundering to the enforcement of sanctions.11 Financial firms are required to
know their customers and file suspicious activity reports,12 and they are responsible for
ensuring that they do not facilitate financial transactions in violation of sanctions13 or to
evade tax laws. But a number of visible examples of non-compliance with these
obligations have threatened to reduce confidence in the integrity of the financial
markets.14 Similarly, concerns about ensuring the integrity of financial benchmarks
involve an emphasis on ensuring compliance.15
7
A potential whistleblower would need to weigh the risks of retaliation against a perceived
duty to disclose. Employer retaliation may be counter-productive. See, e.g., Tina Uys, ‘The
Politicisation of Whistleblowers: A Case Study’ 9 Business Ethics: A European Review 259–
267. (2000) (noting that retaliation may ‘transform … a loyal employee into a political activist’).
8
Although cf. e.g., Orly Lobel, ‘Citizenship, Organizational Citizenship, and the Laws of
Overlapping Obligations’ 97 Cal. L. Rev. 433, 434 (2009) (arguing that there is a ‘deep
ambivalence within judicial and statutory doctrines about the role of individuals in resisting
illegality in their group settings’).
9
However, cf. Kate Kenny, ‘Banking Compliance and Dependence Corruption: Towards an
Attachment Perspective’ Edmond J. Safra Working Paper No. 38 (6 March 2014) <http://
ssrn.com/abstract=2405615> accessed 8 August 2014, at 27 (Whistleblowers suffer for disclos-
ing wrongdoing: they are ‘isolated, humiliated and cast out’).
10
Compliance is not a fee-generating activity. Cf Kenny, supra note 9, at 19 (noting that
sometimes compliance personnel in banks are described as ‘business prevention officers’).
11
See, e.g., Financial Action Task Force, Guidance on the Risk-Based Approach to
Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures,
2–3 (June 2007) (‘A risk-based approach should not be designed to prohibit financial institutions
from engaging in transactions with customers or establishing relationships with potential
customers, but rather it should assist financial institutions to effectively manage potential money
laundering and terrorist financing risks’); Maria Bergström, Karin Svedberg Helgesson, and
Ulrika Mörth, ‘A New Role for For-Profit Actors? The Case of Anti-Money Laundering and Risk
Management’ 49 J. Common Market Studies 1043 (2011).
12
See, e.g., Basel Committee on Banking Supervision, Sound Management of Risks Related
to Money Laundering and Financing of Terrorism, 9 (January 2014).
13
See, e.g., Bank Mellat v. HM Treasury [2013] UKSC 39.
14
See, e.g., United States Senate, Permanent Subcommittee on Investigations, Committee on
Homeland Security and Governmental Affairs, Offshore Tax Evasion: The Effort to Collect
Unpaid Taxes on Billions in Hidden Offshore Accounts (26 February 2014).
15
See, e.g., Financial Stability Board, Reforming Major Interest Rate Benchmarks (22 July
2014).
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Some commentators have argued that compliance may be improved through encour-
aging whistleblowing and, in particular, by paying rewards or financial incentives to
whistleblowers. Paying rewards to whistleblowers may counteract the strong social
pressures which favour silence.16 For this reason policy-makers in the US have decided
that in defined circumstances whistleblowers should be compensated. In other juris-
dictions the situation of a whistleblower is more precarious as whistleblowers may
infringe obligations of professional secrecy.17 In some jurisdictions whistleblowers are
protected from retaliation, but not remunerated for their efforts.18 In the UK, the
Parliamentary Commission on Banking Standards argued that whistleblowing should be
encouraged,19 but so far the UK’s financial regulators are not persuaded that the
payment of rewards to whistleblowers will in fact improve enforcement.20
2. REWARDING WHISTLEBLOWING: THE US

The US has long relied on private citizens as a component of law enforcement: bounty
hunters are part of the cultural landscape.21 Implied private rights of action have
allowed citizens to act as ‘private attorneys general’ to enforce the law (even if the
phenomenon has declined since the 1970s).22 Provisions for multiple damages in
antitrust suits encouraged litigation.23 Class actions enabled groups of plaintiffs to join
16
See, e.g., Kenny, supra note 9, at 22–23.
17
See, e.g., Bradley J. Bondi, ‘Don’t Tread on Me: Has the United States Government’s
Quest for Customer Records from UBS Sounded the Death Knell for Swiss Bank Secrecy Laws’
30 Nw. J. Int’l L. & Bus. 1 (2010); Scott Schumacher, ‘Magnifying Deterrence by Prosecuting
Professionals’ 89 Indiana L. J. 511 (2014).
18
See, e.g., Terry Morehead Dworkin and A.J. Brown, ‘The Money or the Media? Lessons
from Contrasting Developments in US and Australian Whistleblowing Laws’ 11 Seattle Journal
for Social Justice 653, 655 (2013) (noting that the US approach ‘contrasts sharply with
the approach taken in Australia, where there are no rewards, and where, in addition to the
institutional or structural model, law reform has focused on legitimating whistleblowing to the
media as a means of inducing change’).
19
Report of the Parliamentary Commission on Banking Standards, Changing Banking for
Good (Vol. 1, HL Paper 27-I, HC 175-I , June 2013) (Parliamentary Commission on Banking).
20
Bank of England Prudential Regulation Authority (PRA), Financial Conduct Authority
(FCA), Financial Incentives for Whistleblowers: Note by the Financial Conduct Authority and
the Prudential Regulation Authority for the Treasury Select Committee (July 2014) (PRA/FCA
Note).
21
See, e.g., <http://www.dogthebountyhunter.com/> accessed 8 August 2014; Laura I.
Appleman, ‘Justice in the Shadowlands: Pretrial Detention, Punishment, and the Sixth Amend-
ment’ 69 Wash. & Lee L. Rev. 1297, 1308–1310 (2012) (although note that some states do not
allow bounty hunters. Id. at 1309); Taylor v. Taintor, 83 U.S. (16 Wall.) 366 (1872).
22
See, e.g., Jeremy A. Rabkin, ‘The Secret Life of the Private Attorney General’ 61 L. &
Contemp. Probs 179, 180 (1998) (noting that ‘[f]or lawyers today, it is far less inviting to play
the role of “private attorney general” than it was in the 1970s’).
23
See, e.g., Joshua P. Davis and Robert H. Lande, ‘Toward an Empirical and Theoretical
Assessment of Private Antitrust Enforcement’ 36 Seattle U. L. Rev. 1269 (2013) (arguing that
private antitrust enforcement has been effective in compensating victims and promoting
deterrence).
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together to enforce their rights in circumstances where individual suits would have been
prohibitively expensive.24 But commentators argued that many class actions were really
nuisance suits designed to force businesses to agree to settlements to avoid the costs of
litigation and Congress and the courts have limited the availability of class actions,25
including securities class actions.26 Policy-makers in the US worry about how to ensure
the benefits of private enforcement while limiting its costs.27
Conceptually, rewarding whistleblowers for their disclosures is related to this idea of
a private component to law enforcement.28 Just as the possibility of treble or punitive
damages29 might encourage litigation the possibility of a reward may lead people to
become whistleblowers rather than remaining silent. Indeed, writers about private law
enforcement and whistleblowing often cite the US False Claims Act.30
When Congress enacted the Dodd-Frank Act in response to the global financial crisis
it included new provisions in section 922 relating to rewards for whistleblowers,31 to
encourage people with knowledge of violations of the securities laws to help with the
prosecution of the violations,32 and similar provisions in section 748 with respect to
violations of the Commodities Exchange Act.33 There is some possibility for overlap of
24
Cf. Samuel Issacharoff, ‘Class Actions and State Authority’ 44 Loy. U. Chi. L. J. 369, 371
(2012–2013) (‘The class action offers an alternative form of collective organization to the state
– without the elements of popular participation, political consent, and electoral accountability
that justify governmental authority in a democracy’).
25
See, e.g., Wal-Mart Stores v. Dukes 131 S. Ct. 2541 (2011); Jean R. Sternlight and
Elizabeth J. Jensen, ‘Using Arbitration to Eliminate Consumer Class Actions: Efficient Business
Practice or Unconscionable Abuse?’ 67 Law and Contemporary Problems 75–104 (Winter 2004).
26
See, e.g., A.C. Pritchard, ‘Securities Law in the Roberts Court: Agenda or Indifference?’
37 J. Corp. L. 105, 109–110 (2011–2012).
27
See, e.g., David Freeman Engstrom, ‘Agencies as Litigation Gatekeepers’ 123 Yale L. J.
616, 619 (2014).
28
Enforcement in the US clearly involves a mix of public and private elements. Cf. Margaret
H. Lemos and Max Minzner, ‘For-Profit Public Enforcement’ 127 Harv. L. Rev. 853 (2014)
(arguing that financial incentives affect public enforcement).
29
For a discussion of punitive damages see, e.g., Robert J. Rhee, ‘A Financial Economic
Theory of Punitive Damages’ 111 Mich. L. Rev. 33 (2012).
30
See, e.g., Rabkin, supra note 23, at 197–199. See also, e.g., J. Randy Beck, ‘The False
Claims Act and the English Eradication of Qui Tam Legislation’ 78 N.C. L. Rev. 539
(1999–2000). Cf. Mathew Andrews, ‘The Growth of Litigation Finance in DOJ Whistleblower
Suits: Implications and Recommendations’ 123 Yale L. J. 2422 (2014) (discussing implications
of third party funding for false claims litigation).
31
Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong.
(2010) codified at 15 U.S.C. Section 922 adds a new section 21F to the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.). The Sarbanes-Oxley Act of 2002 was an earlier attempt to
encourage whistleblowing by employees of public companies by providing for protection from
retaliation. See, e.g., Richard E. Moberly, ‘Unfulfilled Expectations: An Empirical Analysis of
Why Sarbanes-Oxley Whistleblowers Rarely Win’ 49 Wm. & Mary L. Rev. 65 (2007). The SEC
had a bounty programme in place even before the Sarbanes-Oxley Act, but few applications for
bounties were made. SEC, Office of Inspector General, Evaluation of the SEC’s Whistleblower
Program (Report No. 511, 18 January 2013) at v (SEC OIG Report).
32
S. Rep. No. 111–176, at 110 (2010).
33
Commodities Futures Trading Commission, Whistleblower Incentives and Protection, 76
Fed. Reg. 53172 (25 August 2011).
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the two regimes as the same circumstances might give rise to regulatory action by both
regulators.34 The US Securities and Exchange Commission (SEC) and Commodities
Futures Trading Commission (CFTC) rules implementing the Dodd-Frank whistle-
blower provisions are broadly similar.35
Under the Dodd-Frank Act the SEC may pay financial rewards to whistleblowers
who provide information relating to a violation of the securities laws to the SEC which
results in judicial or administrative action by the SEC under the securities laws that
produces monetary sanctions exceeding $1,000,000. The SEC may pay a reward for
‘original information’ which is ‘derived from the independent knowledge or analysis of
a whistleblower’ and ‘is not known to the Commission from any other source, unless
the whistleblower is the original source of the information’. The reward will generally
be between 10 and 30 per cent of the amount of the monetary sanctions. Rewards may
not be paid to whistleblowers who work for regulatory agencies, the Department of
Justice, a self-regulatory organization, the Public Company Accounting Oversight
Board, or a law enforcement organization, or to those who are convicted of a criminal
violation related to the securities law violation in question. The statute aims to reward
whistleblowers whose information was truly useful, and not those whose involvement
in the acts in question are culpable. Initially whistleblowers may provide information
anonymously, although they must disclose their identity before receiving any payment.
The SEC established an Office of the Whistleblower in August 2011, and has also
issued regulations to implement the new rules.36 The Adopting Release for the SEC’s
regulations noted that the SEC has received 240 comments on its proposals, many of
which focused on the relationship between the whistleblower rules and internal
corporate compliance programmes.37 The Dodd-Frank Act had not indicated whether or
not whistleblowers might be expected to work through internal compliance systems
before making disclosures to the SEC. The SEC announced that it would provide
incentives for whistleblowers to participate in internal compliance systems; for
example, whistleblowers who do work through internal systems may receive increased
rewards and those who interfere with internal compliance systems could see their
rewards reduced as a consequence.38 For employees of smaller companies the idea of
reporting internally may be unrealistic because of the risk of retaliation.39 Some
34
See, e.g., SEC, Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300,
34305 (13 June 2011).
35
See, e.g., Thomas W. White et al., ‘CFTC and SEC Whistleblower Bounties: Largely
Similar But Important Differences Remain’ (22 August 2011) <http://www.wilmerhale.com/
pages/publicationsandnewsdetail.aspx?NewsPubId=94288> accessed 8 August 2014. These are
not the only US regimes for rewarding whistleblowers. See, e.g., Michelle M. Kwon, ‘Whistling
Dixie about the IRS Whistleblower Program Thanks to the IRS Confidentiality Restrictions’ 29
Va. Tax Rev. 447 (2010).
36
SEC, Securities Whistleblower Incentives and Protections, supra note 34, at 34300 (13
June 2011).
37
SEC, Securities Whistleblower Incentives and Protections, supra note 34, at 34300.
38
Id. at 34301.
39
See, e.g., Chelsea Hunt Overhuls, ‘Unfinished Business: Dodd-Frank’s Whistleblower
Anti-Retaliation Protections Fall Short for Private Companies and Their Employees’ 6 J. Bus.
Entrepreneurship & L. (2012).
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commentators are concerned that employers may seek to limit whistleblowing through
retaliation or through agreements with employees (even if the agreements are un-
enforceable) that undermine the SEC’s Whistleblower Program and are inconsistent
with the policy reflected in the Dodd-Frank Act.40 Others worry that the Program may
encourage employees to look to the SEC for rewards rather than working internally to
fix compliance.41
As a result of comments, and in order to increase the possible number of awards, the
SEC provided that the $1 million recovery prerequisite for awards could comprise two
or more smaller recoveries.42 Although the SEC had proposed to take a narrow view of
when whistleblowers were coming forward voluntarily (in order to be eligible for
rewards), commenters quibbled with the SEC’s analysis of voluntariness. The SEC
wrote that
our final rule narrows the types of requests that may preclude a later whistleblower
submission from being treated as ‘voluntary’. All requests from the Commission are still
covered, as we believe that a whistleblower award should not be available to an individual
who makes a submission after first being questioned about a matter (or otherwise requested
to provide information) by the Commission staff acting pursuant to any of our investigative or
regulatory authorities.43
In addition the rules provide that people who are subject to a legal duty to report
information to the SEC are not eligible to be rewarded as whistleblowers.44 Certain
employees who are responsible for compliance are not eligible to be rewarded as
whistleblowers,45 nor are people responsible for outside audits who owe legal obliga-
tions to the SEC.46
40
See, e.g., Jordan A. Thomas, Labaton Sucharow, Petition for Rulemaking and the Issuance
of a Policy Statement Regarding Certain Aspects of the Dodd-Frank Whistleblower Program (18
July 2014) <http://www.sec.gov/rules/petitions/2014/petn4-677.pdf> accessed 7 August 2014.
41
See, e.g., Rachel S. Taylor, ‘A Cultural Revolution: The Demise of Corporate Culture
through the Whistleblower Bounty Provisions of the Dodd-Frank Act’ 15 Tenn. J. Bus. L. 69, 70
(2013) (arguing that ‘Dodd-Frank’s failure to meaningfully support internal reporting has an
injurious effect on corporate cultures of trust and compliance’). Although cf. Justin Blount and
Spencer Markel, ‘The End of the Internal Compliance World as We Know It, or an Enhancement
of the Effectiveness of Securities Law Enforcement – Bounty Hunting under the Dodd-Frank
Act’s Whistleblower Provisions’ 17 Fordham J. Corp. & Fin. L. 1023, 1044 (2012) (doubting the
effectiveness of internal compliance systems).
42
SEC, Securities Whistleblower Incentives and Protections, supra note 34, at 34301.
43
Id. at 34307.
44
Id. at 34309.
45
Id. at 34314 (noting that the exclusion promotes ‘the goal of ensuring that the persons
most responsible for an entity’s conduct and compliance with law are not incentivized to
promote their own self-interest at the possible expense of the entity’s ability to detect, address,
and self-report violations’).
46
Id. at 34314 (‘The exclusion for auditors performing engagements required by the
securities laws reflects the fact that these individuals occupy a special position under the
securities laws to perform a critical role for investors. Further, as adopted, our rule permits such
individuals to become whistleblowers under certain circumstances’).
Barry Rider - 9781783475780

The SEC’s Adopting Release covers 85 pages of the Federal Register, and a detailed
analysis of the rules is therefore necessarily beyond the scope of this short chapter. The
SEC’s analysis of the issues of interpretation raised by the statute and attempts to
balance the advantages and disadvantages of encouraging whistleblowing by means of
financial rewards led to a complex set of rules.47 This complexity is not unusual in US
securities regulation, but analysing the complexities of the rules would be hard for
prospective whistleblowers with no knowledge of securities regulation.48 Whistle-
blowers need either a certain level of confidence in their ability to navigate the system
or expert support.49 The prospect of the financial rewards for whistleblowing seems to
have engendered an industry of lawyer and non-lawyer representatives of prospective
whistleblowers, which in turn has led to questions about whether the activity of
representing whistleblowers should be regulated.50
The CFTC announced its first whistleblower payment in May 2014.51 By that time
the SEC had made a number of payments.52 Evaluating how successful these
programmes are is difficult. For example, when the SEC’s Office of the Inspector
General examined the SEC’s programme and consulted other federal government
agencies with whistleblower programmes to assess whether the amounts the SEC paid
were appropriate it discovered that the agencies generally did not have an opinion about
award levels as they were set by statute.53 The SEC reports that it has received an
47
The Government Accountability Project, which provides support to whistleblowers, states
that whistleblowers and the lawyers who help them in seeking both remedies for retaliation
under Sarbanes-Oxley and bounties can face ‘very complex claims requiring sophisticated
strategies and difficult decisions as to the timing of bringing multiple claims’. Government
Accountability Project, Banking Sector Accountability: Understanding and Handling the Com-
plex ‘SOX Plus One’ Whistleblower Claim, 6 (18 September 2013) <http://www.whistleblower.
org/sites/default/files/BSA.pdf> accessed 7 August 2014.
48
The SEC’s Office of Inspector General has stated that: ‘The implementation of the final
rules made the SEC’s whistleblower program clearly defined and user-friendly for users that
have basic securities laws, rules, and regulations knowledge.’ SEC OIG Report, supra note 31, at
v. The Report notes that the user-friendliness of the system is improved by the website. Id. at 11.
49
Cf. Kenny, supra note 9, at 16 (noting that ‘Swiss whistleblower Rudolf Elmer, who spoke
out against large-scale tax evasion in an offshore branch of Julius Baer bank’ said ‘there is no
school for whistleblowers’).
50
See, e.g., Alison Frankel, ‘Is SEC Whistleblower Program Underregulated?’ (2 October
2013) <http://blogs.reuters.com/alison-frankel/2013/10/02/is-sec-whistleblower-program-under
regulated/> accessed 8 August 2014.
51
CFTC Press Release, ‘CFTC Issues First Whistleblower Award’ (PR 6933-14, 20 May
2014) <http://www.cftc.gov/PressRoom/PressReleases/pr6933-14> accessed 8 August 2014.
52
See, e.g., SEC, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower
Program, 14 (SEC 2013 Annual Report) (noting that six awards had been paid to whistleblowers
and that ‘In each instance, the whistleblower provided high-quality original information that
allowed the Commission to more quickly unearth and investigate the securities law violation,
thereby better protecting investors from further financial injury and helping to conserve limited
agency resources’).
53
SEC OIG Report, supra note 31, at 23.
Barry Rider - 9781783475780

increasing number of tips since the establishment of its whistleblower programme,54

and has argued that whistleblowers have helped the SEC to stop frauds.55
3. UNCERTAINTIES ABOUT WHETHER REWARDING

WHISTLEBLOWING IS EFFECTIVE: THE UK
Like other jurisdictions the UK has provided statutory protections from retaliation for
whistleblowers.56 In 2013 the Government worried that employees had too often taken
advantage of the statutory protections in the Employment Rights Act 1996 to further
their own private interests rather than the public interest,57 and stated that in future
whistleblowers would be required to act in the public interest.58 In July 2013 the
Government published a call for evidence on whistleblowing asking what changes
(other than those in the Enterprise and Regulatory Reform Act 2013) should be made.59
Respondents raised a number of concerns about the effectiveness of the existing rules.
For example, the UK rules encourage employees to raise their concerns internally at
first,60 and respondents worried that whistleblowers might suffer from reprisals or
might be deterred from making disclosures because the rules were unclear. Respond-
ents also expressed concern that whistleblowers’ disclosures were not acted on, and that
some workers were excluded from the protections of the rules.61 In 2014 the
Government stated that it would include new provisions in the Small Business,
Enterprise and Employment Bill,62 including rules requiring prescribed persons (to
whom disclosures may be made) to produce reports about whistleblowing.63 However,
some of the Government’s responses to the call for evidence suggested that the
necessary changes were cultural rather than legal.64
In the summer of 2013 the UK Parliamentary Commission on Banking Standards
published its report on the culture of banking, expressing concern that employees of
54
SEC 2013 Annual Report, supra note 52, at 8 (noting the receipt of 334 tips in fiscal year
2011, 3001 in 2012 and 3238 in 2013).
55
SEC 2013 Annual Report, supra note 52, at 15.
56
Employment Rights Act 1996, 1996 c. 18, Part IVA, as amended by the Public Interest
Disclosure Act 1998, 1998 c. 23 and the Enterprise and Regulatory Reform Act 2013, 2013 c. 24.
57
Department for Business, Innovation and Skills, Enterprise and Regulatory Reform Act
2013: Policy Paper, 10 (June 2013).
58
Id. at 11 (‘In future, whistleblowing claims will only be valid where an employee blows
the whistle in relation to a matter for which the disclosure is genuinely in the public interest.
This will exclude breaches of individuals’ employment contracts and breaches of other legal
obligations which do not involve issues of a wider public interest’).
59
Department for Business, Innovation and Skills, Whistleblowing Framework Call for
Evidence (July 2013) (BIS Call for Evidence).
60
Evidence: Government Response, 9 (June 2014) (BIS Government Response).
61
The Government proposes to add student nurses to the category of employees. Id. at 17.
62
Evidence: Government Response, 7 (June 2014).
63
Id. at 15.
64
See, e.g., id. at 12, 18, 20.
Barry Rider - 9781783475780

financial institutions had failed to report wrongdoing,65 and arguing that new measures
were necessary to encourage whistleblowing.66 The Government’s call for evidence
asked for evidence on the usefulness of financial incentives for whistleblowing,67
noting that financial incentives were available in the US, but stating that it was unclear
whether the financial incentives prompted disclosures.68 A ‘majority of respondents’
opposed the introduction of financial incentives, suggesting that the introduction of a
profit motive would corrupt the process, interfere with working relationships and have
negative effects on the whistleblowing process.69 Those who supported financial
incentives seem to have been motivated by a desire to protect whistleblowers from
adverse consequences of their actions rather than by wanting to pay them for
disclosures.70 The Government suggested that in due course it might consider financial
incentives for specific circumstances or cases.71
The UK’s FCA and PRA have agreed that whistleblowers should be encouraged and
protected but have concluded that there is no empirical evidence to support paying
financial incentives to whistleblowers.72 They stated that research showed that most
whistleblowers did not receive payments, that there was no empirical evidence that
payments increased the number or quality of disclosures, that the governance structure
for financial incentives was complex and costly, that whistleblowers incurred costs
(although they could be limited by contingent fee arrangements) and that financial
incentives might undermine effective internal whistleblowing systems.73 In addition, the
regulators said that financial incentives for whistleblowers would involve ‘moral and
other hazards’ and that public policy norms in the UK were different from those in the
US.74 The conclusions were based on discussions with a number of US agencies and
the secondment of an FCA staff member to the SEC,75 and the note cites no academic
literature on when payments might affect behaviour.76 The ‘British Bankers’ Associ-
ation and organisations representing whistleblowers’ in the UK opposed financial
incentives.77 The regulators stated that they would develop plans to encourage
65
Parliamentary Commission on Banking, supra note 19, at 45.
66
Id. at 45–47. The Commission said that the FCA should research the impact of financial
incentives in the US. Id. at 46–47.
67
BIS Call for Evidence, supra note 59, at 16–17.
68
Id. at 16.
69
BIS Government Response, supra note 60, at 19.
70
Id. (‘Of those respondents who considered that the introduction of incentives would be
appropriate as a form of reward, this view was formed mainly in light of the fact that the
individuals are acting in the public interest not their own, yet suffer a personal detriment.
Responses suggest individuals should be rewarded for any stress, loss or detrimental effects they
have suffered as a result of blowing the whistle’). The Government thought such harms could be
remediated through claims before an employment tribunal. Id. at 20.
71
Id. at 20.
72
PRA/FCA Note, supra note 20.
73
Id. at 2.
74
Id. at 3.
75
Id. at 4.
76
Cf. Uri Gneezy, Stephan Meier, and Pedro Rey-Biel, ‘When and Why Incentives (Don’t)
Work to Modify Behavior’ 25:4 Journal of Economic Perspectives 1–21 (2011).
77
PRA/FCA Note, supra note 20, at 4.
Barry Rider - 9781783475780

whistleblowing,78 and in early 2015 they published a consultation document recom-

mending that UK banks, building societies, credit unions, PRA-designated investment
firms and insurers with assets over £25 million be required to implement whistle-
blowing arrangements.79 The consultation document stated that the regulators intended
‘to encourage individuals to raise their concerns about wrongdoing by protecting them
from unfair treatment, and in doing so, help firms manage their risks more efficiently
by enabling alleged misconduct, dishonesty and illegal activity to be exposed at an
early stage’.80 Firms should designate a ‘whistleblowers’ champion’, ensure that
employment contracts and settlement agreements specify that whistleblowing would
not involve a breach of contract, and inform employees about their rights to blow the
whistle to the FCA or PRA, and that they would be protected if they did so.81
4. CONCLUSIONS
Financial incentives for whistleblowers are part of the regulatory tool-box in the US,
but have not found the same acceptance elsewhere. Although the US False Claims Act
qui tam action has its origins in English common law, the action was abandoned in
England because it was perceived to encourage extortion and fraud.82 This history may
help to explain why the UK Government and regulators have been reluctant to reward
whistleblowers. However, even in the US, where policy-makers have chosen to reward
whistleblowing, whistleblowers are still vulnerable to employer retaliation, and the
rules reflect some uncertainties about the employee’s role, and about the appropriate
balance between encouraging internal compliance and external enforcement.
78
Id. at 6.
79
Bank of England Prudential Regulation Authority and Financial Conduct Authority,
Whistleblowing in Deposit-Takers, PRA-Designated Investment Firms and Insurers, Consultation
Paper FCA CP15/4, PRA CP6/15 (February 2015).
80
Id. at 5.
81
Id. at 6.
82
See, e.g., Beck, supra note 30 at 548 (‘for centuries, qui tam legislation produced
significant and recurring problems in England, such as widespread extortion of secret settlements
and fraudulent or malicious prosecution of innocent defendants’).
Barry Rider - 9781783475780

50. Auditors and fraud detection: an elusive role?

Maria Krambia-Kapardis
INTRODUCTION
Etymologically, the word ‘audit’ is derived from the Latin word ‘audire’ which means
to hear. Auditing appears to date back to around 350 BC in ancient Greece, Egypt and
China1 and, in England, to the Exchequer during the reign of Henry I (1100–1135),
where audit officers were appointed to make sure that state revenue and expenditure
transactions were properly accounted for.2 Similar auditing activities have also been
traced back to the Italian City States of Florence, Genoa and Venice.3 It seems that
pre-1840 auditing involved the performing of detailed verification of every transaction.
Some authors4 have argued that the audit objective was that of verifying the honesty of
persons in charge of fiscal rather than managerial responsibilities. Following the
industrial revolution, auditors began utilizing sampling techniques because it was
nearly impossible to audit every transaction. This came about because of the acceler-
ating growth of the world economies, the advancement of credit granting institutions,
the socio-developments in the UK and the development of the Stock Exchange. The
evolution in auditing as well as the application of the materiality concept caused a
change in audit opinion from ‘complete assurance’ to ‘reasonable assurance’.
The auditing profession has been criticized and auditors have been sanctioned for
failure to: (a) gather sufficient competent evidence, (b) exercise due professional care,
(c) exercise a sufficient level of professional scepticism, (d) obtain evidence related to
management representations and (e) express an audit opinion.5 Francine McKenna lists
four cases of auditors having been sued: (a) Deloitte settled claims for the failures of
Bear Stearns and Washington Mutual; (b) KPMG settled claims against it for New
Century and Countrywide; (c) Ernst & Young was facing a class action suit by the
1
Lee J, ‘Government auditing in China’, Journal of Accountancy (1986) 62: 190; Boyd E,
‘History of auditing’, in Brown R (ed.), A History of Accounting and Accountants (Edinburgh:
TL & EC Jack 1905) p. 74.
2
Gul F, Teoh H, Andrew B and Schelluch P, Theory and Practice of Australian Auditing
(3rd edn, Australia: Nelson 1994).
3
Brown R, ‘Changing audit objectives and techniques’, Accounting Review (1962) 37(4):
696–703.
4
Fitzpatrick L, ‘The story of bookkeeping, accounting and auditing’, Accounting Digest
(1939) 217; Littleton AC, Accounting Evolution to 1900 (American Institute Publishing 1933).
5
McKenna F, ‘Auditor independence, professional skepticism, auditors’ fraud obligations:
case studies and examples’. (Georgia Southern Fraud and Forensic Accounting Conference,
16 May 2013) <retheauditors.com/wp-content/themes/magazine/…/GSFFAConf2013.pdf>
612
Barry Rider - 9781783475780
Auditors and fraud detection: an elusive role? 613
NewYork Attorney General for Lehman; and (d) PwC was sued by Federal Deposit
Insurance Corporation (FDIC) for crisis-era failure Colonial Bank.6
As Lee Teck-Heang and Azham Md Ali have put it, ‘in view of the economic
condition, the audit function was mainly to provide credibility to the financial
statements prepared by company managers for their shareholders’.7 In Dicksee’s
Auditing, published in England in 1892, the objectives of an audit were stated as ‘the
detection of fraud; the detection of technical errors; and the detection of errors of
principle’.8 Some years later, a close look at Montgomery’s Auditing 1934 and 1940
editions shows a shift in the bearers of fraud detection responsibility. In the 1934
edition of the book9 it is stated that ‘an incidental objective of an audit is the detection
of fraud’ whereas six years later the ‘primary responsibility … for the control and
discovery of irregularities necessarily lies with management’.10
AUDITOR’S ROLE TO DETECT FRAUD AND ERROR

Philmore Alleyne and Michael Howard have argued that the role of auditors has not
been well defined from inception.11 Brenda Porter, however, has stated that the primary
objective of an audit in the pre-1920s was to uncover fraud.12 Due to the increase in
size and volume of companies’ transactions which in turn made it unlikely that auditors
could examine all transactions, the primary objective changed to verification of
accounts. In the 1960s, the ‘media and public were generally unhappy that auditors
were refusing to accept the duties of fraud detection’.13
In the early English case Re the Royal British Bank (Nicol’s case) [1859] 3 DE G. &
J. 387, the detection of fraud and error was identified as an audit objective by Lord
Turner. His Lordship stated that the auditors, having been appointed by the share-
holders, ‘were within the scope of their duty – at least as much as the agents of the
shareholders as the directors were, and the false and fraudulent representations were
discovered by them’. By 1887 the courts in England in Leeds Estate Building and
Investment Company v. Shepherd [1887] 36 Ch. D. 787 established that auditors have a
6
See supra n. 5 at p. 42.
7
Teck-Heang L and Ali A, ‘The evolution of auditing: an analysis of the historical
development’, Journal of Modern Accounting and Auditing (2008) 4(12): 1–8 at p. 4.
8
Sherer M and Turley S, Issues in Auditing (3rd edn, Sage 1997) at p. 33.
9
Montgomery R, Auditing, Theory and Practice (5th edn, New York: Ronald Press 1934) at
p. 26.
10
Montgomery R, Auditing, Theory and Practice (6th edn, New York: Ronald Press 1940) at
p. 13.
11
Alleyne P and Howard M, ‘An exploratory study of auditors’ responsibility for fraud
detection in Barbados’, Managerial Auditing Journal (2005) 20(3): 284–303.
12
Porter BA, ‘Auditors’ responsibilities with respect to corporate fraud – a controversial
issue’, in Sherer M and Turley S (eds), Current Issues in Auditing (3rd edn, Paul Chapman
1997).
13
Oyinlola AO, ‘The Role of auditors in fraud detection, prevention and reporting in
Nigeria’ (2010) at p. 3 <http://digitalcommons.unl.edu/cgi/viewcontent.cgi?article=1456&
context=libphilprac> accessed 15 December 2013.
Barry Rider - 9781783475780

duty to consider the substantial truth as well as the mechanical correctness of accounts.
However, in Re London and General Bank (No.2) [1895] 2 Ch. 673, Lindley L.J.
rejected the view that the auditor is an insurer who guarantees the absolute correctness
of accounts. In Re Kingston Cotton Mill Co. (No.2) [1896] 2 Ch. 279, Lopes L.J.
established the following principles:
+ Auditors must exercise reasonable skill, care and caution when they are called
upon to audit.14
+ What is reasonable skill, care and caution must depend on the particular
circumstances of each case.15
+ An auditor is not bound to be a detective.16
+ An auditor is a watchdog not a bloodhound.17
+ If there is anything calculated to excite suspicion he should probe it to the
bottom.18
+ The duties of auditors must not be rendered too onerous.19
The above principles have been reiterated in later cases and extended the auditor’s duty
to audit outside the books in Re City Equitable Fire Assurance Company [1925] Ch.
406.
Other relevant principles worth mentioning are:
+ An auditor is not an insurer who guarantees the absolute correctness of the

accounts.20
+ If the auditor is placed on ‘inquiry’ he should probe it to the bottom.21
+ Auditors cannot place reliance on management as a substitute for inquiries which
they should have made themselves.22
+ Auditors are negligent if they fail to detect fraud when the application of a
reasonable standard of care and skill in carrying out their audit would have
uncovered the fraud.23
+ Auditors have a duty to check for the existence of errors irrespective of whether
grounds of suspicions actually exist.24
+ The duty to audit involves a duty to do so with due care and skill which includes
due regard to the possibility of fraud.25
14
Lopes LJ (1896) at 284.
15
See supra n. 14 at 288.
16
17
18
19
20
Re London and General Bank (1895).
21
Re Kingston Cotton Mills Co. (No.2) [1896].
22
The London Oil Storage Co. Ltd v. Sear Hasluck & Co. (1904).
23
Armitage v. Brewere and Knott (1932).
24
Fomento (Sterling Area) Ltd v. Selsdon Fountain Pen Co. Ltd (1958).
25
Pacific Acceptance Corporation Ltd v. Forsyth and Others (1970).
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+ Auditors have a duty to warn management of any suspected fraud of which they
may have become aware, irrespective of whether it is material or not.26
+ Although professional standards constitute a satisfactory guide to the court in
determining what is reasonable, it is always the court’s prerogative to determine
whether an auditor has properly performed his duty with reasonable care and
skill.27
+ Auditors have a duty to audit the financial affairs of the company throughout the
relevant accounting period and not merely to report an opinion as to the truth and
fairness of the financial statements.28
Brenda Porter asserts that despite the fact that case law has in some cases determined
that auditors have a duty to detect fraud, the courts have attempted to maintain the
auditor’s duty within reasonable limits.29 William Boynton and Raymond Johnson have
argued that since the fall of Enron, auditing standards have been revamped to
re-emphasize the auditor’s duty to detect fraud.30 In reviewing the professional
standards one could argue that William Boynton and Raymond Johnson are correct
since the auditing profession has attempted to encompass these expectations and
judicial principles and revised many auditing standards to close what Brenda Porter
referred to as the ‘expectation gap’.31 On the same note Brenda Porter, Ciaran
ÓhÓgartaigh and Rachel Baskerville state that ‘as politicians become involved in the
profession’s affairs, the profession’s standard setting bodies review – and in many cases
– revise their auditing standards’.32
The audit profession is engaged in the clarification of the auditing responsibilities, as
a means of avoiding legal intervention imposing new regulations or detrimental court
rulings.33 In fact, the International Auditing and Assurance Standards Board (IAASB)
reviewed all the International Standards on Auditing (ISAs) and issued one new
standard addressing communication of deficiencies in internal control; sixteen stand-
ards contained new and revised requirements and twenty standards have been
redrafted.34
More specifically, ISA 240 ‘The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements’ states that the objective of the auditor is:
26
See supra no. 25.
27
Pacific Acceptance Corporation Ltd v. Forsyth and Others (1970); Lloyd and Cheyham v.
Littlejohn (1987).
28
WA Chip and Pulp Pty Ltd v. Arthur Young & Co. (1987).
29
See supra n.12.
30
Boynton W and Johnson R, Modern Auditing: Assurance and the Integrity of Financial
Reporting (8th edn, John Wiley & Son Inc 2005).
31
See supra n. 12; Porter B, ÓhÓgartaigh C and Baskerville R, ‘Audit expectation–
performance gap revisited: evidence from New Zealand and the United Kingdom Part 2: changes
in the gap in New Zealand 1989–2008 and in the United Kingdom 1999–2008’, International
Journal of Auditing (2012) 16: 215–247.
32
33
Holm C, Lansted LB and Seehausen J, ‘Establishing proactive auditor responsibilities in
relation to fraud: The role of the courts and professional bodies in Denmark’, International
Journal of Auditing (2012) 16: 79–97 at p. 92.
34
See supra n. 31.
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+ to identify and assess the risks of material misstatement of the financial statements due
to fraud;
+ to obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatements due to fraud, through designing and implementing appropriate responses;
and
+ to respond appropriately to fraud or suspected fraud identified during the audit.35
The Standard also requires auditors to be more proactive in searching for fraud during
the course of an audit since auditors are now expected to: (a) consider incentives and
opportunities presented to potential fraudsters as well as rationalizations justifying the
fraudulent act; (b) inquire more closely into reasons behind errors, accounting
estimates, unusual transactions and transactions with related parties that appear to lack
business rationale; (c) obtain reasonable assurance that the financial statements are free
from material misstatement; (d) make inquiries of management and those charged with
governance regarding management’s assessment of the risk that the financial statements
may be materially misstated or the risks of fraud in the entity or whether they have
knowledge of any actual or suspected or alleged fraud affecting the entity; (e) assess
the risks of management override of controls and design audit procedures accordingly;
(f) hold discussions with the engagement team and exchange ideas about how and
where they believe the entity’s financial statements may be susceptible to material
misstatement due to fraud; and (g) in the exceptional circumstances where the ‘auditor
has doubts about the integrity or honesty of management or those charged with
governance, the auditor may consider it appropriate to obtain legal advice to assist in
determining the appropriate course of action’.36 The Standard does clarify that the
‘primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and management’.37
The auditor, in accordance with ISA 200 ‘Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with International Standards on
Auditing’, shall maintain professional scepticism, ‘considering the potential for man-
agement override of controls and recognizing the fact that audit procedures that are
effective for detecting error may not be effective in detecting fraud’.38
To restore public confidence and to limit the auditors’ responsibilities on fraud
detection, the US Congress in 2002 passed the Sarbanes-Oxley Act (SOX). Following
the 2008 financial crisis, in the UK, the House of Lords’ Economic Affairs Committee
held an inquiry into the role of auditors and the European Commission developed a
Green Paper.
According to SOX, auditors are not required to detect fraud but to ‘report specific
situations and events relating to fraud and illegal acts to the clients’ audit committee as
35
International Auditing and Assurance Standards Board, ‘The auditor’s responsibilities
relating to fraud in an audit of financial statements’ ISA 240 (2009) at para. 10.
36
See supra n. 35 at para. A63.
37
See supra n. 35 at para. 4.
38
International Auditing and Assurance Standards Board, ‘Overall objectives of the
independent auditor and the conduct of an audit in accordance with international standards on
auditing’, ISA 200 (2009) at para. 4.
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well as to the authorized authorities’.39 President George W Bush confirmed, in signing

SOX into law, that it ‘adopts tough new provisions to deter and punish corporate and
accounting fraud and corruption, ensure justice for wrongdoers, and protect the
interests of workers and shareholders’.40 According to Daniel Reach, SOX represents ‘a
recent movement in favour of greater corporate transparency, notably because it
reinforces the independent auditor’s role in restoring investor confidence with thorough
financial statement evaluations, and also because it requires management to disclose
instances of fraud to its independent auditors’.41 On the other side of the globe the
European Commission points out in its Green Paper on the role, position and liability
of the statutory auditor within the European Union that the ‘public expects the auditor
to play a role in protecting the interests of shareholders, creditors and other stake-
holders by providing assurance regarding the existence of fraud’.42
Mahdi Salehi and Ali Mansoury maintain that the external auditor’s role is to
provide, with competence and independence, reasonable assurance as far as the quality
of financial information presented to the users of the financial statements.43 Users of
the financial statements rely on the audited financial statements to assist them in
making a decision as far as investing, extending credit or even buying out a company.
Thus, audited accounts enhance the credibility of the financial statements. In fulfilling
this duty the auditors need to carry out their work in line with the ISA, exercise due
care and diligence and act as a reasonable auditor would have done. In addition to the
international auditing standards, auditors need to comply with the requirements of their
national Companies Act and relevant EU Directives.
Statement of Auditing Standards No. 99 (SAS 99) ‘Consideration of Fraud in a
Financial Statement Audit’, issued by the Auditing Standards Board of the American
Institute of Certified Public Accountants (AICPA),44 and ISA 200 ‘Overall Objectives
of the Independent Auditor and the Conduct of an Audit’, issued by the IAASB, refer
to the fraud triangle, being: (a) incentives/pressures; (b) opportunities; and (c) ration-
alizations. In an effort to expand the fraud triangle model, Maria Krambia-Kapardis
suggested that fraud is facilitated by the: (a) existence of opportunities for individuals
who collude to commit the crime; (b) lack of emphasis on fraud-prevention controls by
a company; (c) absence of a code of conduct; and (d) presence of inadequately trained
39
Chong G, ‘Detecting Fraud: What are Auditors’ Responsibilities’, Journal of Corporate
Accounting and Finance (2013) 24(2): 47–53 at p. 49.
40
Statement on signing the Sarbanes-Oxley Act of 2002, 38 Weekly Compilation of
Presidential Documents 1286 (30 July 2002).
41
Reach DM, ‘Keeping your friends close but your auditors closer: corporations risk waiver
when independent auditors request work product’ (2011) <http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1929610> accessed 17 December 2013, p. 33.
42
Holm C, Lansted LB and Seehausen J (2012) supra n. 33 at 80; EU Commission, Green
Paper on the Role, Position and Liability of the Statutory Auditor in the European Union (1996).
43
Salehi M and Mansoury A, ‘Firm size, audit regulation and fraud detection: empirical
evidence from Iran’, Management (2009) 4(1): 5–19.
44
American Institute of CPAs (AICPA) (2002) SAS 99 ‘Consideration of Fraud’ issued by
the Auditing Standards Board of the American Institute of CPAS.
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internal and external auditors.45 Furthermore, two characteristics that affect the
opportunity for fraud are organizational structure and management style. Situational
factors such as a perceived low risk of being detected and a perception that upon
conviction the likely penal sanction will be relatively lenient, contribute to fraud. The
incentives and/or pressures may arise due to economic, industry, social or other
conditions that threaten the financial stability of the fraudster. Such pressures could be
the loss of one of the family’s incomes, extra marital affairs placing a strain on
disposable income, gambling, and so on. As argued by Maria Krambia-Kapardis,
‘ultimately a trusted person with an unshareable financial problem who perceives an
opportunity to commit fraud does so as a result of neutralizing verbalisations that make
possible frauds’.46 Auditors are thus asked to keep in mind these three components that
make fraud possible and apply them in fraud detection.
It is evident from studies in many countries, Gary Monroe and David Woodliff in
Australia;47 Mark Epstein and Marshall Geiger in the US,48 Christopher Humphrey,
Peter Moizer and Stuart Turley in the UK49 and Patrick Leung and Gerald Chau in
Hong Kong,50 that financial statement users believe that the auditors ought to have a
primary audit responsibility to detect all irregularities. This has led to the creation of
the expectation gap concept. In this context, Brenda Porter has argued users’ expect-
ations are beyond what is reasonably expected by common law and by the auditing
profession.51
METHODS USED
It must be acknowledged that on the one hand auditors are asked to ‘do everything
possible to prevent material financial statement fraud’ whereas on the other hand the
reality is that ‘auditing is a competitive business, subject to the same demands for
profitability and return on capital, as other businesses’.52 At the same time, as James
Bierstaker, Richard Brody and Carl Pacini point out, entities of all kinds are taking
more and different steps to fight fraud; and, to make things worse, the traditional red
45
Krambia-Kapardis M, Enhancing the Auditor’s Fraud Detection Ability (Peter Lang 2001)
at p. 70.
46
47
Monroe G and Woodliff D, ‘An empirical investigation of the audit expectation gap:
Australian evidence’, Accounting and Finance (1994) 34: 47–74.
48
Epstein M and Geiger M, ‘Investor views of audit assurance: recent evidence of the
expectation gap’, Journal of Accountancy (1994) 177(1): 60–66.
49
Humphrey C, Moizer P and Turley S, ‘The audit expectation gap in Britain: an empirical
investigation’, Accounting and Business Research (1993) 23: 395–411.
50
Leung P and Chau G, ‘The problematic relationship between audit reporting and audit
expectations: some evidence from Hong Kong’, Advances in International Accounting (2001)
14: 181–206.
51
See supra n. 12.
52
Makkawi B and Schick A, ‘Are auditors sensitive enough to fraud?’ Managerial Auditing
Fraud (2003) 18(6): 591–598 at p. 591.
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flags approach is not considered effective,53 because the existence of red flags
represents conditions associated with fraud but does not indicate the presence of
fraud.54 Various techniques for detecting or preventing fraud include: ‘fraud policies,
telephone hot lines, employee reference checks, fraud vulnerability reviews, vendor
contract reviews, and sanctions, analytical reviews, password protection, firewalls,
digital analysis and other forms of software technology and discovery sampling’.55
Others56 suggest a more advanced statistical methodology of integrated fraud risk
factors. James Bierstaker, Richard Brody and Carl Pacini have reported that the most
frequently used techniques are virus protection, firewalls, password protection, internal
control review and improvement whereas the least frequently used are forensic
accountants, digital analysis, staff rotation, employment contracts and data mining.57
Interestingly, the same authors have found that forensic accountants are least often used
to combat fraud (14 per cent) but are rated as most effective. Nowadays, the eclectic
fraud detection model suggested by Maria Krambia-Kapardis in 2001, covering
fraudster characteristics as well as auditor firm and auditor characteristics, appears to
be in need of updating, and a more holistic approach is required if auditors are to detect
fraud.58 A holistic approach would also encompass corruption detection, corporate
social responsibility, corporate governance and ethics.59
Bilal Makkawi and Allen Schick state that there is no consensus on the relevant
significance and value of each auditing procedure in the evaluation of audit risk and the
risk of material misstatement caused by fraud.60 Nowadays auditors are asked to ‘audit
smarter’ since the audit fee is not based on the work done but is rather a fixed fee. A
key point in the detection of fraud is the ‘auditor’s recognition of the signs’ that fraud
exists.61 ‘Auditing smarter means that auditors have to achieve a greater balance
between effectiveness and efficiency’ and in doing so they have ‘greater awareness of
the context in which the audit takes place’.62 In order for the auditors to be effective
and efficient, they need to exercise greater scepticism and perform a better assessment
of management’s integrity; thus, they need to understand the relationship of audit
procedures and audit objectives as well as the likelihood of certain kinds of accounting
frauds in fraud-prone industries.63
53
Bierstaker JL, Brody RG and Pacini C, ‘Accountants’ perceptions regarding fraud
detection and prevention methods’, Managerial Auditing Journal (2006) 21(5): 520–535 at
p. 521.
54
Krambia-Kapardis M, ‘A fraud detection model: a must for auditors’, Journal of Financial
Regulation and Compliance (2002) 10(3): 266–278.
55
56
See, for example, Sitorus T and Scott D, ‘Integrated fraud risk factors and robust
methodology: a review and comment’, International Journal of Auditing (2009) 13: 281–297.
57
See supra n. 53.
58
See supra n. 45.
59
See Krambia-Kapardis M, Preventing Fraud and Corruption: Averting Corporate Col-
lapses and Financial Crisis. (Palgrave Macmillan 2016).
60
See supra n. 52.
61
See supra n. 52.
62
63
Krambia-Kapardis M and Zopiatis A, ‘Investigating incidents of fraud in small economies:
the case for Cyprus’, Journal of Financial Crime (2010) 17(2) :195–209
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Brainstorming sessions are used by audit teams to assess fraud risk factors. Joseph
Brazel, Tina Carpenter and Gregory Jenkins have emphasized that tangible benefits can
be derived from higher quality brainstorming.64 The audit team discussion suggested by
ISA 240 and the brainstorming session suggested by Brazel et al. could be a combined
procedure.
The traditional audit risk model has provided a more proactive integrated approach to
preventing and detecting fraud. Hubert Glover and June Aono argued that ‘corporate
culture and industry traits are denoted as interaction terms to parallel the posited
relationship between a client’s business and its respective industry segment’.65 A
corporate culture promoting self-maximizing behaviour encourages the tendency to
manipulate financial information to achieve a personal objective, whereas ‘industry
traits’ refer to the inherent risks, focusing on the nature of the culture of the industry.
‘The interaction of corporate culture and industry traits yields the overall effect of the
client’s management philosophy and the general management style of the industry’.66
Thus, Hubert Glover and June Aono have suggested that auditors ought to carry out a
corporate culture review, including an analysis of the corporate board minutes and
management’s overall philosophy. The auditors ought to also carry out an industry traits
review in an effort to obtain information regarding operational, financial and manage-
rial issues related to specific industries as well as companies. Overall, auditors ought to
change their audit approach from reactive to being more proactive.67
PROFESSIONAL SCEPTICISM AND CORRELATES

Professional scepticism is an attitude that includes a questioning mind and a critical
assessment of audit evidence: ‘the auditor should not be satisfied with less-than
persuasive evidence because of a belief that management is honest’.68 Auditors, as
average human beings, may exercise a lack of scepticism due to implicit prejudices
arising from an ordinary and unconscious tendency to make associations, or in-group
favouritism due to knowing someone intimately by virtue of belonging to and
frequently mixing in the same social circles or being an ex-colleague, ex-university
friend, and so on.
Not surprisingly, perhaps, Francine McKenna has found evidence that auditors
appear not to be sceptical enough since an examination of the Securities and Exchange
Commission’s enforcement actions from 1987–1997 found that 60 per cent of
enforcement actions related to a lack of professional scepticism.69 Francine McKenna
also cites a Public Company Oversight Board review in 2008 that found that in four
64
Brazel JF, Carpenter TD and Jenkins JG, ‘Auditors use of brainstorming in the consider-
ation of fraud: reports from the field’, Accounting Review (2010) 85(4): 1273–1301.
65
Glover HD and Aono JY, ‘Changing the model for prevention and detection of fraud’,
Managerial Auditing Journal (1995) 10(5): 3–9 at p. 6.
66
67
See supra n. 42.
68
69
See supra n. 5.
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years of inspections of the eight largest accounting firms deficiencies were found that
were attributable to a lack of professional scepticism when performing audit procedures
and performing audit tests.70
Rosemary Fullerton and Cindy Durtschi have reported that ‘auditors who rank higher
on the scepticism scales generally have a significantly greater desire to increase their
information search related to fraud symptoms’.71 The same authors have argued that if
an auditor is more sceptical about the possibility of fraud existing, fraud detection
improves. Whilst training can improve professional scepticism, the same authors have
found that, after training, the differences between high and low scepticism groups were
narrow for several of the personality characteristics. Professional scepticism is affected
by the assessed level of management’s integrity.
Regarding client integrity, studies from Australia,72 New Zealand73 and the United
States74 found that the evaluation of client integrity was perceived by auditors as one of
the most difficult steps in the audit process. Richard Bernardi reported that fraud
detection rates vary according to the position of the auditor vis-à-vis being a senior or
a manager and whether the auditor is experienced or inexperienced in cue selection.75
In addition, Richard Bernardi found that auditors with high moral development are
more sensitive to the client’s integrity ratings.76 However, once auditors develop trust in
a client, this will affect their audit decision and, as Francine McKenna mentioned
above, his/her professional scepticism.
The more suspicious an auditor becomes about a client’s low integrity, the more
sceptical the auditor should be.77 William Kerler and Larry Killough have found that
over time auditors develop trust in a client and this trust will impair their professional
scepticism, since there is a negative relationship between trust and perceived fraud
70
See supra n. 5.
71
Fullerton RR and Durtschi C, ‘The effect of professional scepticism on the fraud detection
skills of internal auditors’, Working Paper Series (2004) <http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=617062> accessed 19 December 2013, at p. 2.
72
Van Peursem KA and Pratt MJ, ‘Difficult and critical auditing procedures: New Zealand
auditor perceptions’, Accounting Forum (1993) 16(4): 43–63.
73
Kelly CF, ‘Auditor’s perception of the audit process’, Unpublished working paper (Deakin
University, Australia 1991).
74
Chow CW, McNamee AH and Plumlee RD, ‘Practitioners perceptions of audit step
difficulty and criticalness: implications for audit research’, Auditing: A Journal of Practice and
Theory (1987) 6(2): 123–133.
75
Bernardi RA, ‘Fraud detection: the effect of client integrity and competence and auditor
cognitive style’, Auditing: A Journal of Practice and Theory (1994a) 13(Supplement): 68–84;
Bernardi RA, ‘Reply to comments on: Fraud detection: the effect of client integrity and
competence and auditor cognitive style’, Auditing: A Journal of Practice and Theory (1994b)
13(Supplement): 97–101.
76
Richard Bernardi (1994a), see supra n. 75.
77
Messier SA, Bernardi RA and Bernard JJ, ‘A review of the impact of client trustworthi-
ness on the audit decision-making process’, Journal of Forensic and Investigative Accounting
(2014) 6(1): 222–247.
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risk.78 They have also found that moral reasoning does not have an effect on trust in
management, whilst auditors who had experience in fraud detection tended to be more
sceptical. Management’s competence and integrity are significantly related to audit
risk.79 When management’s integrity and competence is low, audit risk is decreased as
the auditor’s level of moral development increases. However, when competence is high
and integrity is low, audit risk increases as moral development increases. It has been
found by Philip Beaulieu80 and Samantha Messier, Richard Bernardi and Jeffrey
Bernard81 that auditors respond to risk and management’s integrity by adjusting audit
work; thus at audit planning stage auditors compensate for low client integrity by
extending audit evidence and/or audit fees. Management integrity was also found by
Schroeder and Verreault82 to be an important factor in determining audit withdrawal as
well as prior estimates of the likelihood of fraud existing at the client.83 Jenny Goodwin
found that auditors are less likely to trust evidence from an internal or external source
where they place low integrity on the source provider.84
Interestingly, the external auditor’s role in detecting fraud has become more
complicated and controversial over the years but, in addition, the auditor’s capabilities
have been called into question. Ian Fraser and Chris Pong have questioned whether any
‘independent’ external auditors are capable of auditing effectively the accounting
intricacies of the ‘new’ capitalism, since the ‘complexities involved may be too great
for “outsiders” to grapple with effectively’.85 Auditors are required to communicate
with stakeholders and be involved in ‘dirtier data-processing’, but the auditors’
dependency on the client may create fundamental problems compromising the quality
of auditor independence.86
78
Kerler WA and Killough LN, ‘The effects of satisfaction with a client’s management
during a prior audit engagement, trust, and moral reasoning on auditors perceived risk of
management fraud’ Journal of Business Ethics (2009) 85(2): 109–136.
79
Ponemon LA, ‘The influence of ethical reasoning on auditors perceptions of manage-
ment’s competence and integrity’, Advances in Accounting (1993) 11: 1–29.
80
Beaulieu PR, ‘The effects of judgments of new clients integrity upon risk judgments, audit
evidence, and fees’, Auditing: A Journal of Practice and Theory (2001) 20(2): 85–100.
81
See supra n. 77.
82
Schroeder RG and Verreault K, ‘An empirical analysis of audit withdrawal decisions’,
Advances in Accounting (1987) 5: 205–220.
83
See supra n. 77.
84
Goodwin J, ‘The effects of source integrity and consistency of evidence on auditors
judgments’, Auditing: A Journal of Practice and Theory (1999) 18(2): 1–16.
85
Fraser I and Pong C, ‘The future of the external audit function’, Managerial Auditing
Journal (2009) 24(2): 104–113 at p. 108.
86
Power M, The Audit Society: Rituals of Verification (Oxford: Oxford University Press
1997) at p. 145.
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FIRM SIZE, AUDIT QUALITY AND THE ECLECTIC MODEL

The size of the audit firm has been used as ‘a surrogate for audit quality’ due to ‘better
financial resources, research facilities, superior technology and more talented employ-
ees to undertake large company audits than smaller firms’.87 The same authors argue
that large audit firms have a reputation to maintain and, consequently, they will ensure
an independent quality audit service. Apart from quality, Mahdi Salehi and Ali
Mansoury advance the argument that larger audit firms have larger client portfolios
which enable them to resist management pressure, ‘whereas smaller firms provide more
personalized services due to limited client portfolios’.88 This is in line with Linda
DeAngelo’s argument that larger audit firms are more independent.89 Given larger firms
are more independent and have more techniques, resources and facilities to utilize, their
work is of ‘higher quality’. They also have more wealth at risk should there be an audit
failure. Ronald Dye has argued that it is more likely that larger audit firms will be sued
as opposed to smaller firms due to their ‘deep pockets’.90 For this reason larger audit
firms tend to be stricter in issuing opinions.91
Ian Fraser and Chris Pong remind their readers that ‘every financial scandal over the
past 150 years has reinforced a continuing discourse about the competence of auditors
or of bold claims for audit’s capabilities’.92 External auditors are currently facing
challenges both as to the subject matter being audited and the audit procedures as well
as to whether independent auditors are capable of ‘auditing intricacies of the new
capitalism effectively’.93 Furthermore, the concept of corporate financial reporting has
been broadened to include financial and non-financial information, corporate respons-
ibility reporting, disclosure on corporate governance and risk, going concern and
related-party transactions.94 External auditors ought to communicate with stakeholders
and get involved in ‘dirtier data-processing’.95 Another difficulty faced by auditors is
that, due to the nature of the audit work and the evolution of external auditing, auditors
are interested in fraud or theft of assets but not corruption. Corruption in the private
sector can take place when management bribes a government official, thus external
auditors would rarely know of the offence and, consequently, cannot detect or report
it.96
87
See supra n. 43.
88
89
DeAngelo LE, ‘Auditor size and audit quality’, Journal of Accounting and Economics
(1981) 3(3): 181–199.
90
Dye R, ‘Auditing standards, legal liability and auditor wealth’, Journal of Political
Economy (1993) 101(5): 887–914.
91
Craswell A, Stokes D and Laughton J, ‘Auditor independence and fee dependence’,
Journal of Accounting and Economics (2002) 33(2): 253–275.
92
93
94
95
96
Khan MA, ‘Role of audit in fighting corruption’, Paper presented for an Ad Hoc Group
Meeting held 26–27 September (St Petersburg, Russia 2006).
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CONCLUSION
The auditor’s legal responsibilities as prescribed in common law, as far as fraud
detection is concerned, has evolved over the years, but have been kept within
reasonable limits. The auditing profession on the other hand has been extending this
role of detection and it now expects auditors to exercise professional scepticism and be
more proactive in their search of fraud. As far as legislative requirements, Sarbanes-
Oxley does not expect auditors to detect fraud, but to report specific situations and
events relating to fraud and illegal acts. There is no expectation of detecting corruption,
and as stated above, auditors do not have such skills.
Auditors are expected to assess the level of client integrity and base their work on
this assessment. Due to the inherent difficulties created by exogenous and endogenous
factors, auditors nowadays are not equipped to detect fraud. As mentioned above,
auditors need to audit outside the books and to utilize professional scepticism to assess
the honesty and integrity of management as well as identify any opportunities that can
be used by the fraudster to commit a fraud against a corporation. However, as argued
above, because fraud is rare and fraudsters are educated and trusted in the business
environment, auditors do not have the skills and know-how to detect fraud. Bigger audit
firms, due to their size and the higher stake they have to lose should they issue a wrong
audit opinion, appear to resist management pressure and are generally stricter in issuing
opinions.
Mahdi Salehi and Ali Mansoury stated that the ‘dominant reasons for corporate
failure are bad operational and strategic decisions, unanticipated exogenous shocks and
the dysfunctional behaviour of the firm’s executives and employees’.97 External
auditors are not fraud examiners or forensic accountants; they are expected to form an
opinion on the reliability of the internal controls and on the truth and fairness of the
financial statements. As already stated, fraud detection ‘requires unique skills’,98 and
these skills can be found in the work of a forensic accountant and not an external
auditor. Given that ‘auditors appear to encounter corporate fraud only incidentally … it
is difficult for individual auditors to build up expertise in fraud detection’.99 Thus,
financial statement users ought not to be relying on auditors to detect and report fraud
but should instead use forensic accountants for this purpose, unless auditors adopt a
holistic audit approach.
97
98
99
Nicolaescu E, ‘Internal auditors’ role in detecting fraud’, Contemporary Readings in Law
and Social Justice (2013) 5(1): 106–111 at p. 108.
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51. Control liability and compliance: tools for

controlling financial crime
Christopher Stears
INTRODUCTION
This chapter focuses on the definition and scope of the concept of ‘control liability’ and
the application of such liability, as well as the role of ‘compliance’ within financial
institutions, as a tool for combating financial crime. The term ‘compliance’ in this
context is not merely the ‘compliance function’ (as a constituent of an institution’s
wider assurance, regulatory control, prudential and reporting framework), but it also
encapsulates the much broader range of officers, employees, agents, professional
advisers, contractors and counterparties (collectively ‘actors’) whose responsibility
might variously include everyday observance with legal, regulatory and financial
crime-related obligations.
The genesis of this chapter is the growing influence of regulatory risk on the
successful use of traditional ‘control liability’ as a credible ‘stand-alone’ tool in the
battle against financial crime.
The preservation of ‘financial stability’ has taken precedence over cultural and other
behavioural dynamics within institutions. As such, regulatory policy and enforcement is
potentially now acting with material unintended consequences upon the effectiveness of
the ‘control function’. This is arguably undermining the efficacy of holding financial
institutions to account (and more specifically their senior management and ‘compli-
ance’ function) as a principal instrument in the fight against financial crime. The legal
risks of increased personal liability (potentially criminal) now being faced by those
who are mandated to police and in essence have ‘control’ over the detection and
interdiction of financial crime must be aligned with the measured benefits expected by
global prudential policy makers.
The provisions of the US enacted Dodd Frank Act;1 the EU enacted European
Market Infrastructure Regulation;2 Alternative Investment Fund Managers Directive;3
1
Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 124 Stat. 1376, 111
Cong. 2d Sess. (USA).
2
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July
2012 on Over-the-counter (OTC) derivatives, central counterparties and trade repositories [2012]
OJ L201/1.
3
Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on
Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC
and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 [2011] OJ L174/1.
625
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Capital Requirements Directive IV4 and related Regulation;5 and most notably in the
UK, the Financial Services Act 20126 and Financial Services (Banking Reform) Act
20137 have, without doubt, brought about truly blockbuster changes in the conduct of
all business within the global financial services sector: changes that were focused on
market and institutional structures plus prudential reforms.
Criminal misconduct and integrity failings were not, at least at first, identified as
personifying the financial crisis. However, when one looks behind the prudential policy
espoused in consequence of the crisis, one can readily identify within the many enacted
reforms a manifestly increased expectation of individual responsibility, combined
strongly with a demand for cultural amelioration and behavioural ‘control’.
‘Control liability’ is as much a tool in the fight against the external threats from
financial crime as it is about policing threats from ‘inside’. Accordingly, it is
appropriate to appraise the extent to which the newly emergent regulatory landscape
has impacted both institutional and individual attitudes to financial crime obligations.
I. FINANCIAL CRIME AND THE ‘CONTROL LIABILITY’

CONCEPT
No complex cases of financial crime could ever be perpetrated without the complicity
of a ‘control person’, specifically well-placed bankers or ‘actors’. Indeed, recent
successful prosecutions have highlighted the fact that such ‘actors’ will and do get
involved in financial crime.8
Imposing liability on those that exercise ‘control’ over the money and assets of others
(a ‘control person’) is viewed as an effective tool for controlling financial crime. But
why, and how effective can it really be? Further, to what extent do the obligations
arising under the regulatory system influence the effective policing of financial crime
threats?
4
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on
access to the activity of credit institutions and the prudential supervision of credit institutions
and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and
2006/49/EC [2013] OJ L176/338.
5
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June
2013 on prudential requirements for credit institutions and investment firms and amending
Regulation (EU) No 648/2012 [2013] OJ 176/1.
6
Financial Services Act 2012, c. 21 (UK).
7
Financial Services (Banking Reform) Act 2013, c. 33 (UK).
8
There are a plethora of insider dealing cases both in the UK and US. However, these are
often prosecuted under civil and administrative regimes rather than criminal indictments. Indeed,
the recent LIBOR and FX-related prosecutions have focused on market abuse and anti-
competitive practices. See Conduct Costs Project for details of all ‘conduct costs’ incurred by ten
of the largest banks over the period 2008–2014 (http://blogs.lse.ac.uk/conductcosts/), including
those relating to financial crime.
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Control liability and compliance: tools for controlling financial crime 627
Control liability and successful compliance functionality relies upon the placing of a
statutory obligation upon a control person. A ‘control person’ is not a new concept.
Liability of ‘controlling persons’ and persons who aid and abet regulatory or other
violations was first introduced in 1934 by section 20 of the US Securities and
Exchange Act.9 The US Securities and Exchange Commission (SEC) defines a ‘control
person’ as an individual or body who possesses, directly or indirectly, ‘the power to
direct or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise’.10 This is,
however, far from universally applied, even within the US. The lack of an agreed
definition has in fact caused concern among commentators11 due to the uncertainty that
such a nebulous concept brings.12 Should, for instance, control liability be imposed by
virtue of an official position or by virtue of a regulatory-mandated control function? It
remains unclear whether ‘status as a director [or say, money laundering reporting
officer] establishes (or should establish) a presumption of control’.13 While a presump-
tion of such would be rebuttable, the legal risk presented by this uncertainty could lead
to protectionist disclosures and, ultimately, undermine the control liability doctrine.
Coupled with the historically effective defence of acting in good faith and/or not
knowingly or recklessly inducing an act of violation, the vagueness and fact-dependent
nature of ‘control’ and ‘culpability’ has, as we explore further below, led to an
ever-increasing focus on the ‘deterrent effect’ of civil enforcement proceedings and on
individual ‘accountability’.
Control liability and compliance obligations must engender (at both an institutional
and individual level) an approach to the threats of financial crime that is focused on
protecting the integrity of the firm, its clients, the financial markets and society. It
should not be premised singularly on an assessment of regulatory risk. There is no
place for regulatory neurosis14 in the scoping of financial crime-related responsibilities.
That said, a certain degree of specificity within the regulatory law is required. This is
9
Securities and Exchange Act 1934 c. 404, § 20(a), 48 Stat. 881 at 899 (codified as
amended at 15 USC § 78t).
10
US Code of Federal Regulations 17 CFR § 230.405 – Definition of Terms.
11
See for example, Erin L. Massey, ‘Control person liability under section 20(a): striking a
balance of interests for plaintiffs and defendants’, 6 Houston Business and Tax Law Journal
(2005) 109–143 for a discussion on the US courts’ approach to ‘control liability’.
12
The International Monetary Fund, in its Financial System Abuse, Financial Crime and
Money Laundering – Background Paper (12 February 2001) at para 9, notes that the reporting of
financial system abuse is complicated by the fact that ‘… no internationally accepted definition
of financial crime exists’.
13
For discussion of the position in the US see Louis Loss, Joel Seligman and Troy Parades,
Fundamentals of Securities Regulation (6th ed., New York, Wolters Kluwer Law & Business,
2011) 607–623.
14
For a discussion on the meaning and application of ‘regulatory neurosis’ in the context of
bank conduct, culture and responsibility, see Roger McCormick and Chris Stears, ‘Banks:
conduct costs, cultural issues and steps towards professionalism’, 8 Law and Financial Markets
Review (2014) 134–144.
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not only in an attempt to fill the evidential gaps in respect of facilitator liability left by
the criminal law but to also set reasonable expectations for governance, risk manage-
ment and operational compliance on financial institutions, given their collective and
vital importance in combating financial crime.
II. REGULATORY GOVERNANCE OF ‘CONTROL LIABILITY

AND COMPLIANCE’: THE FRAMEWORK
‘Financial crime’ is defined within the Financial Services and Markets Act 2000
(FSMA).15 It includes any kind of criminal conduct relating to money or to financial
services or markets, including any offence involving fraud or dishonesty; misconduct
in, or misuse of information relating to, a financial market; handling the proceeds of
crime; or the financing of terrorism.16
The legal risk inherent in a control function is as fluid as it is potentially broad. As
the definition of financial crime alludes, the origin of control liability may lie in the
commission of a predicate crime or in the failure to prevent or report the commission
of a crime, or the proceeds arising therefrom. While an analysis of the legal risk profile
of a control function is beyond the scope of this chapter, it is necessary for this
discussion to outline the genesis of the legal/regulatory obligations placed on control
persons.
The regulatory mandate in respect of financial crime starts with FSMA, although
duties also exist under additional primary and secondary legislation, such as the
Criminal Justice Act,17 the Proceeds of Crime Act 2002 (POCA)18 and Money
Laundering Regulation 2007.19 In addition to the Principles for Businesses,20 the FCA’s
rules within its Senior Management Arrangements, Systems and Controls Sourcebook
require firms to ‘take reasonable care to establish and maintain effective systems and
controls for compliance with applicable requirements and standards under the regula-
tory systems and, for countering the risk that the firm might be used to further financial
crime’.21
15
Financial Services and Markets Act 2000, c. 8 (UK) as amended by the Financial Services
Act 2012, c. 21 (UK).
16
s. 1H(3) Financial Services and Markets Act 2000, c. 8 (UK), as amended by the Financial
Services Act 2012, c. 21 (UK).
17
See s. 52 Criminal Justice Act 1993, c. 36 (UK).
18
Proceeds of Crime Act 2002, c. 29 (UK) as amended by the Serious Organised Crime and
Police Act 2005, c. 15 (UK).
19
The Money Laundering Regulations 2007, SI 2007/2157 (UK).
20
Financial Conduct Authority (FCA) Handbook, PRIN 2.1.1 R.
21
FCA Handbook, SYSC 6.1.1 R and see also, SYSC 6.3: Financial Crime.
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Notably, financial institutions have not only the obligation to report money launder-
ing knowledge or suspicion,22 they must report to the regulator where a firm knows,
suspects or has reasonable grounds for suspicion that a transaction involves market
abuse.23 Given that ‘insider dealing’ will produce criminal property, the POCA will also
require a report to the National Crime Agency in tandem with that filed with the
regulator.
The regulatory system places obligations on so-called approved persons24 to act, inter
alia, with integrity, to observe proper standards of market conduct and deal with the
regulator(s) in an open and cooperative way.25 Furthermore, such ‘approved persons’
‘must take reasonable steps to ensure that the business of the firm for which he/she is
responsible [i.e. within that person’s accountable function], is organised so that it can
be controlled effectively’.26 What is deemed effective ‘control’ is a matter for the firm
to assess, although ultimately, much depends on the ‘expectations’ and enforcement
practices of the regulator(s).
III. REGULATORY GOVERNANCE OF ‘CONTROL LIABILITY

AND COMPLIANCE’: IN PRACTICE
The consequences for failing to meet the regulator’s financial crime expectations are
often severe. Leaving aside the incalculable reputational damage, the regulatory reprisal
in respect of control liability has taken the form of large fines, public censures,
disgorgement, disqualification or licence forfeitures. The benchmark legal risk profile
inherent in a control function is largely discernable, having regard to the underlying
law and regulatory guidance. However, overlaying regulatory risk changes the dynamic
and could undermine the efficacy of control liability. Regulatory oversight and
enforcement has, in the past, failed to appreciate this nuance and the unintended
consequences on ‘control person’ behaviour.
A) Institutional Risk
Research undertaken by the Conduct Costs Project illustrates the immediate financial
consequences of regulatory enforcement of control liability:
22
See Regulation 20(1)(b) Money Laundering Regulations 2007, SI2007/2157, FCA Hand-
book, SYSC 6 and requirements of ss. 330/331 Proceeds of Crime Act 2002, c. 29. See R v Da
Silva [2007] 1 WLR 303 for the accepted test of ‘suspicion’.
23
FCA Handbook, SUP 15.10.2 & 3 R and SUP 15.10.4 G.
24
Being a person in relation to whom the regulator has given its approval under s. 59
Financial Services and Markets Act 2000, c. 8 (UK) for the performance of a controlled
function; see also FCA Handbook, SUP 10.A. The Statements of Principle for Approved Persons
are espoused under authority provided by s. 64 of FSMA 2000.
25
FCA Handbook, APER 2.1A.1 G and APER 2.1A.3 P.
26
FCA Handbook, APER 2.1A.3 P: Statement of Principle 5.
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Note: Amounts in millions of GBP; sample consists of ten internationally active banks; see website for
underlying data and notes of interpretation.
Source: Conduct Cost Project, 2014 (http://blogs.lse.ac.uk/conductcosts/).
Figure 51.1 Direct institutional costs of criminal enforcement (2009–2013)

Figure 51.1 depicts the total costs incurred by ten selected international banks in
respect of financial crime-related liability. Notably, the costs (totalling GBP 61.4 billion
over the period 2009–2013) were borne by the institution, irrespective of the root cause
of the indiscretion(s). They also represent approximately 39 per cent of the total
‘conduct costs’ over the period.27
The Project’s research, while limited to a small sample, sets in context the debate
surrounding the regulatory burden imposed on financial institutions in combating
financial crime (whether from external or internal sources). The Project data also raises
a related point concerning disclosure and consistency of enforcement.
As to disclosure, financial institutions do not disclose in a comprehensive or
comprehensible form the extent of their control liabilities. This is notwithstanding that
such disclosure would aid in the development of best practice in areas such as financial
crime and regulatory risk, through the ability to integrate and assess control liability
causes into risk management and governance operations.
As to enforcement practice, it is of some concern that cross-border, as well as
domestic, regulatory enforcement in this area is far from transparent. Take for example
HSBC’s record fine for money laundering breaches. HSBC was additionally obliged to
27
Being GBP157.43 billion, see http://blogs.lse.ac.uk/conductcosts/files/2014/07/CCP4-
Summary-Table-and-Results.pdf for the Project results and http://blogs.lse.ac.uk/conductcosts/
2014/01/13/conduct-costs-definition-and-reporting-issues/ for the Project’s working definition of
‘conduct costs’.
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sign a Deferred Prosecution Agreement (DPA)28 for violations of the US Bank Secrecy
Act, the Trading with the Enemy Act and assorted other offences. This in effect placed
the bank on ‘criminal probation’. The reality, however, is that had HSBC been formally
indicted for these ‘crimes’, and likewise many other institutions who fell foul of the
law, the US government could no longer have conducted business with it – which
would have been highly damaging to the global market place. The US regulators hit as
hard as they could ‘civilly’, but they were unable or unwilling to go further in spite of
public outcry for fear of destabilising the very banking system that they seek to police
and protect.
Institutions should, of course, reasonably face liability where they fail to meet their
obligations. However, such liability can only ever be effective when, and if, it is
uniformly and fairly applied by regulators across all market participants, without
exception and without political bias. The Financial Services Authority (FSA), for
instance, was heavily criticised in respect of its supervision and review of RBS29 and,
later, its reliance on confidentiality protections in justifying its refusal to disclose its
findings.30 Likewise, the Parliamentary Commission on Banking Standards, when
commenting on the collapse of HBOS, concluded that the ‘FSA was not so much the
dog that did not bark as a dog barking up the wrong tree’.31
Regulatory ineptitude has on occasion been matched with what might be viewed as a
degree of overreach. Take for example the potential ‘control liability’ in tax matters.
The reporting with respect to the crime of tax evasion is now also in the process of
being added to the list of ‘gatekeeper’ duties of financial institutions, although a very
grey line is emerging. Tax evasion is a financial crime in most jurisdictions but tax
avoidance schemes, through which large volumes of funds are capable of being
processed to legally avoid assessment, are not. Such schemes are, at worst, morally
questionable. However, they are being increasingly targeted by governments who are
able to infer a ‘conspiracy to evade taxation’ as sufficient grounds for disclosure by
facilitating financial institutions. This places institutions at risk should a scheme,
subsequently proven to be wholly lawful, result in an action for damages by the
scheme’s beneficiaries or advisers.
The point here is that in the pursuit of its statutory objectives of maintaining market
integrity – thus imposing liability for financial crime-related failings – regulators must
secure a consistent and predictable approach to overseeing (and enforcing) the control
framework. A failure to strike this balance will lead to the unintended consequences of
a regulatory-risk-focused approach to control liability and to costly protectionist
reporting practices.
28
See, USA v HSBC Bank USA, N.A. and HSBC Holdings Plc, United States District Court,
Eastern District of New York, Cr. No. 12-763, Deferred Prosecution Agreement, dated 10
December 2012, available at http://www.justice.gov/opa/documents/hsbc/dpa-executed.pdf.
29
See HC Treasury Committee, The FSA’s Report into the Failure of RBS, Fifth Report of
Session 2012–2013 (19 October 2012) HC 640.
30
Ibid, para 1. See s. 348 of FSMA 2000 for reference to the confidentiality obligations
placed on the regulator.
31
Parliamentary Commission on Banking Standards, ‘An Accident Waiting to Happen’: The
Failure of HBOS, Fourth Report of Session 2012–2013 (4 April 2013) HL Paper 144, HC 705 at
para 84.
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B) Control Person Risk
Regulatory risk pertaining to control liability is not limited to ‘control persons’,

whether defined as the SEC advocates32 or, in the context of UK financial regulation,
confined to approved persons. Compliance officers, who are not necessarily approved
persons, are often cast in the role of policing financial crime and are exposed to the
legal and regulatory risk as a result of this expectation.
Compliance officers are charged with ensuring institutional compliance with law and
regulation (and, more pointedly, the ‘principles’ that underpin them). They are
potentially exposed to a large number of risks outside the immediate confines of their
employment contract which can extend to personal accountability. Exposure factors
include the risk that the ‘control person’ could be deemed a ‘principal offender’ by
regulators or other agencies, with respect to money laundering, sanctions breaches or
for aiding and abetting, conspiring, and/or failing to report. Vicarious liability of
supervisors, or persons otherwise in a position to ‘control’ financial crime threats, is
equally germane. Legal risk has also manifested itself in circumstances where there
exists a conflict of duty, such as that presented by the case of Shah v HSBC Private
Bank (UK) Limited:33 the conflict between private client obligations and the statutory
duty to report suspicious activity.
However, most prevalent is the risk posed by the regulatory expectation that the
compliance officers are guardians giving effect to regulatory policy and are thus
implicitly responsible for policy interpretation, internal assimilation and adherence. In
practice, regulators (both in the US and the UK) effectively cast compliance officers as
reluctant policemen, or at a minimum, as informants. Indeed, it might be said that there
is a conflation of regulatory expectation in regard to ‘compliance officers’ as opposed
to those holding a controlled function. Compliance professionals are increasingly
worried that, such is the scale of regulation now in force across every facet of an
institution’s business model, regulators may deem them to be ‘de facto supervisors’
and, as such, hold them to the same legal standard as that of any control person within
the institution.
The US SEC enforcement proceedings against Theodore Urban34 elucidates this
exposure. Mr Urban, once general counsel of the brokerage Ferris Baker Watts LLC,
was accused of failing to supervise a rogue broker, even though Urban had warned the
firm about the broker’s trading and urged it to fire him. Ultimately, judge Murray
decided that a case against Urban was inappropriate. Notwithstanding that ‘… the
supervisory obligations imposed by the federal securities laws require a vigorous
response even to “indications of wrongdoing” …’,35 Mr Urban was absolved of liability
having acted reasonably, within an appropriate control framework, and had reported to
compliance.
32
See supra, n 10.
33
[2012] EWHC 1283 (QB).
34
SEC v Theodore W. Urban, Securities Exchange Act Rel. No. 66259 (26 January 2012),
Admin. Proc. File No. 3-13655.
35
SEC v Theodore W. Urban, Initial Dec. Rel. No. 402 (8 September 2010), 99 SEC Docket
3215 at 52, citing John H. Gutfreund, 51 SEC 93 (1992) at 108.
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No doubt, an appropriate control framework can mitigate potential ‘control-person

liability’. However, this is not always assured. Indeed, in the UK, the regulator has
prosecuted compliance personnel for failing to proactively challenge36 or make
reasonable enquiries before sanctioning what turns out to be illegal conduct.37 This is
so, notwithstanding adherence to an applicable policy.38
IV. CONTROL LIABILITY AND COMPLIANCE: A STATEMENT

OF EXPECTATION
So what are the lessons for control liability? What will the legal risk profile of
compliance in the context of financial crime-related obligations look like going
forward? And, what ‘statements of expectation’ can we accentuate through the
regulator’s approach to protecting the integrity of the markets. This debate, it is
suggested, divides broadly into three threads.
The first thread must be a recognition that the efficacy of policing the financial
markets relies profoundly on the behaviour of individuals. Thus, control persons
(and/or those having a ‘compliance’ obligation) must ‘own’ for themselves the control
liability risk: there must be accountability. This must be underpinned by an appropriate
culture and ethical compass. Firm policies and procedures, not to mention regulatory
risk, must not act disproportionately to undermine what is ethical. While policing what
is ‘ethical’ removes the objective element, which might give rise to some uncertainty,
the prospect of insurmountable conflicts of legal/ethical interest or duty must be
negligible.
The second thread would stress the importance of firm governance, risk management
systems and controls. Behavioural economics recognises the environment in which
behaviour is incentivised. Individuals do not act in a vacuum. Firms must take on a
more enlightened approach to operational risk management that embeds not only legal
risk, but also a comparative approach to conduct and regulatory risk profiling. This, it
is argued, must be facilitated by the third thread, namely, a more ‘partnered’ approach
to policing financial crime in/by the regulator sector.
A) Individual Accountability, Culture and Ethics
The key to efficiencies in interdiction by the financial sector is at the ‘individual’ level.
Regulatory risk must be such that it instils a sense of ‘ownership’ and responsibility for
combating the financial crime threat: it must apply equal weight to ethical practices as
it does to the cost/benefit of enforcement. A culture that supports ‘whistleblowing’ for
instance would embody an ethically centric approach to financial crime obligations.
Individuals must have faith in the integrity of such policies and therefore the absence
of undue regulatory risk. However, as the SEC case against Ray Dirks illustrates,
regulatory risk can prevail. Although Dirks acted in the public interest by revealing a
36
FSA Final Notice, David Davis (5 July 2012), FSA Ref No. DTD01011 paras 6–18.
37
FSA Final Notice, Alexander Ten-Holter (26 January 2012) paras 2.4 & 2.5.
38
FSA Final Notice, Darren Morton (6 October 2009) paras 6.10–6.12.
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fraud, he was indicted by the SEC and convicted for ‘insider trading’. On appeal to the
US Supreme Court, the conviction was overturned on, inter alia, the premise that the
offence required a breach of fiduciary duty and an intention (not necessarily on the part
of the insider) to benefit from that breach.39 This ‘fraud theory’ of insider trading
remains good law in the US. However, this conflicts with the view of the SEC and the
position in the EU, namely that anti-fraud provisions ‘require equal information among
all traders’40 and that maintaining an orderly market is paramount. This conflict
exemplifies the unavoidable regulatory risk faced by ‘control persons’. One might
argue that the SEC’s approach places greater weight on the effects on ‘the market’
rather than establishing truth and fairness and an adherence to what is ethically correct.
On the other hand, a recent global survey conducted by the Economist Intelligence
Unit found that although most firms have embarked on heavy duty internal programmes
to enhance ethical conduct, 53 per cent of financial services executives say that
adhering to ethical standards will inhibit career progression at their firms.41 The
regulator would no longer countenance such a reality.42
Indeed, legislative reaction to the perceived inadequacies of the criminal law has
given rise to yet further regulatory risk. Section 36 of the Financial Services (Banking
Reform) Act 2013 imposes criminal liability on senior managers whose reckless action
(or inaction) causes the failure of the institution. Regardless of how well intended, the
practicalities of prosecuting this ‘control liability’ is considered questionable. This is
because there exist definitional issues (including ‘implied responsibility’ by delegated
authority) that are likely to create much interpretive debate and thus legal risk. Equally,
the growing use of ‘regulatory attestations’ is presenting some concern. Commentators
have observed that:
[a]though not specifically required by the regulatory regime, individuals are [being] asked to
confirm that the internal measures for which they are responsible are adequate and in
compliance with FCA rules. Its potential use as an enforcement tool, it is argued, will cause
senior management to take greater responsibility for the operational realities of the firm.
While (even a cognitive perception of) greater accountability through attestations must be
welcomed, there may be unintended consequences. They may simply reinforce the preoccu-
pation with regulatory compliance rather than tackling the root causes of misconduct and
seeking to place ‘good conduct’ at the centre of the bank’s business models. This is, in fact,
the approach regulators expect of firms.43
It is nevertheless acknowledged that specific criminal ‘control liability’ applicable ‘at

the top’ will, if caused to pervade effectively throughout the institution, likely act to
39
Dirks v SEC 463 US 646 (1983), cited in John Kay, ‘Do not criminalise traders just for
being in the know’, Financial Times (4 February 2014).
40
Ibid at 463 US 657.
41
The Economist Intelligence Unit, A Crisis of Culture: Valuing Ethics and Knowledge in
Financial Services (2013) at 9.
42
See Martin Wheatley, FCA, ‘The fairness challenge’, Mansion House Speech (24 October
2013).
43
Roger McCormick and Chris Stears, ‘Banks: conduct costs, cultural issues and steps
towards professionalism’, 8 Law and Financial Markets Review (2014) 134–144 at 141.
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reinforce a real ‘ownership’ of risk that will bolster the efficacy of utilising financial
institutions in policing financial crime.
B) Firm Governance and Risk Management Systems and Controls
It is arguable that, in the run up to the financial crises, financial institutions

unknowingly developed an increasing propensity for incompetence, rather than wilfully
perpetrating, or inadvertently aiding and abetting, acts of financial crime. In their
pursuit of short-term profits, market share and time sensitive market opportunities,
many of the banks and financial institutions became culturally rogue, by default. The
longer this went unchecked, the more banks had fewer misgivings about the pursuit of
improper behaviour in exchange for a quick return. The efficacy of control liability and
compliance as tools for combating financial crime were culturally undermined.
Ultimately, the burden of keeping the financial institution (and by default its officers
and employees) out of harm’s way will always rely heavily on the skill, calibre,
independence and effectiveness of the compliance and risk management functions and
the sophisticated information capture, management, analysis and reporting systems that
feed it.
Many, if not most, new risks over the last two decades, including those derived from,
or which have given rise to, the impact of financial crime, can be attributed to the
effects of government foreign policies, the internet and the globalisation of commerce,
credit expansion, growth in technology and gains in efficiency. These changes have
brought about a multitude of risk, which has caused the fundamental changes now
being evidenced in the approach to risk management.
Compliance as a function is not to be confused with internal and external audit
activities of a firm. The former is charged by regulatory dictate with ensuring that the
bank complies at all times with the law. The latter is principally responsible for
ensuring that the bank’s financial profile complies with applicable accounting prin-
ciples and is true and fair – although there is a growing debate as to the benefits of
engaging outside counsel on culture, integrity and conduct risk audits. In any event,
there is considerable overlap in both the compliance and audit functionalities. While
some compliance functions, including forensic investigations, may be outsourced to
specialist providers, this will not now absolve the control person/compliance officer
from ultimate responsibility: it is merely a matter of risk mitigation or of some
evidential value.
C) A More ‘Partnered’ Approach to Financial Crime Obligations
In truth, regulators across the globe were ‘caught out of their depth’ by the scale and
complexity of financial product engineering, the implications of global credit expan-
sionism, the financial market drivers and other socio economic conditions that preceded
the 2008 crash. This was aggravated by a lack of understanding of the changing nature
of financial crime since 9/11, 2001 and the absence of a public–private information
exchange necessary to manage the same. Policy mistakes, market mis-readings, lack of
‘relevant reporting’ of key information and inadequate regulation bears a large measure
of responsibility for the crisis and for the financial crimes subsequently discovered.
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The key ingredient to a real success in dealing with the roots of financial crime is not
just a highly resourced and professional compliance function but a workable partner-
ship between public (government and regulators) and private parties – and realistic
expectations. Having a ‘best in class’ legal and compliance function, while essential in
order to ‘protect’ the institution, is not of itself sufficient to identify all potentially ‘bad
apples’. The public and private sector rely on separate bodies of intelligence in order to
combat crime, and the bringing together of such sources is often prohibited by Data
Protection and other source protection issues. Stuart Levey, HSBC’s chief legal officer,
illustrated the point when he stated that the private sector reports potentially nefarious
conduct to the government through methods like ‘suspicious activity reports’, but has
no understanding of ‘the illicit conduct government is most concerned about and its
assessment of who may be engaged in that conduct. The reporting would be enhanced
if there were a greater understanding [by institutions] of the government’s concerns.’44
CONCLUSION
The unprecedented scale of enactments now swamping the financial services industry
represents a unified response to rightly perceived systemic weaknesses, cultural
malaise, fundamental risk assessment, and management errors and acts of financial
criminality. However, (re)establishing ‘best practice’ competence among persons work-
ing in the financial services sector requires a cultural revolution – not regulatory
mandate. But, this should not be limited to inappropriate sales incentives or poor
customer outcomes. While the regulatory focus on outcomes is an important one, it is
not given due regard in the context of facilitator liability for failures in financial crime
prevention.
It is this author’s view that regulation should underpin and facilitate, but not embody,
the manner of approach to financial crime threats. Responsibility for financial crime
prevention is not a duty to a third party that must be discharged, but the recognition
that the institution (and the individual) has an economic, reputational and ethical
responsibility to root out financial crime. We need regulation/regulators to adopt an
approach that does not engender regulatory neurosis. We need financial institutions
(and those individuals charged with policing the integrity of the financial markets) to
take ownership of the financial crime risk for themselves and not as a means of
managing regulatory risk. We need a complementing ethically centric culture of
professional pride and impeccable behaviour. This must, in turn, be endemic to the
institution and manifested in its governance arrangements, systems and controls and
whistleblowing policies and protections.
Much debate has focused on the perceived evidential hurdles in bringing criminal
prosecutions against institutions (and/or individuals) that have failed in their duty to
combat financial crime, the immediate criticism being of the integrity failings at the
point of most likely interdiction – i.e. the financial institution – and the response: to
mete out fines of ever-increasing severity. While this is a virtuous and necessary
44
Rachel Ensign, ‘HSBC’s top lawyer on what banks need to spot “truly bad actors”’, WSJ
Risk & Compliance Journal (11 June 2014).
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endeavour, focusing on more regulation and providing prosecutors with further tools to
exact punishment (DPAs, regulatory attestations and the like) has caused policy makers
to miss a vital issue and, perversely, risks undermining the efficacy of ‘control liability’
as a necessary tool in combating financial crime. A holistic view of the institutional
(and/or individual) response to financial crime responsibilities should not simply be
measured as a function of the firm’s ‘compliance’ profile. Rather, one must account for
the impact of regulatory ‘expectation’ and enforcement practice on the discharge of
‘control’ duties. This is the axiom of this chapter.
Regulatory ‘direction’, together with enforcement of control liability and compliance
failings, needs to be met with reasoned policy objectives. Duty must meet with
‘expectation’. ‘Expectation’ must be communicated. In short, education and an enlight-
ened ‘awareness’ are therefore essential if one is to drive up the efficiencies of the
unassuming policemen of the financial sector.
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52. Disruption of crime and the use of intelligence

David Johnston
INTRODUCTION
Far-reaching changes need to be made in the way law enforcement agencies access
intelligence and disrupt crime because cyberspace means that the traditional approach
that has served so well for more than 40 years is no longer fit for purpose.
Since the early 1970s, ‘intelligence led policing’ and Problem Oriented Policing
(POP) have provided the model for tackling criminality in most western countries. The
problem is that these models rely on the localized nature of the relationship between
the victim, the location and the offender.1
The development of the internet and the ability of criminals to commit crime from
great distances, often beyond the jurisdiction of the victim and local law enforcement
agencies, are testing the traditional model of combating crime.
This development has major implications for the way law enforcement agencies
address all types of environmental and situational crime including economic crime. The
growing reliance by society on the ‘internet of things’2 world is arguably having a
greater impact on less tangible concepts like economic crime than on ‘real world’
property or location crimes such as robbery or burglary.
Moreover, the increased societal use of the internet has much wider implications that
significantly challenge sovereign nations and governments as their laws prove to be
inadequate for making timely interventions against criminals or for allowing disruption
to their activities online.
To be more effective:
+ Governments need to acknowledge that the lack of geographical boundaries in

which the internet operates can no longer go unchallenged.
+ The concept of net freedoms needs to be considered against the need for effective
controls to rebalance governments’ duty to protect citizens while building
enterprise and economic growth.
+ Law enforcement agencies will increasingly need new operating models and
supporting law to allow them to take online action to disrupt, detect and collect
intelligence related to crime in the internet age.
1
Leigh, A., Read, T. and Tilley, N., (1996), Problem Oriented Policing: Brit POP, London:
Home Office.
2
Refers to the interconnection of uniquely identifiable embedded computing. The intercon-
nection of these embedded devices (including smart objects) is expected to usher in automation
in nearly all fields, while also enabling advanced applications like a Smart Grid. Höller, J.,
Tsiatsis, V., Mulligan, C., Karnouskos, S., Avesand, S. and Boyle, D., (2014) From Machine-to-
Machine to the Internet of Things: Introduction to a New Age of Intelligence, Oxford: Elsevier.
638
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Disruption of crime and the use of intelligence 639
It will be far from easy to get a consensus between governments and to persuade law
enforcement agencies to change an approach that has served them so well for so long.
All British police forces place Local Intelligence Officers (LIOs), at the heart of the
collection of intelligence to drive operations at the Basic Command Unit (BCU) level.
This approach feeds into a Force Intelligence Bureau (FIB), and prioritization of
resources is driven through the use of the National Intelligence Model (NIM).
But the need for change is illustrated by comparing the figures on armed robbery
with economic theft and fraud online. The British Bankers’ Association (BBA) reported
in December 2013 that in 2011 there were 66 armed robberies against banks and other
financial institutions in the UK, compared to 847 in 1992.3 In the same period online
financial crime has increased massively.
Fraud, which hits individuals, the public and private sectors, costs the UK £73 billion
each year4 and is increasingly conducted online. Some 40 per cent of crimes reported to
Action Fraud in 2012 were committed online, with criminals taking advantage of the
vulnerabilities of online services and their users.
The use of the internet makes crime possible on a significant scale: a single
‘phishing’ email (an email where the sender purports to be a trustworthy entity to
secure financial or other details) can target very large numbers of people and is often
used by criminals based overseas or making use of overseas IT infrastructure.
CONVENTIONAL WISDOM ON DISRUPTING CRIME

Much of the strategy employed by western nations in the late 20th century to disrupt
crime is based on ‘environmental criminology’. This approach, developed by Paul and
Patricia Brantingham in the early 1980s, emphasizes the relationship between space
(location), time, law, offender, and target or victim. Without even one, the other four
factors, even together, will not constitute a criminal incident.5
This approach was further developed into a ‘rational choice theory’ by Cornish and
Clarke in 1987.6 They laid out factors including recognition that the state is responsible
for maintaining order and preserving common good through law and the likelihood,
swiftness and severity of punishment that may follow an act or crime, and argued these
would act as a deterrent. The role of the state in creating a fear of being caught has
been a major factor in the approach to environmental criminology.
Environmental crime theory was further developed through the concept of POP,
which was trialed in Leicestershire in the mid-1990s and later adopted across the UK
and included the ‘problem analysis triangle’, consisting of features of the victim,
3
www.bbc.co.uk/news/technology-25526671, accessed 16 July 2014.
4
National Fraud Authority (2013), Annual Fraud Indicator, www.gov.uk/government/up
loads/system/uploads/attachment_data/file/206552/nfa-annual-fraud-indicator-2013.pdf, accessed
July 2014.
5
Brantingham, P. J. and Brantingham, P. L. (1991), Environmental Criminology, Prospect
Heights, IL: Waveland Press.
6
Cornish, D. B. and Clarke, R. V. (1987), ‘Understanding crime displacement: An
application of rational crime theory’, Criminology, 25: 933–948. Doi: 10.1111/j.1745-9125.
1987.tb00826.x.
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features of the offender and features of the location; they form a linked paradigm
which, if interrupted on any of the three vectors, will cause a crime to fail.
The POP model suggests that there must be a motivated offender who has come to
the same location as an attractive target. For property crimes the target is an object and
for personal crimes a human being. So, if the target is not in the same place as a
motivated offender, there will be no crime.
The model is further supported by ‘controllers’, whose presence can also prevent or
disrupt crime. These controllers fall into three broad categories that map against the
features of victims, locations and offenders.
Offenders often have ‘handlers’, who have some control over their behaviour, and
would include parents, relatives, siblings, peers and teachers.
Victims have ‘guardians’, who seek to protect them from attack and targets of theft
or damage. Formal examples include the police, neighbourhood watch, neighbours and
security patrols. They are close to a victim or target and will act in a formal (police) or
informal (neighbours) role to reduce the likelihood of a crime.
Locations and places usually have owners or ‘managers’ with a vested interest in
controlling or regulating security. There can be an overlap between the roles of
handlers and guardians as security to guard a site will act in a guardian role. Similarly,
other owners or neighbours who have a communal interest in protecting locations will
have a wider manager effect beyond their own location. For instance, a block of small
commercial units in an enclosed space may share security and control of the wider
area; or a car park attendant will protect many individual cars to the benefit of many.
The POP approach emphasizes the dependencies between victim location/places and
offenders. The theory infers that a crime cannot occur when one of these elements is
missing. The second level ‘controllers’ supports the theory that even where victim,
location and offender are present, the chances of disrupting a crime in the physical
environment is greatly increased by active involvement of one or more of those
controllers.
All these elements have traditionally provided good sources for collecting the
intelligence needed to detect and disrupt crime. Guardians will note descriptions,
vehicle numbers and the names of offenders. Handlers may inform on the criminal to
help disrupt their criminal activity. Managers use closed-circuit television (CCTV) to
provide intelligence and evidence to identify offenders.
Good intelligence remains at the heart of effective crime disruption and has
traditionally been carried out by local collection of intelligence from citizens, victims,
forensic examination of crime scenes and building networks of informers in the
criminal world, to give context and specific information about local crimes.
The Brantinghams’ model provided a solid approach to collecting this intelligence
through contact with victims. Several studies conclude that property crime, including
burglary, theft and shoplifting, are often committed by offenders within a two mile
radius of their homes.7 Local intelligence has therefore been a vital part of operations
which have focused on catching and prosecuting the offender.
7
http://www.popcenter.org/learning/60steps/index.cfm?stepNum=16, accessed July 2014.
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THE PROBLEMS OF THE INTERNET OF THINGS

The problem with rational choice theory and POP is that they fail to take into account
the way in which the internet has changed the nature of crime.
The increase of online criminality, where intelligence and relationships between
victim, location and offender are now more distributed, is a significant challenge to the
localized model. It invalidates the assumptions of Brantingham and Brantingham, and
Cornish and Clarke in several areas; these include the state being responsible for
maintaining order and preserving common good through law and the likelihood,
swiftness and severity of punishment that may follow an act of crime. Similarly, the
concept of gaining local intelligence has changed dramatically as offenders may be in a
different country from their victim or the location where the crime is committed
thereby negating opportunity for forensic or local intelligence collection.
The transnational nature of crimes has been made easier by the increased use of the
internet and challenges the traditional paradigm because it allows the victim, location
and offender to be more separated than ever before. The ability of a fraudster to commit
an online 4198 fraud against a victim in Liverpool from a laptop computer in, for
example, Lagos, Nigeria challenges the problem oriented approach that requires all
three vectors to be present and suggests that ‘virtual presence’ between victim and
offender is now sufficient to complete a crime.
On the disruption side of this model, this spatial separation has greater impact on and
reduces the effectiveness of controllers as their geographical separation or absence
means that they are unable to intervene or provide intelligence. In these cases, system
security, firewalls and government blocking of known fraud websites and URLs are
seeking to fill the role of guardian and manager.
Since 2002 ACPO9 has differentiated between internet based crime types in the
following ways: ‘old crimes new tools’ – describes traditional crimes such as theft,
fraud and blackmail but which today are increasingly being committed with the
assistance of a computer or internet communications; ‘new crimes new tools’ – these
crimes can only be committed by or rely upon the availability of a computer or other
technology including the internet. This includes computer misuse act offences, denial
of service attacks and hacking offences. These are often referred to as ‘cybercrime’.
Old and new crime committed on the internet is increasing and undoubtedly will
continue to do so. The annual turnover of transnational organized crime groups and
networks is $870 billion according to estimates by the United Nations Office for Drugs
and Crime (UNODC). The most significant and sophisticated of these networks now
operate in the manner which was previously the preserve of nation states or large
corporations. They have access to vast illicit wealth, recruit specialist technical
personnel and seek to wield state-like commercial and political power.10
8
Section 419 of the Nigerian Penal Code that deals with advance fee fraud.
9
Association of Chief Police Officers, UK.
10
UN Office on Drugs and Crime (UNODC) (2011), Estimating Illicit Financial Flows
Resulting from Drug Trafficking and other Transnational Organised Crimes, www.unodc.org/
documents/data-and-analysis/Studies/Illicit financial_flows_2011_web.pdf, accessed 15 July
2014.
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There is also strong evidence that ‘new’ crimes such as phishing and Trojans are
being used as a way to obtain sensitive financial and identity information, which
provide the information that is essential for committing ‘old’ crimes such as insurance
and mortgage fraud and thefts against individuals and the global banking system.
Organized crime groups are also engaged in intellectual property crime, including the
supply of counterfeit medicines and electrical goods, while increasing numbers are
involved in stocks and derivative market abuse.
The number, sophistication and impact of cybercriminals continue to grow. Whether
for financial gain or just to cause disruption of services, threats evolve to frustrate
network security defences, and many business and home computers fail to keep what
protection they have up to date. ‘Hacking’ has become an increasingly mature
marketplace where technical skills and data can be purchased by criminal groups to
carry out specific attacks.
In 2008, more than 55,000 phishing website hosts were detected, a 66 per cent
increase on the previous year. In the same period, spam detected across the internet
grew by 192 per cent, from 119.6 billion messages to 349.6 billion. In 2008, bot
networks were responsible for distributing about 90 per cent of all spam email.
Criminals are developing their own sophisticated tools, but also use legitimate or
publicly available software, such as peer to peer and social networking to network and
to share files and illegal images.11 The trend therefore is for the threat to internet
security and the opportunity for crime to continue growing.
The interconnectedness of citizens on social media such as Facebook and Twitter
provides a rich source for cybercriminals to infiltrate larger groups at a single hit.
Additionally, the growing use of anonymous services such as TOR12 makes the
identification of offenders and collection of intelligence increasingly difficult.
This annual growth of threat and impact suggests that the environmental crime
operational model is no longer a viable option. Indeed, the biggest crime fighting
organization in the western world has re-evaluated its mission approach. In April 2014,
the new director of the US Federal Bureau of Investigation (FBI), James Comey, told
the RSA Conference in San Francisco that for him cybercrime was a bigger priority
than terrorism. His agents are moving to a more proactive stance against online crime.
He said that ‘… agents will shift from a reactive mode into a more forward-looking
approach when tackling internet criminals, by offering services with fast response times
you’d expect from computers rather than their slower human builders’ (Comey J, April
2014).
The FBI has acknowledged the need for timely and effective intelligence collection
to disrupt activity online and has built a database of malware samples, Binary Analysis,
Characterization, and Storage System (BACSS), for its investigators to offer services to
ensure faster response to identified malware and attacks.
Effective and timely intelligence is still at the heart of this approach, and the very
nature of the crimes and the modus operandi being used means that traditional
11
Home Office (2010), UK National Cyber Crime Strategy, HMSO, paras 32–33.
12
Anonymized internet access referred to as ‘The Onion Router’ (TOR). TOR is free
software and an open network designed to defend against traffic analysis and identification by
state security or law enforcement.
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intelligence collection from forensic, crime scene analysis and local intelligence is fast
being replaced by effective analysts with good online skills and capability for early
identification of denial of service attacks and theft of personal data that could be used
for traditional theft or fraud later.
The approach of the FBI suggests that disruption and prevention are more important
in tackling online criminality than conventional reactive investigations leading to the
arrest of an offender after the event. This shift in approach, which is being replicated in
many other countries, is recognition in part of the multi-jurisdictional issues and
complexity of chasing criminals to ground across international borders.
However, there is a problem in building a consensus between governments. Com-
pare, for example, the following comments. The US State department says it has
advanced U.S. initiatives to preserve the open Internet and promoted the worldwide
deployment of broadband communications through the World Telecommunication Policy
Forum. We are an active member in the Freedom Online Coalition, a forum for like-minded
governments – over 20 and growing – committed to collaborating to advance Internet
freedom. This has provided us and others an opportunity to coordinate efforts and work with
civil society to support the ability for individuals to exercise their universal human rights and
fundamental freedoms online.13
In contrast, the UK Home Office Cyber Crime Strategy of 2010 seems to advocate a
more robust and regulatory approach when it says it
believes that actions should be legal or illegal according to their merits, rather than the
medium used, so that what is illegal offline should be illegal online. The Home Office
believes that the internet and other communication technologies are the conduit for the
criminal activity for such groups, rather than being the cause. We are committed to ensuring
that where additional legislative or regulatory tools are appropriate to tackle cybercrimes
these are introduced swiftly and effectively.14
Cybercriminals will seek to exploit international differences by deliberately targeting

their activities in or through jurisdictions where regulation or legislation is not strong,
or where investigative or other co-operation is known to be poor. This enables them to
minimize the risk of discovery or punishment. International investigations require a
time-critical response to help negate attacks as well as secure evidence.
There has been some recognition of the need to counter this approach, and some
progress has been made. Much of the work has been to establish mutual legal
assistance at the United Nations, the Internet Governance Forum, the Council of
Europe and the European Union. But beyond that the picture is not so positive. For
example, there are problems with Mutual Legal Assistance Treaties (MLATs) due to
bureaucracy. The delays in creating and documenting all the various steps of an MLAT
request militate against the often time-critical nature of those investigations and
intelligence collection and allows offenders to change location or modus operandi well
before the legal net can close on them. This can lead to the displacement of cybercrime
13
US Department of State public website, ‘Internet Freedom’, http://www.state.gov/e/eb/cip/
netfreedom/index.htm, accessed July 2014.
14
Home Office (2010), UK Cyber Crime Strategy, HMSO, para 27, page 9.
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to and through jurisdictions where lower standards exist, presenting the cybercriminal
with enhanced opportunities to avoid detection, prosecution and imprisonment.
If governments and law enforcement agencies are to regain the initiative, there will
have to be changes in the environmental crime model. It is also clear that the POP
model is not an answer because it presumes that in most if not all cases the victim,
place/location and offender are closely spatially located and can be dealt with in one
jurisdiction.
MLATs have traditionally been reserved for obtaining witness statements, seeking
disclosure of banking or other documents which are usually out of reach of the offender
who consequently cannot lose, alter or destroy them. However, with the three vectors
postulated in the problem triangle now widely distributed across international borders
and the offender controlling the evidence on his or her personal computer, it is no
longer possible to make this assumption of spatial co-location and MLATs become too
slow and ineffective.
A different approach is needed even where the offender can be identified – in these
cases, obtaining the evidence or recovering stolen assets becomes more complex in an
online cross jurisdictional crime.
For example, two Russian hackers, Vasily Gorshkov and Alexey Ivanov,15 were
detained in the US in 2000 but the evidence and assets were held in Russia. In this
case, the FBI used covertly obtained passwords to access computers in Russia from the
US and extracted data and evidence. This active online approach seems to indicate that
a MLAT was seen as not feasible given the relations between the US and Russia, or
more likely that the use of a MLAT was seen as too bureaucratic and slow to meet
operational need.
Despite arguments in the US courts that this approach breached the constitutional
rights of the defendants, the actions of the FBI were upheld. A second defence claiming
that the FBI had broken Russian law was also dismissed by the court on the grounds
that Russian law had no application in the US. The court also ruled that even in the
event it had applied, the agents had acted correctly and ‘complied sufficiently’.
The Russian government responded by issuing arrest warrants for the two FBI
agents. Though these were never followed up or carried out, it demonstrates the high
level of concern and feeling when one nation ‘invades’ the territory of another even at
the virtual level.
Faced with these difficulties, law enforcement agencies are expanding their concept
of disruption to consider more active operations upstream or online to attack offenders
– with many offenders resident in states which offer no, or poor co-operation with other
countries, this kind of intelligence led disruption operation becomes cost effective and
timely.
Countries are making efforts to work together to recognize the growth in the use of
the internet not just as a source for good but also as increasing opportunities for
criminality and harm to nations.
The Convention on Cybercrime, also referred to as the ‘Budapest Convention,’ first
considered these issues in 2001. It seeks to build co-operation between member states:
as of March 2014, 42 countries have ratified this convention with another 11 countries
15
United States v Gorshkov, 2001 WL 1024026 U.S. Dist. LEXIS 26306 (WD Wash 2001).
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having signed but not yet ratified it in domestic law. This convention seems to be a
positive step but it stops short of authorizing states to operate independently across
borders and still seeks to rely on mutual co-operation.
Several other nations have responded to the increase of online crime and the
ineffectiveness of MLAT processes to assist in a timely manner; they have passed laws
that provide protection from criminal liability to certain law enforcement agencies for
computer related acts done outside their own country. Australia for instance, has a law
that allows federal police to carry out online operations.16
Canada views international collaboration as an essential way of securing cyberspace
and acknowledges the benefit from being seen as a trusted partner in this area. It
supports international efforts to develop and implement a global cyber-governance
regime that will enhance security. The Canadian government plans to develop a
cybersecurity foreign policy.
The US International Strategy for Cyberspace (2011) aims to unify its engagement
with international partners on the full range of cyber issues and to ensure that partners
at home and abroad understand the priorities and how this can be used to reduce the
threats from criminal or military action in cyberspace.
The UK took the lead in a multilateral dialogue with the 2011 London Conference
on Cyberspace and promotes the adoption of international norms of behaviour in
cyberspace. The development of a cohesive UK cyber defence strategy has also helped
to co-ordinate the collection and understanding of emerging threats, whether they are
state sponsored, individual’s intent on crime or organized or sophisticated crime groups
seeking to attack the private and public purses.
This approach allows law enforcement agencies to share intelligence that was
previously the domain of intelligence agencies or the military. However, while they
now have a better intelligence picture, it is unclear how they can tackle criminals and
disrupt them online.
The Computer Misuse Act 1990 in the UK sets out to prevent computer crime in
three categories: unauthorized access to computer material, unauthorized access with
intent to commit or facilitate commission of further offences and unauthorized
modification of computer material.
Unfortunately, these very clauses also prevent law enforcement agencies from
undertaking online disruption operations themselves, as the Computer Misuse Act
makes such activity illegal.
Providing strong network defences and educating potential victims on how they can
protect themselves from online criminality has some value, but maintaining a defensive
line at the victim or location vector allows the offender to act with relative impunity
from his or her own part of the world and target many thousands of people at one time.
Inevitably, they will find a less well-protected victim to exploit and this merely
displaces crime as offenders move to those less well-protected regimes or networks.
Most strategies stress the need for better alliances and partnerships with like-minded
countries or allies, including the capacity building of less developed countries. They
identify with the role of international organizations such as the Council of Europe, the
16
Criminal Code Act 1995, No 12 (Cth), at 476.5, ‘Liability for certain acts’ includes Secret
Intelligence Service and Australian Signals Directorate.’
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G7, the Internet Governance Forum, the Organisation for Economic Co-operation and
Development (OECD), the Organization for Security and Co-operation in Europe
(OSCE), and the United Nations, but they provide little detail as to the role that each
organization plays or should play and how to ensure consistency across them. The
North Atlantic Treaty Organization (NATO) is also mentioned by several countries with
respect to cybersecurity in the military context (Canada, Finland, Germany, the
Netherlands, Spain and the UK). The European Union is referred to by European
countries. Spain and Germany also indicate a possible extension of the role of the
European Network and Information Security Agency (ENISA). As one sets the scale of
the problem posed by internet crime alongside the international and national measures
taken to address them thus far, it becomes clear that there is a compelling need to
enhance considerably the ability of law enforcement agencies to operate across borders.
Failure to do so will make it much harder to meet the challenge of criminal groups
which, motivated by financial gain, seek to exploit their entrepreneurial skills gained in
the ‘real’ world to maximize the benefits from digital crime in the virtual world.
CONCLUSION
The emphasis of effort to date appears to be towards better collaborative working and
defence for systems and potential victims. This, however, is not enough. There has to
be a wider acceptance that states should take an intelligence led approach including
online action to disrupt offenders, regardless of their geographical location. The
example of the FBI taking direct action and being supported by their courts is
indicative of this, as is Australia’s legislation which recognizes that sometimes law
enforcement officers need to take direct action.
The ambition should be to develop new national and international strategies that
create a system that achieves the right balance between helping drive economic and
social prosperity, respecting the openness of the internet and protecting cyberspace-
reliant societies against cyber-threats.
This strategy will be unbalanced if it does not include effective protocols and policies
that will allow, in specific circumstances, law enforcement officers to take action across
borders to disrupt and prevent crime as well as being able to secure evidence to support
traditional enforcement and prosecution of offenders.
If we do not find a way of defining this new balance and ensure that law enforcement
agencies can fight cybercriminals, the risk to citizens will continue to grow as our
dependency on the internet for critical and economic services increases.
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53. Extradition
Colin Wells and Emma Stuart-Smith
WHAT IS EXTRADITION?
Extradition is the legal process for returning a person to the jurisdiction of a foreign
state, at the request of that state (“the requesting state”). They may be requested to
return only for the purpose of criminal prosecution or for sentencing or the execution
of sentence. They cannot be returned for the purpose of investigation.
It is different to deportation which is the process by which a country removes the
person from within the state.
Extradition is a crucial process in the combating of crime, and in particular serious
and organised crime, on an international level and through international judicial
cooperation. It serves to ensure that a person cannot escape justice by leaving a
country. The law also serves to protect those whose extradition is sought in such
circumstances where they would suffer injustice or oppression.1
In this chapter we will provide a concise overview of the law of extradition and the
basis upon which someone may oppose extradition. We also focus upon the key
principles that lie at the heart of extradition law and have particular importance to
international financial crime. Due to the complexity of this area of law, it is impossible
to provide a comprehensive overview in this text. Of particular note, we do not deal
with procedural issues, abuse of process, bar by reason of earlier extradition to the UK2
or cases where someone is charged with an offence in this jurisdiction or serving a
sentence in this jurisdiction. Therefore the reader will need to make direct reference to
the primary legislation and specialist texts if representing someone facing extradition
proceedings.
THE LEGAL FRAMEWORK

The legal framework for domestic extradition is found within the European Framework
Decision3 and the Extradition Act 2003 (“EA 03”). The EA 03 categorises countries
that the UK has an extradition agreement with. Extradition from the UK to category 1
territories,4 namely members of the European Union operating the European Arrest
Warrant, is dealt with in Part 1 of the Act. Extradition from the UK to category 2
1
As per Lord Bingham, Knowles v Government of USA [2006] UKPC 38, para.12.
2
S.18, 19 and 96 EA 03.
3
Of the Council of the European Union, 13.6.02.
4
Extradition Act 2003 (Designation of Part 1 Territories) Order 2003 S.I. 2003/3333 as
amended.
647
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territories,5 those territories which the UK has bilateral treaty arrangements with, is
dealt with in Part 2 of the Act.
Part 3 of the EA 03 deals with extradition to the UK from category 1 territories.
Extradition requests from category 2 countries to the UK are made under the Royal
Prerogative.
WHO CAN BE EXTRADITED?

A person accused of a crime or convicted of a crime can be the subject of an
extradition request. As stated above, the purpose of the extradition request must be to
either return the person for trial (where accused) or for punishment (where convicted).
The requesting state must state the reason for which the person’s extradition is
requested.6
WHAT CAN THEY BE EXTRADITED FOR?

A person can be extradited for an extradition offence. This is a crucial concept to the
law of extradition and is defined at sections 64–66 EA 03 (for category 1 territories)
and sections 137–138 EA 03 (category 2). A person may only be extradited for criminal
conduct, and not conduct in breach of a civil order or code. This issue is considered in
greater detail later in the chapter.
WHY MAY SOMEONE’S EXTRADITION BE REFUSED?

The court, on considering whether to order extradition, must decide whether their
extradition is barred by statute, or is incompatible with their human rights. The reader
must also be aware that there are numerous procedural requirements set out in the EA
03 that must be satisfied before an order for extradition can be made; these are not
dealt with here.
BARS TO EXTRADITION
The EA 03 sets out the bars to extradition, which if made out, must result in the
discharge of the extradition request.7
Double jeopardy:8 the principle of double jeopardy prevents a person from being
prosecuted twice for the same offence in different jurisdictions. Therefore a person’s
5
Extradition Act 2003 (Designation of Part 2 Territories) Order 2003 S.I. 2003/3334 as
amended.
6
S.2(2) EA 03 and s.70(4) EA 03.
7
S.11–19A (category 1 territories) and s.79–83A (category 2 territories).
8
S.12 and s.80 EA 03.
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Extradition 649
extradition is barred if it would violate the rule against double jeopardy, in other words,
if the person has already been acquitted or convicted of the same offence as the
extradition request.
Absence of a prosecution decision:9 a person’s extradition to a category 1 territory is
barred if there are reasonable grounds for believing that the competent authorities in
the territory have not made a decision to charge or try the person for the offence, and
the person’s absence from the territory is not the sole reason for that failure, and the
territory does not prove the contrary.
Extraneous considerations:10 a person cannot be extradited where it appears that the
warrant issued is in fact issued for the purpose of prosecuting or punishing him on
account of his race, religion, nationality, gender, sexual orientation or political opinion,
or if the person may be prejudiced at trial or punished or detained for those reasons.
The defendant must show a causal link between the issue of the warrant or the
prejudice and the grounds.11
The passage of time:12 a person must not be extradited if and only if it appears that
it would be unjust or oppressive to do so by reason of the passage of time since either
he is alleged to have committed the extradition offence, or alleged to have become
unlawfully at large where he is alleged to have been convicted of the offence.13 The
court will consider whether the defendant is a fugitive from justice. Delay caused by
the defendant by fleeing the country, concealing his whereabouts or evading arrest
cannot be relied upon as a ground for holding it to be unjust or oppressive to return
him14 save “in the most exceptional circumstances”.15
The key issue is the effect of any delay and whether it would be unjust or oppressive
to extradite the defendant, not whether it would be unjust or oppressive to try him.16 If
the court is bound to conclude that a fair trial is impossible, then it would be unjust or
oppressive to extradite the defendant.17 However, the court will have regard to the
safeguards which exist under the domestic law of the requesting state which protect a
defendant against a trial rendered unjust or oppressive by the passage of time,18 such as
abuse of process jurisdiction. There must be more than the normal degree of disruption
9
S.12A, inserted by s.156 Anti-social Behaviour, Crime and Policing Act 2014 (“ABCP
Act”), in force 21.7.14.
10
S.13 and s.81 EA 03.
11
Hilali v Central Court of Criminal Proceedings Number 5 and another [2006] EWHC
1239 (Admin) para.62.
12
S.14 and s.82 EA 03.
13
S.14 and s.82 EA 03.
14
Kakis v Government of the Republic of Cyprus [1978] 1 WLR 779, para.782–783.
15
Kakis (ibid.) para.782 and Gomes v Republic of Trinidad and Tobago [2009] 1 WLR 1038,
para.29.
16
Woodcock v Government of New Zealand [2004] 1 WLR 1979, para.20, cited in Gomes
(ibid.) para.32; Knowles v Government of the United States of America [2007] 1 WLR 47,
para.31.
17
Woodcock (ibid.) para.21.
18
Woodcock (ibid.) para.21–22.
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which flows from extradition before it can be considered oppressive to extradite the
defendant.19
The person’s age:20 a person cannot be extradited if they would have been under the
age of criminal responsibility at the time the alleged offence was committed. The age
of criminal responsibility in England and Wales is ten years old.
Hostage taking considerations:21 this has been repealed as of 21 July 2014 and
therefore only applies to cases where prior to 21 July 2014 the judge has not decided
whether there are bars to extradition under section 11(1) of the EA 03.22 A person’s
extradition is barred if the country is a party to the International Convention against the
Taking of Hostages and it appears that 1) if extradited he might be prejudiced at his
trial because communication between him and the appropriate authorities would not be
possible, and 2) the act or omission constituting the extradition offence also constitutes
an offence under section 1 of the Taking of Hostages Act 1982 or an attempt to commit
such an offence. The appropriate authorities are the authorities of the territory which
are entitled to exercise rights of protection in relation to him.23
Specialty:24 the rule of specialty prevents someone from being dealt with in the
requesting state for an offence other than that which he was extradited for, one
disclosed by the same facts as that offence, or where consent has been given by an
appropriate judge.25 The bar means that someone must not be extradited to a country
where there are no specialty arrangements in place with that country. This principle is
dealt with in greater detail later in the chapter.
Forum:26 the forum bar was brought into force on 14 October 2013. It was enacted to
allow cases to be prosecuted in the UK where more appropriate to do so, rather than in
the requesting state following extradition.
A person’s extradition will be barred by reason of forum if the extradition would not
be in the interests of justice.27 It would not be in the interests of justice if the judge 1)
decides that a substantial measure of the defendant’s relevant activity was performed in
the UK, and 2) decides, having regard to the specified matters28 only, that the
extradition should not take place.29
The specified matters are: 1) the place where most of the loss or harm resulting from
the extradition offence occurred or was intended to occur; 2) the victim’s interests;
3) the belief of a prosecutor as to the most appropriate jurisdiction to prosecute; 4) the
availability of the evidence in the UK; 5) any delay which may be caused;
6) consideration of the location of witnesses, co-defendants and other suspects and the
practicality of their evidence being given; 7) the defendant’s connections with the
19
Steblins v Government of Latvia [2006] EWHC 1272 (Admin) para.13.
20
S.15 EA 03.
21
S.16 (category 1) and s.83 (category 2) EA 03.
22
S.158 ABCP Act 2014.
23
S.16(2) and s.83(2) EA 03.
24
S.17 and s.95 EA 03.
25
S.17(3) and s.95(3) EA 03.
26
S.19B and s.83A EA 03.
27
S.19B(1) and s.83A(1) EA 03.
28
S.19B(3) and s.83A(3) EA 03.
29
S.19B(2) and s.83A(2) EA 03.
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Extradition 651
UK.30 The judge must give regard to the desirability of not requiring the disclosure of
material which is subject to restrictions on disclosure in the requesting state. A
prosecutor may provide a certificate to the effect that the defendant should not be
prosecuted in the UK; if they do, the judge must decide that the extradition is not
barred by reason of forum.31
Proportionality:32 This applies to those who are accused of an offence. The judge
must decide whether extradition would be compatible with the European Convention on
Human Rights (ECHR) (see below), and whether extradition would be disproportion-
ate. In deciding whether it would be disproportionate, the judge must take into account
only the matters specified at section 21A(3) of the EA 03, namely:
1. the seriousness of the conduct alleged;

2. the likely penalty that would be imposed if the defendant was found guilty of the
extradition offence;
3. the possibility of the relevant foreign authorities taking measures that would be
less coercive than the extradition of the defendant.
PHYSICAL OR MENTAL CONDITION

The court must not extradite someone where it appears that the physical or mental
condition of the person is such that it would be unjust or oppressive to extradite them.33
In Dewani v South Africa34 the extradition of Mr Dewani was ordered after the
requesting state gave an undertaking stating that if following extradition the defendant
was found to be unfit by a judge of the High Court of South Africa, and there was no
realistic prospect of him becoming fit to plead and of the trial commencing within 18
months, he would be free to return to the UK.
PRIMA FACIE CASE

There must be evidence amounting to a prima facie case of the extradition offence(s) in
extradition proceedings to some category 2 territories.35
30
S.19B(3) and s.83A(3) EA 03.
31
S.19C–D and s.83B–C EA 03.
32
S.21A, as inserted by s.157 ABCP Act 2014, in force on 21.7.14.
33
S.25 and s.91 EA 03.
34
[2014] EWHC 770 (Admin).
35
The category 2 territories that do not have to prove a prima facie case are designated at
Extradition Act 2003 (Designation of Part 2 Territories) Order 2003, Article 3.
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HUMAN RIGHTS
The judge cannot order the extradition of a person if it would be incompatible with
their Convention rights within the meaning of the Human Rights Act 1998; in such
circumstances the person must be discharged.36 Therefore every extradition case
requires careful consideration as to whether the person’s extradition would violate their
Convention rights.
Article 2 – the Right to Life
The state has a duty to safeguard the lives of those within its jurisdiction and a duty to
refrain from the intentional and unlawful taking of life.37 The test is whether there is a
real risk to the defendant’s life in the requesting state.38 Where the risk to life is from
non-state agents, it is also necessary to show a lack of reasonable protection in the
requesting state.39
A person must not be extradited if he could be, will be or has been sentenced to
death for the offence in the requesting state;40 the requesting state may provide a
written assurance that the death penalty will not be imposed or will not be carried
out.41
Article 3 – Prohibition of Torture and Inhuman or Degrading Treatment or

Punishment
A person cannot be extradited from the UK to a country where he is foreseeably at real

risk of being seriously ill-treated.42 The burden is on the defendant to show “substantial
grounds for believing that the person concerned … faces a real risk of being subjected
to treatment contrary to Article 3”.43
Examples of issues that give rise to an Article 3 argument are prison conditions, the
length of a sentence (especially mandatory sentences),44 and physical or mental
illness.45
36
S.21 and s.87 EA 03.
37
Osman v UK [1998] 29 EHRR 245.
38
[2008] EWCA 547 (Admin).
39
R (Bagdanavicius) v Secretary of State for the Home Department [2005] 2 AC 668,
para.24.
40
S.94(1) EA 03.
41
S.94(2) EA 03.
42
R (Ullah) v Special Adjudicator [2002] EWCA Civ 1856, para.48.
43
Al-Saadoon and Mufdhi v United Kingdom App. No.61498/08 [2010] ECHR 282,
para.123.
44
See Harkins and Edwards v The United Kingdom App. No.9146/07 and 32650/07.
45
McKinnon v Secretary of State for the Home Department [2009] EWHC 2021 (Admin).
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Extradition 653
Article 5 – Right to Liberty and Security
Extradition will violate Article 5 if there is a real risk of a “flagrant breach” of Article
5 in extraditing the person to the requesting state.46 The Court in Othman v UK (ibid.)
gave the example of such a breach as if the requesting state had arbitrarily detained an
applicant for many years without any intention of bringing him to trial.
Article 6 – Right to a Fair Trial
Extradition is incompatible with Article 6 if the defence shows there is a real risk of a
flagrant denial of justice or fair trial in the requesting state.47 Ordinarily, an issue as to
the admissibility of evidence is for the requesting state to decide upon. However, where
it can be demonstrated that the approach taken by the requesting state’s courts to
admissibility will itself be such as to create a real risk of a fundamentally unfair trial,
then extradition may be prevented on Article 6 grounds.48 In Brown v Rwanda49
extradition was refused due to the real risk that the appellants would suffer a flagrant
denial of justice; key considerations were the independence of the judiciary and the
availability of witnesses.
Article 8 – the Right to Private and Family Life
In Norris v USA (No.2)50 it was stated that the interference with family life must be
“exceptionally serious” before extradition will become a disproportionate interference.
However, this test was clarified by the Supreme Court in HH v The Deputy
Prosecutor51 in which it was said: “The test is always whether the gravity of the
interference with family life is justified by the gravity of the public interest pursued …
Exceptionality was a prediction … not a test”.52 The best interests of the children of the
requested person are a primary consideration to the Article 8 inquiry.53
CASE STUDY: CRIMINAL OR CIVIL CONDUCT AND SPECIALITY

The recent Supreme Court decision in R v O’Brien [2014] UKSC 23 examined the
nature of criminal and civil conduct and its inter-relationship with speciality.
The Supreme Court decided that a person (a US national) extradited from the USA to
the UK for a trial on a criminal fraud charge, who prior to his extradition was guilty of
46
Othman v The United Kingdom App. No.8139/09, para.233.
47
Brown v Government of Rwanda [2009] EWHC 770 (Admin) para.34.
48
R (Ramda) v Secretary of State for the Home Department [2002] EWHC 1278 (Admin),
para.22; also see Othman v United Kingdom App. No.8139/09 in relation to evidence obtained
by torture.
49
Supra n 47.
50
[2010] UKSC 9, para.56.
51
[2012] UKSC 25.
52
HH v The Deputy Prosecutor (ibid.), para.32.
53
HH v The Deputy Prosecutor (ibid.), para.33.
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contempt of court by disobeying a court order (a Restraint Order imposed under

Proceeds of Crime Act 2002 (“POCA 2002”)), is liable to punishment for his contempt,
even though it was not the basis of his extradition. As the breach of the Restraint was
civil in nature, the speciality protections did not apply.
Background
Brian O’Brien, a US national, appealed to the Supreme Court, against a decision of the
Court of Appeal Criminal Division (“COACD”),54 upholding an order of the first
instance Criminal Court, to send the appellant to prison for 15 months for contempt of
court in disobeying a Restraint Order made against him under section 41 of the POCA
2002. Mr O’Brien had failed to make disclosure of his assets, had removed assets from
the jurisdiction and had failed to repatriate assets from abroad.
The appellant argued that his committal was unlawful by reason of the speciality
provisions of Part 3 of EA 03. After committing the contempt the appellant fled to the
USA, from where he was extradited on substantive allegations of boiler room fraud.
The appellant argued that it was not thereafter open to the Crown Court to punish him
for his earlier contempt, for which he had not been extradited.
The COACD rejected the appellant’s arguments but emphasised the importance of
the speciality rule which is based on international cooperation between sovereign
states. R v Seddon55 set the appeal in its proper extradition-speciality context, as
Hughes LJ in the COACD stated:
4. Extradition is a process involving agreement between Sovereign States. The requesting

State has no power to send its policemen into the requested State to arrest a prisoner who
has run away there. That would be a direct infringement of the sovereignty of the
requested State. So the requesting State depends upon the voluntary co-operation of the
State where the fugitive is now to be found. Unsurprisingly States found that they
generally had a common interest in A surrendering prisoners to B if B asked, providing
that B entered into a reciprocal agreement to surrender those whom A wanted when the
boot was on the other foot. On the other hand, States generally wished to retain the
power to refuse to surrender in some circumstances. To take simple but non-exhaustive
examples, they might wish to refuse if the conduct complained of was not a crime in the
requested State, or if it was, for example, a crime of a political character where the
interests of the two States diverged.
5. Historically, extradition was generally achieved through separate bilateral treaties
between States. Commonly the power of the requested State to refuse extradition in
some circumstances was preserved by the terms of such treaties. To give effect to that
practice, the principle evolved that if A requested a prisoner from B, A would identify
the offence for which the prisoner was wanted, so that B could decide whether there was
a sufficient reason to refuse to surrender him. With that went the practice that if
surrendered the prisoner could only be dealt with for the offence for which he had been
sought, otherwise plainly the surrendering State’s power to refuse would be circum-
vented. That principle is called specialty. … The rationale for it may owe something to
the protection of the individual, but it plainly lies principally in the international
obligation between States.
54
[2012] 1 WLR 3170.
55
[2009] 2 Cr App R 9.
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Extradition 655
Manifestly, the principle of specialty applies only to criminal offences and has nothing
to do with civil matters.
If the contempt in the O’Brien case was criminal, the EA 03 makes it clear that the
principle of specialty applies:
148. Extradition offences

(1) Conduct constitutes an extradition offence in relation to the United Kingdom if these
conditions are satisfied –
(a) the conduct occurs in the United Kingdom;
(b) the conduct is punishable under the law of the relevant part of the United Kingdom
with imprisonment or another form of detention for a term of 12 months or a greater
punishment.
151A. Dealing with a person for other offences

(2) The person may be dealt with in the United Kingdom for an offence committed before
the person’s extradition only if –
(a) the offence is one falling within subsection (3), or
(b) the condition in subsection (4) is satisfied.
(3) The offences are –
(a) the offence in respect of which the person is extradited;
(b) an offence disclosed by the information provided to the territory in respect of that
offence;
(c) an offence in respect of which consent to the person being dealt with is given on
behalf of the territory.
(4) The condition is that –
(a) the person has returned to the territory from which the person was extradited, or
(b) the person has been given an opportunity to leave the United Kingdom.
The Court of Appeal was persuaded that the contempt constituted by breach of a POCA
2002 Restraint Order is a civil not a criminal contempt for a number of reasons:
1. Firstly, this conclusion is supported by and consistent with the general discussion
on the classification of contempt in English law. The fact of a custodial
punishment is neutral; what matters is the nature of the contempt (breach of an
existing order of the Court) and the purpose of the punishment (coercive as well
as punitive).
2. Secondly, the Restraint Order in the context of confiscation proceedings is closely
analogous to the freezing injunction in civil proceedings.
3. Thirdly, nothing in the predecessor regimes to POCA 2002 supports the conten-
tion that contempt constituted by a breach of a restraint order is a criminal rather
than a civil contempt. To the contrary, authorities decided under those regimes
speak with one voice, namely, that such contempt is to be characterised as civil
contempt.
4. Fourthly, as to the POCA 2002 regime itself:
i) POCA does not produce a radical departure from the position prevailing under
the previous regimes. While it is true that under POCA, jurisdiction to make
Restraint Orders has been transferred from the High Court to the Crown
Court, the COACD viewed the basis of this change as administrative – rather
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than in any way reflecting a radical change in the classification of restraint

proceedings from civil to criminal.
ii) Section 46 POCA 2002 applies sections 2–4 of the Civil Evidence Act 1995 to
restraint proceedings. It is noteworthy that those sections of the 1995 Act are
made applicable to restraint proceedings under POCA 2002, whereas they do
not apply to confiscation proceedings which are to be regarded as criminal in
nature: see R v Vincent Clipston.56 This conclusion is consistent with and
supported by R v M,57 where the COACD proceeded on the basis that a
contempt constituted by breach of a Restraint Order made under POCA 2002,
section 41, was a civil not criminal contempt.
However, the Court of Appeal certified the following points of law of general public
importance:
i. Whether a contempt of court constituted by breach of a restraint order made under

section 41 of the Proceeds of Crime Act 2002 constitutes a civil or criminal contempt.
ii. If the answer to i) is a civil contempt, whether Section 151A of the Extradition Act 2003
and/or article 18 of the United Kingdom–United States Extradition Treaty 2003
preclude/s a court from dealing with a person for such a contempt when that person has
been extradited to the United Kingdom in respect of criminal offences but not the
contempt in question.
The Supreme Court dismissed both Grounds of Appeal.
Ground 1
On the first issue the Supreme Court held that section 151A of the EA 03 does not
apply directly to this case. In any event, the sections relied upon by the appellant
cannot be read in isolation, and reading the Act as a whole it is clear that conduct
constituting an extradition offence must be a criminal offence under the law of the
requesting state, here the UK (see paragraph 36 of the judgment).
Each of Parts 1–3 of the EA 03 contain a similar definition of extradition offence, in
each case referring to “conduct punishable with imprisonment or another form of
detention for a term of 12 months or a greater punishment”, with a common structure
across the definitions.
Part 1 of the EA 03, an EU Framework Decision, makes it a prerequisite of a valid
arrest warrant that the conduct the person is accused of or has been convicted of
constitutes a criminal offence under the law of the requesting state. In relation to Part 1
(dealing with extradition from the UK to other Member States), the definition of
“extradition offence” accordingly requires that an offence either be a listed extraditable
offence or an offence under UK law.
Part 2 of the EA 2003 provides a similar scheme in relation to extradition from the
UK to those non-EU countries with which the UK has extradition arrangements (see
sections 137–138 EA).
56
[2011] EWCA Crim 446; [2011] 2 Cr App R(S) 101 at [50].
57
[2009] 1 WLR 1179.
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Extradition 657
Part 3 of the EA 2003 deals with extradition to the UK. Section 148 (within Part 3)
has no direct application to this case, since the UK judiciary is not involved in the
process of obtaining Mr O’Brien’s extradition. Nonetheless section 151A should be
understood in the light of the wider scheme of the 2003 Act. Nothing can constitute an
extradition offence unless it is a criminal offence in the relevant state, here the UK (see
paragraph 36 of the judgment).
Ground 2
A Restraint Order under POCA 2002 is an interim remedy, aiming to prevent the
disposing of realisable assets during a criminal investigation. The Crown Court has an
inherent jurisdiction to treat a breach of such orders as contempt of court. There is a
well-recognised distinction between “criminal contempt”, covering conduct which itself
is a crime, and “civil contempt”, covering conduct which is not itself a crime but is
punishable by the court in order that the court’s orders be observed. A civil contemnor
does not receive a criminal record.
If a victim of Mr O’Brien’s fraud had obtained a freezing order against him similar
to the POCA 2002 Restraint Order and he had disobeyed the order, the victim would
have been able to bring contempt proceedings following his extradition. There is no
relevant difference with a POCA 2002 order. The key is the nature and purpose of the
order, not the court in which the order was made. Mr O’Brien’s contempt was civil, and
his committal was not barred by the speciality principle.
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54. International co-operation in fighting financial

crime
John Reading
GLOBALIZATION AND THE GROWTH IN FINANCIAL CRIME

Much has been written about the need for international co-operation in combating
transnational financial crime and the measures that are available to assist in that fight.
In this chapter I discuss the nature of co-operation, the means by which co-operation
is achieved and suggest some reasons why, despite the many benefits to be gained from
co-operating with other places, some places1 choose not to co-operate.
One hundred years ago, the most serious financial crime to be committed upon a
citizen might have been the theft of his prized milking cow. Whilst there were some
transnational crimes, such as piracy on the high seas, the vast majority of crimes were
committed locally or perhaps in the neighbouring village or town. The perpetrators
lived locally, the crime would be investigated by the local constabulary and the local
magistrate would preside over the case. Accordingly, the process of bringing the
perpetrator to justice was not particularly difficult.
Writing in the Berkeley Journal of International Law in 2004,2 Stefan Cassella3
observed that “for law enforcement professionals the hallmark of the new millennium
is the rapid increase in the globalization of crime”. Ten years on, and despite many
initiatives at the national and international, governmental and non-governmental levels,
transnational financial crime continues to be a problem, not just for law enforcement
professionals but for the economies of the nations for whom they work.
Over the past decade tremendous advances in information technology, communica-
tions and modes of transport have continued; not only are financial crimes often
committed across borders in different states,4 but by simply using a laptop computer, a
tablet or a smart phone, the vast proceeds derived from those crimes can be moved
from one anonymous bank account to another around the world in just seconds. Further
the perpetrators can be long gone from the places where the crime was committed often
before the crime has been discovered.
1
For convenience the term state will be used irrespective of whether the place is a nation,
a country, a federation, a republic, a colony or a territory.
2
“Bulk Cash Smuggling and the Globalization of Crime: Overcoming Constitutional
Challenges to Forfeiture under 31 USC 5332” 22 Berkeley Journal of International Law 98
(2004).
3
Assistant US Attorney, US Attorney’s Office, Baltimore, Maryland, USA.
4
Unless otherwise indicated, hereafter, reference to a state or states, shall be a reference to
a separate jurisdiction with its own administration and legal system, whether it is a nation, a
federation, a republic, a colony or a territory.
658
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International co-operation in fighting financial crime 659
Syndicates engaging in financial crime on an international scale are well organized,

well funded and have access to the most up-to-date technology and means of transport
ranging from luxury yachts to Learjets. Like any other international business organ-
ization, the criminal syndicate is concerned with profit, and the amounts involved are
invariably huge; they spend money to make money.
The law enforcement and prosecutorial agencies endeavouring to curtail these
activities are constantly playing “catch up”; unlike the criminals they are seeking,
though, they do not have the benefit of unlimited resources and may not have access to
the most up-to-date equipment and technology, but in order to win even some of these
campaigns they will need the assistance of individuals and organizations outside of
their own jurisdictions. Thus, the daunting task of fighting international financial
criminals with any hope of winning the war must necessarily be a team effort and
success simply cannot be achieved without co-operation between states, between law
enforcement officials, between prosecutors and with the co-operation also of the
business and banking communities.
THE NATURE OF INTERNATIONAL CO-OPERATION

The benefits to be derived from a state co-operating in the area of international law
enforcement are far reaching. Agreeing to co-operate in this area may lead to increases
in investment and trade; a state that has a high degree of integrity will be perceived as
a good place to do business.
The United Nations Convention against Transnational Organized Crime was adopted
by the General Assembly of the United Nations in November 2000, and is promoted as
the main international instrument in the fight against transnational organized crime.5
The convention has been ratified by 147 signatories, representing 180 parties,6 who
have agreed in general terms7 to assist each other. The convention is considered to
represent “a major step forward in the fight against transnational organized crime and
signifies the recognition by Member States of the seriousness of the problems posed by
it, as well as the need to foster and enhance close international cooperation in order to
tackle those problems”.8
Most responsible governments have put in place measures to assist other states in
tracking down and bringing to justice transnational criminals. The work of the
governments of states seeking assistance is coordinated, encouraged and supplemented
by a network of inter-governmental agencies and associations and non-governmental
organizations. These organizations have devised helpful protocols and codes of best
practice to assist states which do want to participate in this fight.
5
https://www.unodc.org/unodc/en/treaties/CTOC/.
6
https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XVIII-12&chapter
=18&lang=en.
7
For a number of parties have specified that they are not bound by some of the provisions
of the convention.
8
Supra n 5.
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However, it is the governments of participating states that must necessarily take the
lead role in securing co-operation. It is they that have agreed to abide by the United
Nations Convention, and this can only be achieved by the enactment of domestic
legislation putting into effect the principles of the convention. Thereafter, it is their
representatives who negotiate treaties or agreements with their counterparts in other
places, signifying and acknowledging that the parties to the agreement will co-operate
in accordance with the terms of any agreement. That there is a legal framework, a piece
of legislation, a statute or a regulation within a participating state is essential, as it is
important for the process in both the requesting state and any co-operating state that
there is a rule of law and that it is adhered to.
Co-operation is sometimes informal in nature. Most informal co-operation occurs at
the law enforcement level. It can be as simple as an officer in the Hong Kong Police
telephoning or emailing an officer in the Australian Federal Police,9 to ascertain if a
person of interest is residing at a particular address in Sydney. Once confirmation is
received, and if the person is wanted for a crime in Hong Kong, then the request will be
formalized, firstly by the issue of a warrant of arrest in Hong Kong,10 and then the
issue of an Interpol Red Notice,11 which will be circulated to the 190 members of
Interpol, including Australia.
Formal co-operation is achieved through law enforcement and the prosecuting
authorities following procedures prescribed by their states’ respective legislative
provisions or in compliance with treaties or agreements to enlist the assistance of their
counterparts in other jurisdictions.
For the law enforcement professional, the first point of contact for co-operation is
Interpol;12 for European law enforcement it is Europol.13
For prosecutors, whilst direct co-operation is ultimately achieved on a state to state
basis, the International Association of Prosecutors is also a helpful source of infor-
mation and provides codes of best practice for prosecuting agencies.14
Organizations offering assistance to developing states will often be urged to fully
participate in the international community by co-operating with other states, including
co-operating in their efforts to combat corruption and other financial crime; thus the
guidance and influence of organizations such as the Organisation for Economic
Co-operation and Development,15 the World Bank16 and the International Monetary
Fund17 may also have the result of securing co-operation in the battle against
transnational financial crime.
9
In this type of situation the initial contact would likely have been made via the Australian
Federal Police Liaison Officer at the Australian Consulate in Hong Kong.
10
For example, the power for a magistrate to issue a warrant of arrest is provided for in s9
of the Magistrates Ordinance, Chapter 227, Laws of Hong Kong.
11
See Interpol website – “Notices” at http://www.interpol.int/INTERPOL-expertise/Notices.
12
For information about Interpol see the Interpol website at http://www.interpol.int/.
13
For information about Europol see the Europol website at https://www.europol.europa.eu/.
14
http://www.iap-association.org/.
15
http://www.oecd.org/.
16
http://www.worldbank.org/.
17
http://www.imf.org/external/index.htm.
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Where corruption is an issue, the Financial Action Task Force will provide guidance
to states directed at “threats to the integrity of the financial system and [to] help ensure
a level playing field”,18 and the International Association of Anti-Corruption Author-
ities,19 formed in 2006, primarily for the purpose of implementing the 2003 United
Nations Convention against Corruption, will also provide information concerning best
practice. The non-governmental organization Transparency International20 has also been
instrumental in encouraging co-operation in combating corruption through maintaining
and publishing a country by country performance index of the incidence of corruption
in each country.
LEGISLATION FACILITATING FORMAL CO-OPERATION

The ultimate aim of seeking co-operation is to obtain assistance in bringing the
financial criminal to justice. Achieving this end usually involves the completion of a
number of steps, including obtaining sufficient admissible evidence to be produced in
court at the offender’s trial, locating and retrieving the offender, prosecuting him and
then relieving him of the proceeds of his crime. All these steps will usually be the
subjects of domestic laws.
Evidence is most conveniently obtained from another jurisdiction if there is
legislation providing for mutual legal assistance, and in consequence of that legislation,
the signing with that place of a mutual legal assistance agreement. Such agreements are
not always easy to achieve, often because of political or cultural differences, so that the
legislation should also provide for ad hoc arrangements,21 enabling a one-off request
for assistance to be made, in the absence of an agreement or treaty.
Mutual legal assistance legislation usually provides for assistance in obtaining the
restraint and confiscation of the proceeds of crime, wherever those proceeds may be
located.
The extradition of a fugitive offender can be more simply and lawfully achieved
where there is legislation providing for the surrender of a fugitive offender, and in
consequence of that legislation, an agreement exists between the requesting state and
the prospective co-operating state in which the offender is located.
I. Legislation Concerning the Gathering of Lawful Evidence
There is little point in obtaining evidence abroad if it will not be admitted at the
offender’s trial, so it is important when evidence is sought that it will be in an
admissible form. If evidence is being obtained with the assistance of a foreign court, a
difficulty that is sometimes encountered is the need to comply with both the law of the
co-operating state and the law of the requesting state. To ensure that the laws in both
places are complied with, careful planning will be necessary.
18
http://www.fatf.gafi.org/pages/aboutus/.
19
http://www.iaaca.org/.
20
http://www.transparency.org/.
21
Usually requiring the requesting state to provide a reciprocity undertaking.
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Evidence may be required firstly as pre-trial evidence for the purpose of building a
case that will support the issue of a warrant of arrest, and if the offender is abroad, a
request for his extradition; secondly, the evidence may be required for production at the
offender’s trial in the requesting state. Evidence may be in the form of exhibits,
including documentary exhibits, or depositions containing the evidence of witnesses
taken before a magistrate, a judge or a consular officer.
If testimony is taken abroad in the form of a deposition and the deponent is not going
to be available to testify at the trial, its admissibility at the trial of the offender may be
challenged unless the offender or his legal representative is afforded the opportunity of
cross examining the deponents.
The process by which evidence is obtained by way of commission rogatoire or letters
of request has been in existence for many years; more modern legislation, however,
appears to have had its genesis with the promulgation of the Hague Convention on the
Taking of Evidence Abroad in Civil and Commercial Matters 1970. Although this
instrument, as the name suggests, concerned the obtaining of evidence for production in
civil and commercial cases, when its provisions were adopted in the form of domestic
legislation in some jurisdictions, provisions for the taking of evidence for use in
criminal cases were also included.22
Most jurisdictions that have legislation of this nature require, as a pre-requisite to
applying for a letter of request in a criminal case, that criminal proceedings must have
been commenced against a suspect or that such proceedings are contemplated.23
Where the requesting state has mutual legal assistance legislation, and has signed a
mutual legal assistance agreement with the co-operating state, then the letter of request
procedure will be unnecessary. Whilst the existence of an agreement does make the
process simpler, legislation may allow for requests to be considered from places with
which there is no agreement.24
Mutual legal assistance legislation commonly contains provisions which facilitate the
gathering of pre-trial evidence, such as documents, banking records and other exhibits
at the investigation stage, as well as evidence for use in the trial itself, including the
oral testimony of witnesses.
The relevant Hong Kong statute is Cap. 525;25 its provisions are fairly typical. For
example, s12(1) enables a domestic search warrant to be sought so that evidence to
assist the requesting state can be obtained. To invoke this provision it is necessary that
22
For example, the UK Evidence (Proceedings in Other Jurisdictions) Act 1975.
23
For Hong Kong now see sections 77E and 77F of the Evidence Ordinance. In Australia,
similar provisions can be found in various state legislation – see, for example, Part 4 of the New
South Wales Evidence on Commission Act 1995. For the procedure in the United States see US
Attorneys Criminal Resource Manual 275. For the United Kingdom see sections 5 and 6 of the
Evidence (Proceedings in Other Jurisdictions) Act 1975.
24
For an example of such a provision, see s5(4) of the Mutual Legal Assistance in Criminal
Matters Ordinance, Chapter 525, Laws of Hong Kong [“Cap. 525”].
25
Supra n 24.
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a criminal matter26 involving an external serious offence27 has commenced in the

requesting state; that there exists reasonable grounds to believe that an exhibit28
relevant to the criminal matter is located in Hong Kong; and the request must be made
by an appropriate authority of that place to the Secretary for Justice,29 requesting him
to arrange for the issue of a search warrant in relation to that thing.30 The Secretary for
Justice will then nominate in writing an authorized officer31 to apply to a magistrate for
the search warrant.
Mutual legal assistance legislation will also provide for the taking of evidence for use
in a court in the requesting place; again, Hong Kong’s legislation is fairly typical. In
regard to incoming requests, there are three modes by which evidence can be received
or given in Hong Kong for production in the requesting state,32 namely, the taking
before a magistrate of evidence from a witness in Hong Kong and the transmission of
a deposition of the witnesses’ evidence to the requesting state, the taking of evidence in
the requesting state via live television link from a witness in Hong Kong, and the
production to a magistrate of an exhibit.33 All three methods require the prior
authorization in writing of the Secretary for Justice.
II. Legislation Concerning the Surrender34 of Fugitive Offenders
Typical extradition legislation35 will contain provisions describing the procedure for
requesting the surrender of a fugitive36 by the prescribed authority of the requesting
state, the specified authority in the place in which the offender is located to whom the
request is to be addressed and the process that is to be followed in effecting the
surrender, including details of the court or authority that is empowered to order the
surrender, and the legislation also usually includes provisions concerning any appeal
against a surrender order and the time period within which such an appeal must be
filed.
26
Which includes an investigation, a prosecution or an ancillary criminal matter, such as
proceedings concerning the confiscation of crime proceeds – see s2.
27
Which is an offence allegedly committed in the requesting state for which the maximum
penalty is not less than 24 months imprisonment – see s2.
28
Referred to in the section as a thing.
29
Hong Kong’s senior law officer, the equivalent of the Attorney-General.
30
There is no detailed definition of the term thing in Cap. 525; in s2; it is merely stated that
“thing includes material”; material, on the other hand, includes “any books, document or other
record in any form whatsoever, and any article or substance”.
31
Which includes a police officer, a customs officer, an independent commission against
corruption officer or any other person authorized in writing by the Secretary for Justice.
32
See s10(1) of Cap. 525.
33
An exhibit or thing seized by an authorized officer under the authority of a search warrant
issued under s12(1) would be produced in this way.
34
Or extradition.
35
The relevant Hong Kong law is the Fugitive Offenders Ordinance, Chapter 503, Laws of
Hong Kong. The relevant Australian law is the Extradition Act 1988. The relevant US law is 18
US Code Chapter 209. The relevant UK law is the Extradition Act 2003.
36
Or wanted person or suspect.
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It is usual for the legislation to provide for the signing of agreements, orders or
treaties with other states. Requests by one signatory country to another must comply
with the terms of the agreement.
Whilst the existence of an agreement makes the process of requesting the surrender
of a fugitive offender from an agreement state and surrendering a fugitive offender to
that state simpler, the legislation may also provide that applications from states with
which there is no formal agreement may be considered where there are special
provisions allowing for such an arrangement and this may require the provision of a
reciprocity undertaking.37
In the absence of a formal treaty or other arrangements for the extradition of a
fugitive, an informal arrangement, such as lawful deportation, may be used to effect the
repatriation of the fugitive.38
Extradition legislation, or agreements which follow the enactment of legislation,
usually contain a number of common features, including the need for dual criminality39
and that extradition requests will not be entertained for offences of a political nature;
there are also sometimes provisions which preclude or restrict extradition for taxation
or revenue offences.40 Some states will refuse to extradite for offences that attract
certain types of punishment, such as torture or the death penalty. Where a state does not
recognize capital punishment and a request is received to extradite a fugitive to a
requesting state which has the death penalty, unless the requesting state undertakes not
to seek the death penalty for the offence, or not to carry out the sentence if the
sentencing court imposes the death penalty, then the request will be refused. This
requirement will usually be incorporated in any extradition treaty or agreement.41
Some states will decline to extradite their own nationals.42 The refusal to extradite a
state’s own citizens usually has nothing to do with the state’s desire to assist its
37
See, for example, s194 of the Extradition Ordinance 2003 [UK]. Hong Kong does not
have such a provision, primarily because of its status and the need to have its extradition
arrangements ratified by China.
38
See, for example, the case of Lai Changxing, who was deported from Canada to China
following protracted negotiations, primarily involving the issue of whether or not Lai would be
facing the death penalty if convicted of major financial crimes. A report concerning the case can
be found on the BBC website at http://www.bbc.co.uk/news/world-us-canada-14245141.
39
That is, the offence that is the subject of the request must also be an offence in the
co-operating state.
40
See, for example, s5(2) of Cap. 525.
41
See, for example, Article 4 of the Agreement between the Government of Hong Kong and
the Government of the United States of America for the surrender of Fugitive Offenders Order,
made under the Fugitive Offenders Ordinance, Chapter 503, Laws of Hong Kong, sub.leg. 503F.
42
Countries which will refuse to extradite their own citizens include Austria (s12 of the
Extradition and Legal Assistance Act), Brazil (Article 5 of the Brazilian Constitution 1988), the
People’s Republic of China (Article 8 of the Extradition Law), the Czech Republic (Article
14(4) of the second Charter of Fundamental Rights and Freedoms), France (Articles 696-1 to
696-7 of the Code of Criminal Procedure, legislative part), Germany (Article 16(2) of the Basic
Law for the Federal Republic of Germany, although Germany will extradite a citizen to another
member state of the European Union in accordance with a European arrest warrant), Japan
(Article 2 of the Law of Extradition) and the Republic of China, that is, the state also referred to
as Taiwan (Article 4 of the Law of Extradition).
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citizens, but is more likely because, in accordance with that state’s criminal justice
system, a citizen can be dealt with for the crime in that state, wherever the crime was
committed.
As with the gathering of lawfully obtained evidence, it is imperative that the means
by which a fugitive is retrieved from another state is lawful. The consequence of the
unlawful surrender of a fugitive could be that the trial of the fugitive will be
permanently halted.43
REASONS FOR NOT CO-OPERATING

On some occasions the reluctance to co-operate is founded on the undue priority given
to a nation’s sovereignty and the disinclination to compromise; on other occasions,
sadly, the lack of co-operation stems from rampant corruption, corruption of govern-
ments, corruption of law enforcement officials and prosecutors, and even corruption of
judges.
I. Reluctance to Relinquish Sovereignty
In the introduction to her article, “When Co-operation and Intervention Meet: Sover-
eignty in the Mexico-United States Relationship”,44 Alba Izado Leon Hernandez wrote
Sovereignty is a cornerstone of the international system and of modern nation-states. Yet the
traditional understanding of this concept is being challenged by problems of such magnitude
and extent that they cannot be dealt with by one state single-handedly. This situation is
further compounded by the fact that anarchy permeates the international system and states
seek to maintain control over their “sovereign” territory. Because of this, cooperation can
become difficult to achieve, as protecting the self-interest of a state from both internal and
external challenges tends to prevail over efforts at collaboration.
A common difficulty in securing international co-operation to combat financial crime,

which will arise in negotiations with new and emerging states,45 relates to a seemingly
inflexible determination to maintain that state’s sovereignty. Co-operation often means
compromise, but compromise is usually necessary where both parties in the negoti-
ations are endeavouring to obtain agreement with optimum benefit to each. The
completion of an agreement in these circumstances very much depends on the skills of
the negotiator for the party seeking the agreement in highlighting the benefits that such
an agreement will provide to the reluctant party.
43
See, for example, the cases of R v. Horseferry Road Magistrates Court ex parte Bennett
[1994] 1 AC 42 [UK] and Moti v. R 283 ALR 393 [Australia].
44
3(4) Amsterdam Law Forum 54 [2011], at 54.
45
Although the reluctance to give way on matters concerning state sovereignty is not limited
to new and emerging nations. Similar problems arose when members of the European Union
were endeavouring to agree upon common foreign and security policies. See the article by
Sascha Mueller, a lecturer at New Zealand’s University of Canterbury, “Europe’s Dichotomy –
the Matter of Sovereignty” 9 New Zealand Forces Law Review 55 (2009).
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II. Corruption
The problem that more often militates against obtaining co-operation in some places is
the problem of corruption. Whilst corruption is not the exclusive province of develop-
ing states, corruption appears to be more often present in such states.
In the British Journal of Criminology in 200346 Professor Jean-Germain Gros47
emphasized that transnational crime was “one of the many challenges of the post-Cold
War” and had “become an integral part of the private accumulation strategies of some
public officials, entrepreneurs and ordinary citizens”. Non-compliant or rogue states
provide safe havens in various places, where the financial criminals, whilst ever they
have the funds to pay bribes to corrupt officials, can come and go with impunity. The
problem often arises in developing economies where ordinary citizens are living in
poverty and are beholden to the whim of public officials and wealthy tycoons for
handouts just to survive. Where corruption is endemic in a society, and the criminal is
prepared to provide financial rewards in the form of bribes in return for protection and
a secure place to live, it can be an extremely difficult task to persuade such a society to
provide assistance to something that is as esoteric as the international community in its
fight against financial crime. For the government official and the businessman the
rewards are just too great to give up, and for the ordinary citizen, whose main focus is
on where his next meal is coming from, and is reliant upon any scraps that the corrupt
official or businessman will throw his way, it is unrealistic to expect him to rebel
against corrupt practices, although history does show that if the conduct of the leaders
of a state becomes too oppressive then citizens will eventually revolt. What are needed
as a first step are incentives focused upon assisting the poor to help themselves.
In October 2013, the World Bank Group introduced a strategy it calls its Corporate
Scorecard. This strategy is “grounded in two ambitious goals”, namely, “ending
extreme poverty by reducing the percentage of people living on less than $1.25 a day to
3 percent by 2030; and promoting shared prosperity by fostering income growth for the
bottom 40 percent of the population in every country”.48
The International Association of Anti-Corruption Authorities49 currently has over 300
organizational members, representing the majority of anti-corruption law enforcement
agencies from around the world. The World Bank is also an organizational member.
Apart from continuing to promote and support implementation of the United Nations
Convention against Corruption, it also fosters constructive collaboration among its
members for the prevention of corruption, asset recovery and international
co-operation.50 One of its future initiatives is the preparation of a digest of good
practices.
46
“Trouble in Paradise. Crime and Collapsed States in the Age of Globalization” 43(1)
British Journal of Criminology 63 (2003).
47
Professor of Political Science and Public Policy and Research Fellow in the Center for
International Studies, University of Missouri-St Louis.
48
www.corporatescorecard.worldbank.org.
49
Supra n 19.
50
http://www.iaaca.org/Documents/workplan/201103/t20110316_512871.shtml.
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In pursuing its objectives, the Financial Action Task Force has issued a number of
recommendations; those recommendations set the standard for anti-money laundering
initiatives and encourages member countries to comply with the recommendations. An
important initiative for encouraging members to comply is the use of peer reviews,
where members evaluate other members’ compliance with the recommendations
through an assessment and preparation of a detailed report.
THE WAY FORWARD

It is difficult to envisage that complete victory can be achieved by those engaged in the
fight against financial crime. Not every criminal will be caught, not every criminal who
is caught can be surrendered for trial, and possibly because of insufficient or inadequate
evidence, not every criminal can be tried, convicted and deprived of the proceeds of his
crimes. This is particularly so whilst there are places on earth that do not have
extradition arrangements or mutual legal assistance agreements with other states. It is
right that a state’s sovereignty should be recognized and its laws respected, but comity
of nations and a desire to be a fully participating member of the international
community, with the benefits that will flow from that participation, dictates that to
provide assistance in tracking down criminals and gathering evidence against them is a
reasonable concession to be made.
It is imperative, to ensure co-operation, that the executive arm of governments and
public officials generally have the will to pursue transnational financial criminals, a will
which is not tainted by corruption. To facilitate the securing of evidence, the extradition
of the offender and the confiscation of crime proceeds, at the very least, it is necessary
for the decision makers in government to ensure the enactment of appropriate domestic
legislation and the provision of adequate funding; funding is required not only to
employ and equip law enforcement personnel and prosecutors, but also to properly train
them, because investigating and prosecuting financial crime requires specialist know-
ledge and skills that are not necessarily required for the investigation and prosecution
of less sophisticated crime.
Apart from the integrity of the administration, law enforcement officers and
prosecutors, it is also essential that the courts are presided over by capable judicial
officers who are prepared to maintain the rule of law, by ensuring that the laws created
by the legislature are properly and fairly applied. Again, it is preferable that these
judicial officers are experienced in trying cases of this nature.
As for non-compliant states, the international community, governmental and non-
governmental organizations alike must maintain pressure upon them to comply.
Undoubtedly aid programmes directed at alleviating poverty and assisting citizens to
become self sufficient, will also encourage the societies of unco-operative states to
change their perspectives.
Fortunately, the number of places that do have laws and procedures in place to assist
in the extradition of fugitive offenders and in the gathering of evidence for use by
another co-operating state continues to grow.
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55. The International Criminal Court and financial

crime
Jessie Ingle
1. INTRODUCTION
Convictions and indictments of genocide and crimes against humanity emanating from
the International Criminal Court (ICC) seem, at first glance, decidedly removed from
the realm of financial crime. However, upon closer look, the history and work of the
ICC is replete with characteristics relating to financial crime. For instance, the modern
form of the ICC was triggered by a proposal for a court to address the concerns of
money laundering and transnational organised crime. Further, there exist often-
overlooked financial aspects to the crimes currently within the jurisdiction of the ICC.
This chapter will address the ways in which the ICC and financial crimes intertwine.
Part 2 will address the history of the ICC with attention to the purposeful exclusion of
financial crimes. Part 3 will examine proposals to expand the current jurisdiction of the
ICC to encompass crimes such a bribery, corruption and terrorist financing. Part 4 will
examine the financial aspects of the core crimes of the ICC. Part 5 will conclude.
The current President of the International Criminal Tribunal for the Former Yugo-
slavia (ICTY) remarked in 1995 that: ‘The internationalization of criminal law,
including the enforcement of its provisions, has assumed central importance. Not only
do crimes against humanity, genocide and war crimes raise our indignation; we are
deeply concerned about terrorism, drug trafficking, money laundering and white collar
crime.’1
2. EXCLUSION FROM THE ROME STATUTE

The ICC as we know it today in fact originated from a proposal by Trinidad and
Tobago for the establishment of an international court with jurisdiction over drug
trafficking.2 The proposal was deeply concerned with the financial aspects of traffick-
ing – such as money laundering and terrorist financing. Trinidad and Tobago’s proposal
1
Theodor Meron, ‘The Internationalization of Criminal Law’ (1995) 89 Am Soc Int L Proc
297, 297.
2
Letter from the Permanent Representative of Trinidad and Tobago to the United Nations
Addressed to the Secretary-General (21 August 1998), UN Doc A/44/195; Patrick Robinson,
‘The Missing Crimes’ in Antonio Cassese et al (eds), The Rome Statute of the International
Criminal Court: A Commentary: Volume I (Oxford University Press 2000) 499–500.
668
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The International Criminal Court and financial crime 669
reignited the debate surrounding a possible international criminal court,3 and the
General Assembly instructed the International Law Commission (ILC) to address the
question of establishing an international criminal mechanism with particular juris-
diction over individuals involved in illicit drug trafficking.4
The final draft statute proposed by the ILC in 1994 separated the ‘treaty crimes’,
including terrorism and drug trafficking, from the ‘core’ international crimes of
genocide, aggression, war crimes and crimes against humanity. After listing the core
crimes as subject to the jurisdiction of the court, the draft statute allowed for crimes
pursuant to treaty provisions listed in the annex to be encompassed by the court, as
long as the conduct alleged constituted an exceptionally serious crime of international
concern.5 Already, the shift away from the initial focus on international financial crimes
– or, at the least, crimes such as drug trafficking and complementary financial crimes
such as money laundering – towards the violent crimes seen at the time in Yugoslavia
is evident.
The report of the Intersessional Meeting of the Preparatory Committee on the
Establishment of an International Criminal Court in 1998 incorporated the crimes of
terrorism (including ‘sponsoring’ and ‘financing’)6 and drug trafficking, although it
attached the proviso that
[t]he Preparatory Committee considered the following three crimes (crimes of terrorism …
and crimes involving the illicit traffic in narcotic drugs and psychotropic substances) without
prejudice to a final decision on their inclusion in the Statute. The Preparatory Committee also
discussed these three crimes only in a general manner and did not have time to examine them
as thoroughly as the other crimes.7
Such a proviso was a clear indication of the waning of support for the inclusion of
these treaty crimes.8
Support continued to decline as the inclusion of drug trafficking and terrorism met
with great resistance at the Rome Conference in 1998. The arguments against inclusion
centred upon claims that the presence of these crimes would trivialise the role of the
3
The idea of an international criminal court surfaces as early as the 15th Century: see
Sandra L Jamison, ‘A Permanent International Criminal Court: A Proposal that Overcomes Past
Objections’ (1995) 23 Denver J Int L & Pol 421. The General Assembly had requested the ILC
to prepare a draft code of offences against the peace and security of mankind following World
War II: Formulation of the Principles Recognized in the Charter of the Nuremberg Tribunal and
in the Judgment of the Tribunal, GA Res 177 (II) (21 November 1947).
4
International criminal responsibility of individuals and entities engaged in illicit traffick-
ing in narcotic drugs across national frontiers and other transnational criminal activities:
establishment of an international criminal court with jurisdiction over such crimes, GA Res
44/39, UN Doc A/RES/44/39 (4 December 1989) para 1.
5
‘Draft Statute for an International Criminal Court’ (1994) II YB ILC, art 20(e).
6
United Nations Diplomatic Conference of Plenipotentiaries on the Establishment of an
International Criminal Court, Report of the Preparatory Committee on the Establishment of an
International Criminal Court, UN Doc A/CONF.183/2 (14 April 1998) 21.
7
ibid.
8
Robinson (n 2) 503.
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Court and stretch its resources.9 Further, it was contended that jurisdiction should be
limited to a few core crimes to promote a unified, coherent system: the role of the
proposed Court was codification, not progressive development – too much emphasis on
the latter would result in fewer ratifications and hence a weaker mandate.10
The United States delegation had previously argued that
[t]his court should not concern itself with incidental or common crimes, nor should it be in
the business of deciding what even is a crime. This is not the place for progressive
development of the law into uncertain areas, or for the elaboration of new and unprecedented
criminal law. The court must concern itself with those atrocities which are universally
recognised as wrongful and condemned.11
Much of the criticism focused on the apparent lack of gravity of drug-related crimes
and terrorism – the formulation of Article 20(e) of the ILC’s Draft Statute evinces a
particular concern to ensure that treaty crimes reach sufficient gravity, despite the
oft-recited preamble that the Court will only have jurisdiction over the ‘most serious
crimes of concern to the international community’.12 The prevailing view at the Rome
Conference was that these treaty crimes do not meet the ‘conceptual conditions for core
crime status because they are not, by definition, a threat to international peace and
security or so egregious as to shock the conscience of humanity’.13
A strong argument against the inclusion of treaty crimes (including the financial
crimes of money laundering and terrorist financing) was that they are not crimes under
international law – they are crimes created by treaties which ‘envisage that national
legislation will be enacted to make specified conduct criminal under the relevant
national law’.14 The demarcation of treaty crimes from core crimes in Article 20(e) of
the ILC’s Draft Statute reflects this distinction.15 As a corollary, the detailed content of
the crimes is not defined at an international level – Professor Crawford emphasised that
‘[t]hose conventions cover a wide range of conduct, far wider than could justifiably be
9
Robinson (n 2) 502–503; Neil Boister, ‘The Exclusion of Treaty Crimes from the
Jurisdiction of the Proposed International Criminal Court: Law, Pragmatism, Politics’ (1998)
3(1) J Conflict Security L 27, 35.
10
Boister, ‘The Exclusion of Treaty Crimes’ (n 9) 35. The non-universal ratification of
treaties in which the crimes of drug trafficking and terrorism were contained presented a further
problem for their inclusion in the Rome Statute: ibid 31.
11
United Nations, ‘United States Representative Tells Legal Committee International
Criminal Court Should Not Be Direct Part of United Nations’ (Press Release, GA/L/3046, 23
October 1997); Andreas Schloenhardt, ‘Transnational Organised Crime and the International
Criminal Court: Towards Global Criminal Justice’ (Crime in Australia: International Connections
conference, Melbourne, 29–30 November 2004) 8–9.
12
Draft Statute (n 5) preamble; Rome Statute of the International Criminal Court (adopted
17 July 1998, entered into force 1 July 2002) 2187 UNTS 90, preamble. See also Boister, ‘The
Exclusion of Treaty Crimes’ (n 9) 28.
13
Neil Boister, ‘Treaty Crimes, International Criminal Court?’ (2009)12 New Crim LR 341,
346.
14
James Crawford, ‘The ILC Adopts a Statute for an International Criminal Court’ (1995)
89 AJIL 404, 410 cited in Boister, ‘The Exclusion of Treaty Crimes’ (n 9) 32.
15
Jurisdiction over war crimes (primarily found in the Geneva Conventions) were limited to
‘serious violations’, presumably easier to locate in customary international law.
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brought within the scope of an international criminal jurisdiction’.16 Without this

specified content, and lacking a basis in international law itself, the enacting of such
crimes in the Rome Statute would arguably be against the principle of nulla crimen
sine lege.17 However, it is contestable that any treaty crimes that would reach sufficient
gravity to come before the Court – major terrorist financing and money laundering
through vast drug trafficking networks – are adequately and near-universally criminal-
ised in national systems so as to satisfy the maxim.18
Exclusion from the Rome Statute in 1998 with a view to possible subsequent
inclusion was the compromise ultimately reached. Resolution E of the Final Act of the
Rome Conference assuaged supporters’ concerns by recognising that terrorism and drug
trafficking are serious crimes and recommending that the Review Conference mandated
by Article 123 aims to arrive at a suitable definition with a view to inclusion in the
jurisdiction of the Court.19
3. FUTURE INCLUSION OF FINANCIAL CRIMES IN THE

JURISDICTION OF THE ICC?
Resolution E provided hope for supporters of the inclusion of treaty crimes that their
cause would be renewed at the Review Conference in Kampala in 2010. Trinidad and
Tobago and Belize submitted a proposal for an amendment to Article 5 of the Statute to
include ‘The Crime of International Drug Trafficking’ in the jurisdiction of the Court.20
However, the crime of aggression was the only new addition to the purview of the
Court.
Further calls have been made to include financial crimes in the Statute; indeed, after
the global financial crisis, there were calls to submit those ‘responsible’ to the ICC.21
This part examines the proposals for the extension of ICC jurisdiction into financial
crimes.
16
Crawford (n 14) 410.
17
Boister, ‘Treaty Crimes’ (n 13) 345–346.
18
Boister, ‘The Exclusion of Treaty Crimes’ (n 9) 31.
19
United Nations Diplomatic Conference of Plenipotentiaries on the Establishment of an
International Criminal Court, Final Act of the United Nations Diplomatic Conference of
Plenipotentiaries on the Establishment of an International Criminal Court, UN Doc
A/CONF.183/10 (17 July 1998) Resolution E.
20
International Criminal Court Assembly of States Parties, Report of the Bureau on the
Review Conference: Addendum, UN Doc ICC-ASP/8/43/Add.1 (10 November 2009) 17; see also
International Criminal Court Assembly of States Parties, Report of the Working Group on
Amendments, UN Doc ICC-ASP/10/32 (9 December 2011) 4–5.
21
Written Question by Jean-Claude Martinez to the Commission, ‘Wider Jurisdiction for the
International Criminal Court Encompassing Financial Crimes’ (European Parliament Question,
P–1835/09, 17 March 2009).
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3.1 Money Laundering and Drug Trafficking
The UN Office on Drugs and Crime finds that multinational criminality moves $2.1
trillion per year across borders.22 Several authors have proposed that the ICC adopt a
money laundering statute to allow such crimes to be prosecuted at the international
level.23 They suggest that the ICC is the suitable forum to prosecute international
money laundering and drug trafficking due to its far-reaching jurisdiction and availabil-
ity of resources to investigate this particular type of crime.24 It has been proposed that
the proceeds confiscated from drug trafficking could be used to fund the prosecution of
the crime itself, rather than stretch the current resources of the Court.25 Authors further
contend that crimes such as money laundering are in fact more appropriate for the
international criminal jurisdiction of the ICC than the current violent crimes as they
rely on documentary evidence, rather than witness testimony, which is often difficult to
procure for logistic and political reasons.26 As such, the ICC would not face the
backlash and problems it has had prosecuting the core crimes.27 However, this is more
a testament to the sometimes-flawed conduct and architecture of the ICC rather than an
argument to extend its jurisdiction.28
3.2 Bribery and Corruption
The World Bank estimates that more than $1 trillion is paid in bribes each year.29
Appeals for the ICC to extend its jurisdiction to include the crimes of bribery and
corruption are also prevalent.30 The Socio-Economic Rights Accountability Project in
22
United Nations Office on Drugs and Crime, ‘Estimating Illicit Financial Flows from Drug
Trafficking and Other Transnational Organized Crimes’ (Research Report, UNODC, October
2011) 7.
23
Michael Anderson, ‘International Money Laundering: The Need for ICC Investigative and
Adjudicative Jurisdiction’ (2012–2013) 53 VA J Int L 763, 765; Bruce Zagaris and Sheila M
Castilla, ‘Constructing an International Financial Enforcement Subregime: The Implementation
of Anti-Money Laundering Policy’ (1993) 19 Brook J Int L 871, 955.
24
ibid 766; Molly McConville, ‘A Global War on Drugs: Why the United States Should
Support the Prosecution of Drug Traffickers Before the International Criminal Court’ (2000) 37
Am Crim LR 75, 96.
25
McConville (n 25) 99.
26
Anderson (n 23) 779.
27
McConville (n 25) 96.
28
Anderson presents an uncritical, rosy view of the ICC which at times ignores the inherent
complications of the Court: see, eg, Anderson (n 23) 779–781 and ‘abundant resources’: 782.
29
The World Bank, ‘Costs of Corruption’ (Feature Articles, 8 April 2004) http://go.world
bank.org/LJA29GHA80.
30
See, eg, Schloenhardt, ‘Transnational Organised Crime’ (n 11); Ophelie Brunelle-
Quraishi, ‘Assessing the Relevancy and Efficacy of the United Nations Convention against
Corruption: A Comparative Analysis’ (2011) 2 Notre Dame J Int & Comp L 101; Stephen
Kingah, ‘The Effectiveness of International and Regional Measures in Recovering Assets Stolen
from Poor Countries’ (2011) 13 U Botswana LJ 3, fn 107.
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Nigeria, for example, petitioned the ICC to investigate the corruption of past govern-
ments.31 It is argued that the United Nations Convention against Corruption is
weakened by its enforcement regime and the inherent difficulties of investigating a
crime that is conducted in secret, with the consent of both parties, and with no apparent
or direct victim.32 The Global Organization of Parliamentarians against Corruption
suggests that the ICC is well-equipped to respond to worldwide corruption. A 2013
Discussion Paper notes that while the focus of the Court is on predominantly violent
crimes committed during crises and armed conflict, the very nature of corruption
offences is that ‘their prosecution is less dependent on the testimony of victims, and
more focused on documentary evidence accessible to objective subject-matter
experts’.33 As such, the ICC would not have to rely so much on witness testimony –
often logistically burdensome – and its resources would not be unreasonably stretched,
as is so often argued when resisting the inclusion of new crimes in the jurisdiction of
the ICC.
3.3 Obstacles to Future Inclusion of Financial and Economic Crimes
Many of the criticisms launched against the inclusion of terrorism and drug trafficking
at the Rome Conference continue to apply to the inclusion of financial crimes in
the jurisdiction of the ICC. Some criticisms have in fact acquired more force. The
argument that an extension of jurisdiction would unduly burden the resources of the
Court resounds even more persuasively given the recent budget concerns and increased
caseload.34
However, the argument that the gravity of financial and economic crimes is not
sufficient to justify intervention of the ICC lacks merit. An individual financing
terrorism or laundering money to perpetuate violent crimes against hundreds of victims
may in fact be of comparable gravity to an individual committing a single act of
pillaging as a war crime. The issue of gravity is a red herring when dealing with the
jurisdiction of the Court, as the threshold of only the ‘most serious crimes of concern’
is already in place – a lone soldier committing a single act of pillaging will not attract
the attention of the Court, while an individual at the apex of an international terrorist
financing ring ought to.
However, the political will to broaden the jurisdiction of the ICC does not currently
exist. Exclusive of the general State objections to intrusion of their sovereignty,35 many
States are already discontented with the Court, particularly in Africa. The vitriol in
31
‘SERAP v Nigeria’ (SERAP, 2010) http://serap-nigeria.org/escrs-corruption-in-nigeria/. It
must be noted that the petition has received no response, and called for investigations as far back
as 1985, which would be against the temporal jurisdiction of the Court.
32
Brunelle-Quraishi (n 30) 147.
33
Global Organization of Parliamentarians against Corruption, ‘Prosecuting Grand Corrup-
tion as an International Crime’ (Discussion Paper, GOPAC, 1 November 2013) 6.
34
Blake Evans-Pritchard, ‘Mali Case Throws Spotlight on ICC Budget Constraints’ (Institute
for War and Peace Reporting, 6 August 2012) http://iwpr.net/report-news/mali-case-throws-
spotlight-icc-budget-constraints.
35
Andreas Schloenhardt, ‘Transnational Organised Crime and the International Criminal
Court: Developments and Debates’ (2005) 24 UQLJ 93, 113; Brunelle-Quraishi (n 30) 149.
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which the Court is sometimes held and the political backlash felt renders any extension
of its jurisdiction very unlikely.36 Indeed: ‘A review and inclusion is not going to
happen soon, and the mere fact that the ICC’s statute will have to be amended to
include such offences will be a formidable barrier to the ICC ever taking responsibility
for them.’37
4. FINANCIAL ASPECTS OF THE UNDERLYING OFFENCES OF

THE ICC STATUTE
Although the distinct financial crimes of money laundering, bribery or corruption may
never appear under the direct jurisdiction of the ICC, the conduct involved may in fact
contribute to the core crimes of the ICC Statute and entail liability. For example, it is
theoretically possible that an individual could be found liable for aiding and abetting
war crimes in the Democratic Republic of the Congo (DRC) by laundering money in
order to finance such crimes, or by bribing armed groups or governments involved in
an armed conflict to receive business concessions. In this way, financial crimes may
indirectly come under the purview of the ICC.
The financiers – direct and indirect – of war crimes, crimes against humanity, and
genocide are among the individuals who bear the greatest responsibility for such
crimes. Félicien Kabuga, ‘the financier of the Rwanda genocide’, for example, has been
indicted by the International Criminal Tribunal for Rwanda (ICTR) on five counts for
his financial involvement in the conflict.38 Modern forms of conflict are often sustained
by informal and illicit markets that form war economies.39 Former ICC Prosecutor Luis
Moreno-Ocampo emphasised that ‘[t]hose who direct mining operations, sell diamonds
or gold extracted in these conditions, launder the dirty money or provide weapons
could also be authors of the crimes, even if they are based in other countries’.40 As
such, those who commit international financial crimes – even in countries far-removed
from the conflict – may in fact be responsible for crimes under the purview of the ICC.
4.1 Legal Issues
There is limited space in this chapter to delve into the plethora of legal issues that are
integral to establishing individual criminal responsibility for financial crimes connected
to the core crimes of the Statute; however, a few critical issues can be addressed.
36
Abdul Tejan-Cole, ‘Don’t Bank on Prosecuting Grand Corruption as an International
Crime’ (Open Society Initiative for Southern Africa, 6 March 2012) 36.
37
Schloenhardt, ‘Developments and Debates’ (n 35) 113.
38
Kabuga (Indictment) Case No. ICTR-44B-1 (1 October 2004); Morten Bergsmo (ed),
‘Criteria for Prioritizing and Selecting Core International Crimes Cases’ (Forum for International
Criminal and Humanitarian Law, Publication Series, 2010) 259.
39
Mark B Taylor, ‘Conflict Financing: What’s Wrong with War Economies?’ (Report,
Norwegian Peacebuilding Resource Centre, May 2013) 2.
40
Luis Moreno-Ocampo, ‘Report of the Prosecutor of the ICC’ (Second Assembly of States
Parties to the Rome Statute of the International Criminal Court, 8 September 2003).
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The Court’s jurisdiction is limited to natural persons; as such it is unable to prosecute

corporations who are involved in pillage or other war crimes; however, it may
prosecute corporate officers. Individual criminal responsibility of corporate officers for
war crimes and genocide is not unprecedented. Businessman Frans Van Anraat was
convicted by a Dutch court of inhuman treatment as a war crime for commercial
transactions involving the sale of chemicals used to subsequently target Iraqi Kurds.41
Moreover, the ICTR convicted the director of a tea factory for failing to prevent or
punish acts of genocide perpetrated by his employees.42 These convictions ‘demon-
strate the probable stance of courts when called to adjudicate international offenses
perpetrated by individuals acting in commercial capacities’.43
A further difficult question is determining the relevant mode of liability. As such
individuals are likely to be indirectly involved with the underlying crime – they would
not physically undertake pillage themselves, for example – the most apt forms of
responsibility would be superior responsibility or aiding and abetting. Article 28(b)
allows for superior responsibility in relationships outside that of the military superior/
subordinate – relationships that could include civilian superiors such as government
officials or corporate officers.44 However, a much more stringent test of mens rea is
required in civilian superior/subordinate relationships – the superior must either know
or consciously disregard information that subordinates were committing a crime.45 A
more likely mode of responsibility is aiding and abetting.46 Article 25(c) asserts
criminal responsibility for an individual who ‘[f]or the purpose of facilitating the
commission of such a crime, aids, abets or otherwise assists in its commission or its
attempted commission, including providing the means for its commission’. ‘Providing
means for its commission’ could potentially refer to financing underlying crimes
through money laundering, for example. However, the mens rea standard for acces-
sorial liability before the ICC is much more rigorous than that before the other
international tribunals. The ICTY and the ICTR require only that acts be perpetrated in
the knowledge that they will assist the crime, whereas the ICC entails that acts be
committed for the purpose of facilitating the commission of the crime. As such, it
would be necessary to establish that an individual laundered money for the purpose of
facilitating war crimes in order to secure a conviction before the ICC. Conduct
amounting to financial crime could also be prosecuted under the (often-problematic)
mode of Joint Criminal Enterprise. An individual could be criminally liable if he or she
‘in any other way contributes’ to a crime or an attempted crime by a group of persons
acting with a common purpose – such contributions need only be made in the
41
Prosecutor v Van Anraat, LJN:BA6734, Gerechtshof’s-Gravenhage, 2200050906-2 (9
May 2007); James G Stewart, ‘Corporate War Crimes: Prosecuting the Pillage of Natural
Resources’ (Open Society Justice Initiative Publication, 2011) para 127.
42
Musema (Judgment) Case No. ICTR-96-13-A (27 January 2000); Julia Graff, ‘Corporate
War Criminals and the International Criminal Court: Blood and Profits in the Democratic
Republic of Congo’ (2004) 11(2) Human Rights Brief 23, 25.
43
Stewart (n 41) para 128.
44
Graff (n 42) 25.
45
Rome Statute, art 28(b)(i).
46
Reinhold Gallmetzer, ‘Prosecuting Persons Doing Business with Armed Groups in
Conflict Areas’ (2010) 8 J Int Crim J 947, 947–948.
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knowledge of the intention of the group to commit the crime.47 The ICC will have to
grapple with these complex issues of liability if corporate officers or individuals ever
come before the Court for conduct amounting to financial crimes connected to the
underlying offences of the Statute.48
The unique intersectional jurisdiction of the ICC renders it a suitable forum to
prosecute individuals responsible for financial crimes connected to the core crimes of
its jurisdiction. The ICC has jurisdiction over crimes occurring in the territory of a
State Party, as well as over individuals committing crimes who are nationals of a State
Party. As such, it may prosecute a national of Belgium (a State Party) aiding and
abetting war crimes in Iraq (not a State Party) through money laundering, or
businesspeople from America (not a State Party) in the DRC (a State Party).49
4.2 Pillage: A Possible Underlying Crime
A particular war crime that has been intrinsically linked to financial crimes is that of
pillage. In June 2000 the Security Council established a Panel of Experts on the Illegal
Exploitation of Natural Resources and Other Forms of Wealth in the Democratic
Republic of Congo.50 The Panel stated that ‘networks derive financial benefit through a
variety of criminal activities including theft, embezzlement and diversion of “public”
funds, undervaluation of goods, smuggling, false invoicing, non-payment of taxes,
kickbacks to public officials and bribery’.51
An important aspect of money laundering is identifying the constitutive underlying
crime from which the proceeds of the financial transaction derive52 – in situations of
armed conflict within the purview of the ICC, this could include the war crime of
pillage.53 Scholars are exploring ‘how the war crime of pillage can be used against
companies whose theft of natural resources has sustained deadly conflict’.54 In
November 2013, Swiss gold refiner Argor was accused of laundering gold allegedly
pillaged from the DRC from 2004 to 2005.55 The Swiss anti-impunity non-
governmental organisation (NGO), TRIAL, filed a complaint to the federal prosecutor
alleging that the company had committed ‘aggravated laundering’ when it reportedly
refined pillaged gold from the DRC, the sale of which contributed to financing the
47
Rome Statute, art 25(3)(d).
48
Graff (n 42) 26.
49
Stewart (n 41) para 147; Rome Statute, art 12.
50
Statement by the President of the Security Council, UN Doc S/PRST/2000/20 (2 June
2000).
51
Final Report of the Panel of Experts on the Illegal Exploitation of Natural Resources and
Other Forms of Wealth of the Democratic Republic of the Congo, UN Doc S/2002/1146 (16
October 2002) para 21.
52
Anderson (n 23) 774.
53
Rome Statute, art 8(2)(b)(xvi).
54
Tejan-Cole (n36) 36.
55
‘Swiss Refiner Argor Accused of Laundering DRC Gold’ BBC (4 December 2013)
http://www.bbc.com/news/world-europe-24811420.
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operations of an unlawful armed group in a brutal conflict.56 Theoretically, if strong

enough evidence could be found linking particular individuals to the alleged money
laundering (and strong enough evidence linking the money laundering to particular
underlying crimes, such as pillage), a case such as this – for aiding and abetting the war
crimes through money laundering – could be brought before the ICC.
4.3 Forfeiture
If prosecution of conduct that amounted to financial crime were to be pursued by the

ICC – in the form of aiding and abetting pillage through money laundering, for
example – several mechanisms of redress already exist in the infrastructure of the
Court. Article 93(1)(k) obliges States, if requested, to trace and freeze proceeds,
property and assets and instrumentalities of crimes, while Article 77(2)(b) grants
forfeiture of proceeds, property and assets derived directly or indirectly from that crime
as a permissible penalty. The freezing and forfeiture provisions of the Statute are
justified with particular reference to its reparations scheme,57 which enables it to make
a direct order against a convicted person specifying reparations to victims.58
At present, these provisions are used only sporadically and ineffectively.59 It is
arguable that forfeiture has not been implemented simply due to the nature of the
crimes under the Rome Statute, as underpinned by causes such as racial and religious
hatred rather than a profit motive. However, several war crimes are inherently
profit-driven, and the illicit war economy perpetuating conflicts attests to the fruitful-
ness of such crimes.60 The forfeiture and freezing provisions of the Rome Statute could
potentially be used to obtain proceeds indirectly garnered from the use of child soldiers
instead of salaried soldiers, or from the appropriation of civilian property after
displacing a population.61 However, the provisions are regrettably minimal and vague;
difficulties in their application may arise in terms of classifying the difference between
direct and indirect proceeds of crime and in terms of State cooperation.62 Difficulty in
the forfeiture regime was further illustrated when the Accused Bemba’s private plane
was seized by the Portuguese authorities at the request of the ICC, and generated
56
‘TRIAL files a criminal denunciation to the Swiss Federal Prosecutor against a Swiss
refinery company suspected of laundering looted gold from the Democratic Republic of the
Congo’ (TRIAL, 4 November 2013) http://www.trial-ch.org/en/about-trial/trial-acts/details/
article/trial-denonce-au-ministere-public-de-la-confederation-une-entreprise-suspectee-de-blanchi
ment-dor-p.html?tx_ttnews%5BbackPid%5D=1188&cHash=fc4c226a928ed245b4c54617df675c
4e.
57
Lubanga, ‘Request to States Parties to the Rome Statute for the Identification, Tracing and
Freeing or Seizure of the Property and Assets of Mr Thomas Lubanga Dyilo’ (Decision of 31
March 2006), Case No. ICC-01/04-01/06 (Pre-Trial Chamber I).
58
Rome Statute, art 75.
59
Manuel Galvis Martínez, ‘Forfeiture of Assets at the International Criminal Court: The
Short Arm of International Criminal Justice’ (2014) 12 J Int Crim J 193, 194.
60
See, eg, arts 7(1)(c), 8(2)(a)(iv), 8(2)(b)(xiii); Martínez (n 59) 195.
61
Martínez (n 59) 207.
62
ibid 206–207.
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parking fees at Faro airport almost surpassing the value of the plane.63 Moreover, both
the freezing and forfeiture provisions of the Statute entail that such actions are without
prejudice to the rights of bona fide third parties, creating a further obstacle to the
sourcing of proceeds of crime.64
Despite these challenges, the ICC has potential to effectively use forfeiture of
criminal proceeds for reparations to victims – this potential would be further realised if
the ICC prosecuted individuals for financial crimes connected to the underlying crimes
of the Statute.
5. CONCLUSION
The inclusion of financial crimes in the Rome Statute was awash with difficulties from
its initial conception. Future proposals to extend the jurisdiction of the Court are
unlikely to go forward, given the numerous challenges – political, financial, and legal –
that the Court already faces. However, the ICC has the power to prosecute individuals
who directly finance the commission of the underlying crimes of the Statute – it
potentially has the power to prosecute those more indirectly involved, such as those
financing the commission of crimes through money laundering. If the ICC extended its
mandate in this way, it would act as a powerful deterrent on rationally acting
enterprises and business people operating in this area. If an enterprise adapted its
operations to further avoid criminal prosecution in this way, it would make it more
difficult for criminal groups to obtain financing for their conduct.65
Former ICC Prosecutor Luis Moreno-Ocampo stressed that ‘[t]he mandate of the
ICC is to go up the chain of command to those most responsible, to those who ordered
and financed the violence’66 – international financial criminals are often among those
most responsible for crimes during situations of conflict.
63
ibid 212.
64
Rome Statute, arts 93(1)(k), 77(2)(b).
65
Gallmetzer (n 46) 955–956.
66
Luis Moreno-Ocampo, ‘Keynote Address’ (Sexual Violence as International Crime:
Interdisciplinary Approaches to Evidence, Interdisciplinary Colloquium, The Hague, 16 June
2009) 9, http://lexglobal.org/files/SexualViolence-speechOcampo.tif_.pdf.
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56. Offshore issues in policing financial crime

John L. Masters
INTRODUCTION
Issues and barriers regarding policing financial crime in offshore jurisdictions are at the
core no different to those of non-offshore jurisdictions: they involve the delicate
balancing of politics, resolve and law.1 The utility of this chapter in a handbook on
financial crime dictates that, whilst formally acknowledging that there is always the
underlying current of politics and resolve, focus must primarily be on the law.
Whilst a handbook is designed to be practical, the usual formality that comes with
academic publication has to be relaxed to a degree. Due to the nature and sensitivity of
issues to be covered in this chapter, it will not be possible to provide citations for every
proposition or assertion and the reader has to take a leap of faith in accepting the
writer’s experience and reliability of source of information. Undoubtedly many readers
will be able to relate such anecdotal evidence to their personal experiences. At the end
of the day, it would have been a greater disservice not to have included the uncited
examples.
“OFFSHORE” IS A RELATIVE CONCEPT

The title of this chapter reflects and to an extent encourages an “us and them”
mentality. What does “offshore” mean? A person in the United Kingdom or the United
States of America may conjure up a John Grisham style scenario2 of a tropical island in
the Caribbean designed primarily to hide the illicit funds from crimes committed on
home soil. However, for those who actually live on the tropical island it is indeed
everyone else who lives in offshore jurisdictions. Therefore a valid question to raise is:
“Why is it that offshore jurisdictions have been held responsible for crime that was not
committed on their golden sands?”
In a bid to respect all jurisdictions and not to unduly focus on political correctness at
the expense of addressing the needs of the chapter, references to offshore jurisdictions
will reflect the conventional parlance; however, those which do not fit that description
will simply be referred to as a “non-offshore jurisdiction” (NOJ).
Notwithstanding that the law varies with jurisdiction, at times it will be possible to
identify a common theme. In this first edition, offshore references and citations will
1
Kevin M. Stephenson et al. “Barriers to Asset Recovery: An Analysis of the Key Barriers
and Recommendations for Action” Stolen Asset Recovery Initiative 2011, The International
Bank for Reconstruction and Development/The World Bank.
2
See John Grisham “The Firm” Dell, reprint edition (25 August 2009).
679
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tend to favour the Cayman Islands. Those readers wishing to make contributions
regarding other jurisdictions for future editions of the handbook are encouraged to do
so to ensure relevant evolution and maximum utility.
THE “SAFE HAVEN” MYTH

Many are quick to label offshore jurisdictions as “safe havens”; however, this carries a
most negative connotation: it seems to suggest that the offshore jurisdiction is somehow
complicit in financial crime.
It is a useful exercise to consider what is involved in transferring illicit funds
offshore. In fact, a fundamental issue that is rarely addressed is whether there has been
a “transfer” of funds at all or is it really just a legal sleight of hand. It is unfortunate
that misplaced emphasis is often directed at where the proceeds of crime end up as
opposed to their genesis. Perhaps it is deliberate and serves as a deflection for those
who are truly responsible for inadequacies in detection and prosecution.
The whole concept of being a safe haven is that funds that are the fruits of criminal
activity often end up in offshore jurisdictions. The reality is that it is no less legal for
illicit funds to be in the offshore jurisdiction than the jurisdiction where the predicate
offence was committed; however, once outside of that jurisdiction, the process of
seizing or confiscating funds becomes far more complicated because of the layering
and the need to negotiate several complicated legal minefields.
It may come as a surprise to many but in many Commonwealth jurisdictions the law
does not acknowledge that anything has been “transferred” to the offshore jurisdiction
in a wire transfer. The description of a wire transfer across borders is a creature of the
financial, not the legal, world.3
The proposition being put is that, ignoring the limited class of case that falls into
arcane areas such as novation or the physical transferring of an object, it is not really
possible for there to be a transfer of property to an offshore jurisdiction. Offshore
jurisdictions are not safe havens for an asset which has been transferred: the asset in the
offshore jurisdiction was created in the offshore jurisdiction, and it never was
transferred there. With the introduction, through modern legislation, of offences such as
converting criminal property4 there is scope to trace assets in the form of converting
wealth; however, if it is simply a case of evidence of money ending up in the offshore
jurisdiction, the issue is not cut and dried.
What is actually being transferred in a money-transfer? How is it possible to transfer
funds in US Dollars but for it to manifest in the Cayman Islands as British Pounds or
Euros? The manifestation represents something different: it is a new creation born in
the offshore jurisdiction and independent of what existed in the NOJ.
At a most simplistic level, an individual deposits $1 million into Bank A. As a result
of this, a chose in action or debtor/creditor relationship is created: in other words Bank
A owes the individual a debt of $1 million. The individual then decides that he wants
3
Reg v. Preddy [1996] AC 815.
4
See section 133 Proceeds of Crime Law 2008 (Cayman Islands) and section 327 Proceeds
of Crime Act 2002 (UK).
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Offshore issues in policing financial crime 681
to “transfer” the funds to the Cayman Islands. Actually what he is really expressing is
the desire to access to an equivalent amount in the Cayman Islands – which is not the
same thing as transferring the funds.
The individual will establish an account with the bank in the Cayman Islands (“Bank
B”). He will then direct Bank A to lodge funds into his account in Bank B and this is
effected by the individual extinguishing the chose action between him and Bank A.
Bank A then creates a debtor/creditor relationship with Bank B and then Bank B
creates a debtor/creditor relationship with the individual. There has effectively been a
contemporaneous extinguishing and creation of choses in action of the same value
which gives the impression that the funds have been “transferred” (the legal sleight of
hand). This is also typical of legal offshore transactions.
The reality is that all the offshore Financial Crime Unit (FCU) has access to is the
evidence of the creation of a chose in action between Banks A and B (if they are lucky)
and the creation of the chose in action between Bank B and the individual. The source
of the funds is not known and the suspicion only arises by virtue of the creation of the
contract between the individual/entity and Bank B and the legal duty of disclosure by
Bank B to the regulating authority that the transaction is not in accordance with the
customer’s profile. What is often forgotten is that it is not an offence for a customer to
deposit funds contrary to his usual profile. This is not merely semantics because when
provided with intelligence the FCU has to decide what next to do.
Where the funds are truly the proceeds of crime it is common for beneficial
ownership of the funds to be hidden. For example, how often is it the case that an
offshore registered corporation is involved in the trafficking of illicit drugs in a NOJ, let
alone in an offshore jurisdiction? It is always a corporeal being whose name may never
be seen on a financial transaction or record.
The Cayman Islands has an interesting power in section 192 Criminal Procedure
Code (2014 Revision) that goes a long way to overcoming the beneficial ownership
hurdle. Section 192 provides:
192. (1) Any court may order the seizure of any property which there is reason to believe has
been obtained by or is the proceeds or part of the proceeds of any offence, or into which the
proceeds of any offence have been converted, and may direct that the same shall be kept or
sold and that the same, or the proceeds thereof if sold, shall be held as such court directs until
some person establishes a right thereto to the satisfaction of such court. If no person
establishes such a right within twelve months from the date of such seizure, the property or
the proceeds thereof, shall vest in the Financial Secretary for the use of the Islands and shall
be disposed of accordingly.
Therefore, this single section has the potential of overcoming many of the barriers
associated with offenders, who whilst never entering the offshore jurisdiction, abuse
their privacy laws in a bid to avoid confiscation by hiding beneficial ownership. There
is also the added benefit to the Cayman Islands of being able to confiscate and keep the
funds where a lawful claim is not made.
Surprisingly, however, this is a provision which is rarely used in preference to Part
III of the Proceeds of Crime Law 2008 which has the higher threshold requirement of:
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1. the commencement of a criminal investigation with “reasonable cause to believe

that the alleged offender has benefited from his criminal conduct”; or
2. proceedings for an offence have been started within the jurisdiction with the same
reasonable cause to believe.
So is an offshore jurisdiction really a “safe haven”? The answer in most cases is

probably yes, not because the offshore jurisdiction does not have the resolve to take
action; it is more because the NOJ where the predicate offence was committed is
usually not organized enough to establish the requisite evidential trail of converting
criminal property from one form to another. Up to the point that the funds are identified
in the offshore jurisdiction, it is incumbent on the NOJ to provide the evidence of
proceeds of crime. It is so often the case that restrained funds are released in offshore
jurisdictions solely because the requesting NOJ has not provided the evidence to
support confiscation. FCUs regularly have to pick up the slack of these better resourced
NOJ.
SHOW ME THE DIFFERENCE BETWEEN A DIRTY AND A CLEAN

WIRE
What follows is a gloss of what a financial investigator has to weigh up and consider
when policing financial crime. Before doing so, it is most helpful to remember a
number of fundamental truths:
1. There is not a separate wire transfer facility for legitimate and unlawful
transactions. The bulk of wire transfers are automated and are legitimate.
2. Even before the popularity of wire transfers, historically, it was not illegal to
carry large amounts of cash across borders.
3. These days, funds for large transactions are transferred electronically so a fair
question an offshore financial investigator might ask is: “How can you tell the
difference between a clean and dirty wire transfer?”
4. In view of the strict disclosure regimes in NOJs, why can’t an offshore bank rely
on the due diligence of the supposed highly regulated bank from the NOJ to have
sent clean funds?
5. How often does part of a request for mutual legal assistance include a disclosure
that a bank in the requesting NOJ has been prosecuted for facilitating the
movement of funds to the offshore jurisdiction?
6. If the NOJ cannot prosecute or obtain confiscation orders in its home jurisdiction,
why does it believe that it would be any easier in the offshore jurisdiction?
POLICING IS ABOUT IDENTIFYING AND MARSHALLING

EVIDENCE
The issues facing policing financial crime relate primarily to evidence. One must
remember that evidence is every bit as important for exculpation as inculpation of a
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suspect or transaction. In fact, in most jurisdictions there is a presumption of innocence

that does not stop once the offence travels out of the NOJ.
The mandate of policing is ensuring that there is compliance with the law.
Compliance is always with “domestic law” – even requests for international assistance
require that there be a direct link with the domestic law. There are strict laws regarding
confidentiality and consequences for breaches even where the intention is noble,5 so
investigators must control their zeal and ensure that their methodology itself is lawful.
PROSECUTION MUST ALWAYS BE IN THE MIND WHEN

POLICING FINANCIAL CRIME
The processes for policing financial crime inherently must have “prosecution” in mind
because if something is not illegal in the first instance, it arguably should not be
policed.
It is imperative that those policing financial crime know the issues and laws that are
central to fulfilling their role. Therefore it is important to know what types of financial
crime are likely to be prevalent in the jurisdiction (“the risk”), where the intelligence
lies to unearth the evidence and how to lawfully access that evidence and restrain
property to enable further investigation and ultimately prosecution, confiscation and
repatriation.
When it comes to restraint of criminal property, the policing often relates to
suspicious conduct as opposed to securing a domestic conviction because most of the
time the suspect has never actually set foot into the offshore jurisdiction. The policing
therefore tends to focus more on restraining and confiscating assets over prosecuting
the individual.
Therefore the following represents a convenient list of issues that should be at the
fore of every FCU, regardless of whether it is considered offshore or not.
1. What is the alleged financial crime?

2. What is the role of its agency/agencies in policing, interdiction, international
assistance and prosecution?
3. What is the impact such a crime has on its jurisdiction both legally and
financially?
4. Is it intended that the offender be brought to justice or is it a case of only
recovering the proceeds of crime?
5. If the most realistic outcome is the recovery of the proceeds of crime, how is that
property to be dealt with once recovered? Is it simply repatriation or is there to be
a sharing arrangement?
6. Once the role and goals are established, where is it anticipated that the evidence
will be found?
7. Are the goals realistic?
a) How much out-of-jurisdiction assistance is required?
5
See sections 4 and 5 of the Confidential Relationships (Preservation) Law (2009 Revision)
(Cayman Islands).
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b) How likely is it that the assistance will be forthcoming?

c) How likely is it that the evidence will be obtained within a reasonable time?
8. Are there confidentiality issues?
9. Could an equally effective outcome be reached by exhausting domestic non-
conviction based laws (Civil Recovery) and remedies through Proceeds of Crime
Legislation6 or the civil courts?
Whether it is an offshore FCU or an international agency requiring legal assistance

from that offshore jurisdiction, a healthy appreciation of the list above is a must to even
hope to get a proper start. This list, however, is not meant to be exhaustive and each
item on the list could justify a chapter of its own.
THE NATURE OF POLICING IN OFFSHORE JURISDICTIONS

There are two broad types of policing in which offshore jurisdictions are involved:
domestic and international.
Domestic Financial Crime
The domestic investigation of offshore jurisdictions can be categorized as:
1. onshore crime where the proceeds of crime remain in the jurisdiction; or

2. onshore crime where the proceeds of crime are actually sent to other offshore
jurisdictions or NOJs.
Regardless of into which category it falls, the domestic offshore policing agency will
invoke its investigative resources to identify and interrogate domestic suspects in the
same fashion as any police force would throughout the world. It will issue warrants,
obtain orders and seize property in accordance with its domestic laws. To obtain these
remedies or ancillary orders there must be evidence. This is rarely a concern in a
domestic investigation because, when it comes to evidence, the police know what they
have and what they are likely to get. They can swear on information in the genuine
belief that they have full control and can honour any undertaking that they are giving to
a court. The systems of justice in which they operate are also comforted by the
knowledge that if the courts are misled there will be real consequences. Most
importantly, when it comes to assessing the viability of an investigation and ultimately
whether to prosecute, they are in a position to know and address the variables.
The model can be quite simple when investigating domestic financial crime:
1. There is intelligence, information or a complaint that a crime has been commit-

ted.
2. Police then assess, in accordance with their priorities, whether on the best case
scenario it is in the public interest to pursue an investigation.
6
See Part IV Proceeds of Crime Law 2008 (Cayman Islands).
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3. If the answer is yes, they will formulate a plan or strategy and commence the
investigation whilst continually monitoring the public interest element, progress
and impact on resources.
4. Police may even seek assistance from their prosecuting agency on the merits of
the investigation and what assistance they may need to progress it to prosecution.
5. They will immediately start gathering evidence to meet their local code for
prosecution7 and, until the evidence reaches the level of a realistic prospect of
conviction, they will not lay a charge.8
6. During the process, the police will assess whether they meet relevant statutory
tests to seize or restrain property.9 The court will undoubtedly set a review
timetable in place which ensures the prompt investigation of the offences.
7. One must never forget that there is a presumption of innocence in relation to any
suspect; therefore, the proverbial “lap of honour” should not be run after only
successfully securing a first instance restraining order. The real investigation work
is yet to come.
8. In some jurisdictions, suspects may have access to restrained funds for legal
expenses; in others they may not,10 which can affect the issue of level playing
fields and human rights.11 It is worthy of note at this juncture that a single request
for assistance from a NOJ can wipe out the annual budget for an offshore
jurisdiction which quite often does not have a system of taxation to fund complex
financial investigations.12
9. Police will then assess whether they need assistance from other jurisdictions and
the timetabling implications it will have on their investigation. They will also
assess the consequences of the non-arrival of international evidence in the context
of whether they should continue with any investigation or restraint.
10. Once the investigation is exhausted the police are in a position to review whether
there is a realistic prospect of conviction and proceed to charge. If not, the
investigation will stop until evidence is forthcoming and, of course, any property
restrained will most likely be released.
11. Assuming that the police have formed a view that there is sufficient evidence to
charge and a realistic prospect of conviction, the brief is forwarded to the relevant
prosecuting agency, which often operates constitutionally independently13 and has
the final call on whether to prosecute. It is dangerous for police not to properly
7
Code for Crown Prosecutors of England and Wales http://cps.gov.uk/publications/code_
for_crown_prosecutors/introduction.html. Whilst not formally replicated in all jurisdictions, the
philosophy is still followed in most common law jurisdictions.
8
ibid at paragraph 4.4.
9
See s. 192 Criminal Procedure Code (Cayman Islands), Part III Proceeds of Crime Law
2008 (Cayman Islands).
10
s. 45(4) Proceeds of Crime Law 2008 (Cayman Islands).
11
See schedule 1 of the Human Rights Act 1998 (UK).
12
Office of the Auditor General Cayman Islands “Financial and Performance Reporting:
year ending 30 June 2014” which shows an annual budget of just over US$3.5 million for the
prosecution function of the Office of the Director of Public Prosecutions.
13
s. 57(4) of the Constitution of the Cayman Islands 2009.
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consider this from the outset as considerable expenditure may be outlaid only to
have the prosecuting agency not proceed on public interest grounds.14
The issues for the police are relatively simple and require a balancing of resolve,
evidence and public interest. Full control of the investigation lies with the domestic
jurisdiction. When it comes to policing domestic financial crime, it is rare for offshore
jurisdictions to need the assistance of a NOJ.
International Financial Crime
International financial crime impacts offshore jurisdictions in a number of ways. It

invokes a risk that the offshore jurisdiction is being used as a safe haven for illicit funds
whilst at the same time, by that very act, actually constituting a domestic offence.15
The evidence of the crime is usually substantially in a NOJ, as is the offender. Thus
being the case, it is more common for the offshore jurisdiction to have a limited role of
identifying and confiscating the proceeds of crime. Not surprisingly, those assets are
the fruits of calculated risk so will be vigilantly protected and fought for by suspects
and offenders alike. Furthermore, the commercial risk to an offender/suspect is justified
because in comparison to what is to be protected, investment in legal fees is rarely an
issue.
There are calls, often unreasonable, on the limited resources of offshore jurisdictions
to provide all types of assistance under the banner of “mutual legal assistance”.
Assistance is often requested by NOJs to immobilize, freeze, seize, confiscate and
repatriate assets. With many jurisdictions the procedure is to make a request of the
relevant international contact point, which may be assigned by protocol or even
legislation. It is then necessary for the matter to be referred to the local FCU, which
must create an investigation plan in accordance with its priorities. What must be in the
minds of those making the request for assistance is: “Why should the assistance
required by my jurisdiction take priority over a domestic investigation or those of other
requesting jurisdictions? Furthermore, or even more importantly, why should the
offshore jurisdiction investigate the crime against my jurisdiction over others against its
own? If the answer is going to be in the form of a motherhood statement, the chances
of cooperation and success are low and good money is being thrown away after bad in
both jurisdictions.
Once the request is forwarded to the FCU, the first item on the agenda is the nature
of the crime that is alleged to have been committed. Once that is identified it is
commonly necessary to have to identify a similar criminal offence in the offshore
jurisdiction to satisfy the oft required double-criminality requirements.16 This may be a
simple or onerous task. For example, fraud is an offence which is proscribed in all
jurisdictions. In one jurisdiction a fraud may be described in one way17 yet in the
14
Paragraphs 4.7–4.12 Code for Crown Prosecutors of England and Wales.
15
See s. 133 Proceeds of Crime Law 2008 (Cayman Islands).
16
See Criminal Justice (International Cooperation) Law 2004 (Cayman Islands).
17
See section 1 Fraud Act 2006 (UK).
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offshore jurisdiction identified as something else.18 In other offences, however, it may

not be quite as simple; for example, when it comes to tax offences, there may be no
double criminality as many offshore jurisdictions may not have an elaborate taxation
regime. The political pressure in these circumstances becomes very real because there
is an international expectation that the FCU will produce investigative outcomes which
the requesting NOJ could not. There is, furthermore, a domestic expectation that there
will be compliance with both the spirit and technical requirements of the local laws. In
some jurisdictions a court order, that is requested by way of mutual legal assistance, is
still required to release confidential information.19
RESOURCING
Offshore jurisdictions, unlike many of their onshore counterparts, do not have the
resources that come with funding through taxation and economies of scale.
Taking a typical jurisdiction like the United Kingdom, one can see an infrastructure
that not only has the budget of a highly taxed population but also many specialist
departments charged with limited mandates, which can never be duplicated in offshore
jurisdictions. Often these NOJ operational budgets exceed the entire budget for the
considerably smaller offshore prosecution agency.
The difficulty, however, becomes even more apparent when what are being breached
are basic human moral values that require any society or community to intervene via
the rule of law. Having said that, the financial cost is real and has a minimum threshold
regardless of in which jurisdiction the issue arises.
It is therefore imperative that when considering the role of policing in offshore
jurisdictions, requesting nations must assess the following:
1. What is the plan?

2. What is involved for the offshore jurisdiction in the request that is being made?
3. What expertise will the offshore jurisdiction require to effectively assist?
4. How is it envisaged that the offshore jurisdiction is to assist?
5. What resources will it require to assist?
6. How will it impact on its domestic policing duties?
7. How will it impact on its ability to assist other jurisdictions?
8. What are the barriers in your jurisdiction and in the offshore jurisdiction?
9. How can these be overcome?
10. What has been the cost to your department/government of investigating the
financial crime?
11. What do you anticipate to be the cost to the offshore jurisdiction?
12. Who is meant to pay for the offshore investigation?
13. How can you actually assist with resourcing the investigation?
18
Many jurisdictions do not define fraud but would consider various other offences relating
to dishonesty as equivalent.
19
Sections 4 and 5 Confidential Relationships (Preservation) Law (2009 Revision) (Cayman
Islands).
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14. What would be your expectations in relation to a requesting nation if the same
request were made of you?
15. If the circumstances were reversed, would you be able to lawfully assist in the
same fashion as being requested by you?
If your answer to any of these questions is in the form of “motherhood statements”20

you are wasting everyone’s time including your own. Remember that many offshore
jurisdictions do not have specialist investigations units and where they do, they are
commonly filled with expatriates on short-term placements. Compare this with offend-
ers who have hidden beneficial ownership of assets through a labyrinth of corporate
and trust structures.
The most telling reality is that the NOJ, with an armoury, including highly skilled
specialists, have often been unable to detect the predicate offence in its own jurisdiction
in time to stop the proceeds of crime going offshore.
Once you accept that it is common for those committing financial crime to abuse the
financial facilities provided by offshore jurisdictions, multiply this by the number of
other jurisdictions making similar requests with the number of investigations through-
out the world. Therefore, one of the most fundamental steps in policing financial crime
is from where, when and how is the evidence to come; then the issue of funding needs
to be addressed.
The move towards a solution of resourcing of policing financial crime involves at
least the following fundamentals. There must be:
1. a policing plan in relation to the particular operation;

2. available resource analysis and costing in both jurisdictions;
3. a plan to deliver those resources and to meet the costs.
It is not satisfactory to simply say that there will be a sharing arrangement when
proceeds are recovered because the costs of policing and investigation are not
dependent on outcome.
MUTUAL LEGAL ASSISTANCE AND SHARING INFORMATION

Sharing is a two-way street: many forget the word “mutual” when seeking the
assistance of offshore jurisdictions. It is naïve, not to mention arrogant, for a requesting
nation to expect free flowing information and assistance that would not be available in
its own jurisdiction. Openness and trust is crucial for policing financial crime.21
If, for example, there is an allegation that an arms dealer has received an unlawful
commission and has laundered the funds internationally, it is an insult not to provide at
20
For example, it is the duty in the international community for all countries to work
together to overcome the scourge of economic crime.
21
Kevin L. Stephenson et al. “Barriers to Asset Recovery: An Analysis of the Key Barriers
and Recommendations for Action” Star Initiative Barriers studies recommendation 2.
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least the evidence that would be necessary to secure a conviction in the jurisdiction
where the predicate offence occurred.
Some unhelpful requests of offshore jurisdictions appear in the following style:
1. We have a named offender who is a criminal in our jurisdiction; please identify,

freeze and repatriate all assets tied to him in your jurisdiction.
2. Other jurisdictions give the impression of being ready, willing and able to assist
but do not provide evidence for various reasons including lack of evidence and
domestic secrecy laws. It beggars belief that a jurisdiction whilst seeking
assistance refuses to assist in its own investigation and repatriation.
3. Openness and frankness. There have been instances where jurisdictions have been
fully compensated and have not divulged having been compensated. This invari-
ably results in the subject of the action making applications for the return of
restrained property armed with evidence of lawful resolution. Besides the risk of
costs at various levels, it shows a total disregard and respect for the offshore
jurisdiction.
4. Abuse of process. A practice that is becoming prevalent is for a NOJ to put
pressure on a party by threatening to use international cooperation privileges to
freeze offshore assets only to abandon the offshore police and leave it to them to
clean up when the matter is settled in their own jurisdiction.
Therefore the first issue that needs to be resolved is how much information and
evidence is the requesting jurisdiction prepared to give?
The second is, assuming that you are able to secure the seizure of the property, how
do you anticipate that the suspect will retaliate. What is the evidence that s/he would
offer to defeat such a claim. Is there a corporate veil and how is it proposed to be
pierced? If the funds were onshore what hurdles would you anticipate and how do you
intend to assist the offshore jurisdiction to overcome this problem?
TRAINING AND HUMAN RESOURCES

Mention is regularly made of legal resources such as laws, but what is fundamental is
the need for properly trained human resources. Quite often a person is part of a
financial investigating team because no one else wants to do it because it is not a road
to promotion or is even a punishment. To send a financial investigator and/or prosecutor
to court to apply for a restraint order when they do not know what comprises a trust or
corporation is suicidal. It is important that from the outset there is an understanding of
the human resources required for the task.
SECURITY AND SAFETY

When one considers the consequences of a successful confiscation, it becomes
extremely important to offshore investigators that their safety is assured. When one
considers that most offshore jurisdictions are light on qualified human resources there
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is considerable incentive in ensuring that the more proactive investigators are discour-
aged from being vigilant with investigation. A strategic removal of an investigator can
undo years of investigation and may even see the end of the prosecution and/or
confiscation.
The time is fast approaching where appointments of financial investigators and
prosecutors should be in NOJs and not the offshore jurisdictions. Many offshore
jurisdictions brief counsel from outside the jurisdiction for serious domestic trials and
investigations; however, this can be a costly exercise which the requesting NOJ should
seriously consider financing.
CONCLUSION
The most attractive features of simplicity and remoteness, both geographically and
legally, of offshore jurisdictions also double as their Achilles’ heel when it comes to
policing financial crime. It is important to note that whilst the world must unite to
defeat this scourge on international society, it is just not possible to expect offshore
jurisdictions to be responsible for the policing of financial crime.
Domestically, whilst on a smaller scale, they face the same challenges as NOJs and
those third world nations that attract the interest of various international organizations.
The time has come to concentrate less on criticizing what offshore jurisdictions have
not done to concentrating on how it is possible for offenders to send illicit funds
offshore.
The hurdles and barriers for investigators and prosecutors alike are real and need to
be owned by the world in a structured and organized fashion.
There has been considerable academic and policy discourse: the time has well and
truly come to redirect some real resources to the front.
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57. Civil enforcement in the United States securities

and banking industries
Arthur Middlemiss, Hillary Rosenberg and
Chiara Spector-Naranjo
INTRODUCTION
To protect consumers and investors, various federal and state agencies share powerful
tools to enforce the rules and regulations governing the banking and securities
industries and their practices. This chapter introduces the main authorities responsible
for the creation and civil enforcement of banking and securities laws, canvasses the
wide range of regulated conduct, and provides examples of how civil enforcement
authority is employed and the consequences of civil enforcement actions.1
I. SECURITIES REGULATION
Securities regulation refers to the body of rules, regulations, and laws that govern
securities transactions, including both the marketing of securities and the reporting and
disclosure obligations of issuers of US-traded securities. A security is a complex
investment instrument that represents an interest in something else, such as a company.
Millions of ordinary US citizens invest their savings in securities. Unfortunately,
securities transactions are susceptible to fraud and manipulation. Consumer protection,
along with the promotion of overall stability, fairness, and confidence in the securities
markets, are the primary goals of securities regulation.
Securities are regulated at the federal and state levels, and by self-regulatory
organizations (“SROs”), the largest of which is the Financial Industry Regulatory
Authority (“FINRA”). At the federal level, the Securities and Exchange Commission
(“SEC”) is primarily responsible for the civil enforcement of securities laws. At the
individual state level, each state’s attorney general is primarily responsible for
enforcing that state’s securities laws.
Federal securities laws are comprised of a variety of Acts and their amendments. The
primary Acts are the Securities Act of 1933 (the “Securities Act”) and the Exchange
Act of 1934 (the “Exchange Act”). The Securities Act primarily regulates the
distribution of new securities. It includes general antifraud provisions barring material
omissions or misrepresentations in connection with the offer or sale of securities. In
addition, the Securities Act includes reporting and disclosure requirements for secur-
ities issuers. The Exchange Act, which led to the SEC’s creation, is more broadly
1
Responsibility for criminal enforcement falls to the Department of Justice (“DOJ”).
691
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focused than the Securities Act, and regulates the trading of existing securities as well
as the activities of securities brokers and securities exchanges. The Exchange Act’s
protections extend to both sellers and purchasers of securities. Like the Securities Act,
it includes a general prohibition on fraud and material misstatements or omissions in
connection with the purchase or sale of a security as well as reporting and disclosure
requirements. It also includes provisions addressing stock manipulation, improper
trading while in possession of material non-public information (known as insider
trading), and misstatements in SEC filings.
In parallel to these Acts, FINRA writes and enforces rules and regulations that
govern all US brokerage firms and their registered representatives. Every US state has
enacted its own securities laws, commonly referred to as “blue sky” laws, which vary
widely in their terms and scope. Many blue sky laws predate federal securities laws, as
they were passed in the years leading up to the Great Depression as a response to the
increasing numbers of ordinary investors losing money in the financial markets.
II. MAIN CIVIL ENFORCEMENT AUTHORITIES

a. The SEC
Following the 1929 market crash, in 1934, the SEC was created to help restore public
faith in the markets. It oversees the securities industry’s key participants, including
exchanges, broker-dealers, investment advisers and mutual funds, and enforces regu-
lations that require the disclosure of material financial information in connection with
the offer and sale of securities.
The SEC’s Enforcement Division, one of five SEC divisions, investigates and civilly
prosecutes securities law violations, bringing hundreds of civil actions each year. The
SEC’s civil enforcement actions may result in court imposed injunctions that bar future
activity, including the debarment or suspension of individuals from acting as corporate
officers or directors of SEC-regulated companies, monetary penalties, and disgorge-
ment of profits.
In addition to civil enforcement actions, the Enforcement Division may also bring
administrative actions against regulated persons, which are heard by an Administrative
Law Judge. Administrative proceedings may result in cease-and-desist orders, disgorge-
ment of profits, debarment or suspensions from securities-related employment, and
licensing revocations or suspensions.
b. FINRA
FINRA is an independent, not-for-profit organization that creates rules for market

participants to ensure the securities industry operates fairly and honestly. FINRA
enforces the rules by bringing disciplinary actions in the form of a FINRA decision,
which is most common, or a formal complaint. Formal complaints are heard by a panel
composed of a professional hearing officer and two industry representatives. Panel
decisions can be appealed to the National Adjudicatory Counsel (“NAC”). FINRA
decisions can be appealed to the SEC, and then to a United States district court.
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Civil enforcement in the US securities and banking industries 693
Disciplinary actions may result in fines exceeding US$200,000, disgorgement of

profits, suspension from the securities industry for up to two years, or a permanent bar
from work in the securities industry.
c. The Federal Reserve System (“Federal Reserve”)
Created in 1913, the Federal Reserve is the central banking system of the US. Among
other things, it conducts US monetary policy and maintains the stability of the US
banking system. The Federal Reserve also supervises state-chartered banks, bank
holding companies, foreign branches of US national and state banks, and state-
chartered branches and agencies of foreign banks.
d. The Office of the Comptroller of the Currency (“OCC”)
The OCC, a bureau of the US Department of the Treasury, regulates and supervises all
nationally chartered banks as well as the federal branches and agencies of foreign
banks. It carries out its supervisory responsibilities by conducting bank examinations;
reviewing and approving bank licensing applications; issuing rules, regulations, and
interpretive guidance; and taking enforcement actions against banks that do not comply
with applicable laws and regulations. The OCC may remove officers and directors of
financial institutions under its control, enter into agreements with institutions to change
their banking practices, issue cease and desist orders, and assess civil monetary
penalties.
e. The Financial Crimes Enforcement Network (“FinCEN”)
FinCEN is also a bureau of the US Department of the Treasury. FinCEN protects the
US financial system from money laundering by implementing, administering, and
enforcing the Bank Secrecy Act (“BSA”), the federal anti-money laundering and
counter-terrorism financing statute. Among other things, FinCEN collects, analyzes,
and disseminates financial intelligence to US enforcement authorities and to their
international counterparts. FinCEN enforces the BSA by issuing regulations for US
financial institutions and imposing civil penalties, suspensions, and debarments from
the industry.
f. State Regulators
Except where federal law preempts a specific area of the law, states have their own
banking and securities laws, which are enforced by state regulators and law enforce-
ment agencies.
g. Private Individuals
In addition to government regulators, individuals can enforce banking and securities

laws by bringing civil actions seeking damages against the securities issuer, seeking,
among other relief, rescission, restitution, and damages. Providing private individuals
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rights of action increases the accountability of bad actors and can also provide
regulators and enforcement authorities with important investigatory leads.
III. SECURITIES LAW VIOLATIONS AND ENFORCEMENT

ACTIONS
a. SEC
i. Unregistered broker-dealers
The overwhelming majority of the liability provisions included in the securities laws
focus on disclosure and registration requirements. Entities or individuals that engage in
the business of effecting transactions in securities may qualify as broker-dealers under
the securities laws. Broker-dealers must register with the SEC, which requires, inter
alia, filing a registration, or “BD” form, hiring staff with qualified securities licenses,
maintaining a minimum net capital, and joining an SRO, like FINRA. Section 15(a)(1)
of the Exchange Act makes it unlawful for any broker-dealer to use the mail or any
other means of interstate commerce, such as the telephone, facsimile, or the internet,
unless the broker-dealer is registered with the SEC.
“Associated persons,” that is, individuals who work for a registered broker-dealer, do
not generally have to register separately with the SEC. However, they must be
supervised properly by a currently registered broker-dealer, have a qualified securities
license, and register with the SRO of which their employer is a member.
In addition to the general antifraud provisions of the federal securities laws discussed
below, broker-dealers must comply with requirements that are designed to maintain
high industry standards. These requirements include, among others, a duty of fair
dealing to customers, an obligation to recommend only investments or investment
strategies that are suitable to a particular customer, a duty of best execution, which
requires a broker-dealer to obtain the most favorable terms available under the
circumstances for customer orders, and a duty to provide customers with certain
confirmation information regarding transactions.
A broker-dealer’s failure properly to register with the SEC can have significant
consequences. For example, in May 2014, the SEC filed charges against a California-
based securities salesman who sold millions of dollars in oil-and-gas investments
without being properly registered with the SEC as a broker-dealer. The salesman,
Behrooz Sarafraz, agreed to settle the SEC charges by paying over US$22 million,
which included disgorgement of his commissions, prejudgment interest, and a penalty.2
ii. Securities fraud

SEC Rule 10b-5, promulgated by the SEC under section 10(b) of the Exchange Act,
prohibits fraudulent conduct in connection with the purchase or sale of securities. The
2
“SEC Charged Unregistered Securities Salesman for Selling Millions of Dollars in
Oil-and-Gas Investments” (US Securities and Exchange Commission, 15 May 2014) <http://
www.sec.gov/News/PressRelease/Detail/PressRelease/1370541837538#.U87PuFa9-0t> accessed
29 July 2014.
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rule prohibits fraudulent devices and schemes, misstatements and omissions of material
facts, and acts and practices that operate as a fraud or deceit.3
To establish a Rule 10b-5 fraud claim, the SEC must show (i) a manipulation or
deception through a misrepresentation or omission, (ii) materiality, (iii) that the
misrepresentation or omission was made in connection with the purchase or sale of a
security, and (iv) scienter.
The SEC recently secured a judgment in a Rule 10b-5 action against Fabrice Tourre,
a former Goldman Sachs Group vice president. The SEC accused Tourre of deceiving
investors through misstatements and omissions of key facts relating to a synthetic
collateralized debt obligation called Abacus 2007, a highly complex security linked to
the collapse of the mortgage market. Specifically, the SEC claimed Tourre concealed
from investors the information that the same hedge fund involved in putting the deal
together was betting against it. A jury found Tourre liable for defrauding investors and
ordered him to pay more than US$850,000.4 Goldman Sachs reached a related
settlement with the SEC and agreed to pay US$550 million, the SEC’s largest-ever
penalty paid by a Wall Street firm.5
iii. Insider trading

Insider trading refers to the trading of securities by corporate insiders, including
officers, directors, and employees, in their own company. Such trading is generally
legal if certain filing requirements are met. It is illegal when corporate insiders buy or
sell securities in breach of a fiduciary duty or other relationship of trust or confidence
while in possession of material, non-public information about the security. Insider
trading violations under SEC Rule 10b5-1 may include “tipping” such information,
securities trading by the person “tipped,” and securities trading by those who
misappropriate such information. The purpose of prohibitions on insider trading, like
the securities laws generally, is to protect investors and to promote fairness and
integrity in the market. Insider trading laws “the level playing field that is fundamental
to the integrity and fair functioning of the capital markets.”6
A recent high-profile insider trading enforcement action involved Mark Cuban, the
owner of the Dallas Mavericks professional basketball team. The SEC claimed that
Cuban sold his shares in a Canadian internet search engine based on private infor-
mation the company CEO gave him about a planned stock placement that would dilute
the value of Cuban’s holdings. At trial, Cuban asserted that he never agreed to keep the
information confidential or to avoid selling his stock upon learning of the placement.
The jury agreed, concluding that Cuban did not commit insider trading. Cuban claimed
3
FINRA Rule 2120 parallels SEC Rule 10b-5, prohibiting members from using manipu-
lation, deception, or fraud in the purchase or sale of a security. The SEC and FINRA therefore
have concurrent enforcement authority over such fraudulent conduct.
4
SEC v Tourre, No 10-cv-03229 [SDNY 2013].
5
Consent, SEC v Goldman Sachs & Co, No 10-cv-3229 [SDNY 14 July 2010] <http://
www.sec.gov/litigation/litreleases/2010/consent-pr2010-123.pdf> accessed 29 July 2014.
6
“SEC Enforcement Actions, Insider Trading Cases” (US Securities and Exchange Com-
mission) http://www.sec.gov/spotlight/insidertrading/cases.shtml> accessed 29 July 2014.
Barry Rider - 9781783475780

that he turned down a US$2 million settlement offer by the SEC while spending US$12
million in legal fees for his defense.7
iv. The Foreign Corrupt Practices Act

The SEC is also responsible for the civil enforcement of the Foreign Corrupt Practices
Act (“FCPA”), codified at 15 USC §§ 78dd-1, et seq.8 Enacted in 1977, the FCPA
amended the Exchange Act. It was passed in response to concerns about foreign
kickbacks and other corrupt practices taking place outside of the US. The FCPA has
two main parts: the anti-bribery provisions and the accounting provisions. The FCPA’s
anti-bribery provisions prohibit bribe payments to foreign officials to obtain or retain
business or to secure an improper business advantage. The accounting provisions
require covered entities to keep accurate books and records that fairly reflect their
transactions, and to maintain adequate accounting controls. Accordingly, a covered
entity can be liable if it either fails to record a bribe payment as such, or disguises its
records to conceal a bribe.
FCPA accounting provision violations are generally easier to prove than violations of
the anti-bribery provisions because there is no requirement that a false accounting
record or deficient control be linked to an improper payment. Even a payment that does
not constitute a bribe can lead to prosecution under the accounting provisions if the
payment is inaccurately recorded or attributable to deficient internal controls. The
accounting provisions are thus often invoked when the DOJ or SEC is unable to
establish the elements of an anti-bribery prosecution or as a compromise in settlement
negotiations. The SEC’s most common FCPA enforcement mechanism is a civil action
brought in a United States district court. The SEC may seek civil monetary penalties
exceeding US$500,000, disgorgement of ill-gotten gains, and/or an injunction against
prohibited activities.
In April 2014, Hewlett-Packard Company (“HP”) agreed to pay more than US$108
million to the SEC to settle charges under the FCPA’s accounting provisions. The SEC
charged that HP lacked internal controls to prevent bribe payments made to win
business contracts in Mexico and Europe, and that HP recorded the bribe payments in
its books and records as legitimate commissions and expenses.9 In reaching the
settlement, HP did not admit or deny the SEC’s charges.
7
“Billionaire Mark Cuban Takes on the SEC” (The Washington Post, 20 November 2013)
<http://www.washingtonpost.com/business/economy/billionaire-mark-cuban-takes-on-the-sec/20
13/11/20/2b67134a-4a7c-11e3-be6b-d3d28122e6d4_story.html> accessed 29 July 2014.
8
The FCPA is also enforced criminally by the DOJ. Criminal enforcement of the FCPA is
broader than civil enforcement. In addition to US issuers, criminal enforcement extends to US
domestic concerns, which include US citizens, nationals, residents or entities organized under
the US laws or with their principal place of business in the US (15 USC §78dd-2). In addition,
any person acting within the territory of the US may be subject to criminal enforcement of the
FCPA (15 USC §78dd-3).
9
SEC Cease and Desist Order, In the Matter of Hewlett-Packard Company, Release No
71916 (9 April 2014).
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b. FINRA
FINRA pursues more enforcement actions than the SEC, but has levied significantly
less in penalties. For example, in 2013, FINRA pursued 1,535 enforcement actions
compared to the SEC’s 686; however FINRA imposed sanctions of only US$74.5
million compared to US$3.4 billion received by the SEC.10 In context, these numbers
are unsurprising. Where FINRA and SEC jurisdiction overlap, the SEC tends to take on
the most serious fraud-based cases, many of which are referred by FINRA. These cases
generally result in higher penalties. On the other hand, FINRA is more focused on
disciplinary actions that result in bars or suspensions for brokers. In 2013, for example,
FINRA barred 429 brokers and suspended 670.11
Some examples help to understand FINRA’s focus. In one recent disciplinary action,
FINRA barred a Florida broker, Jeffrey Rubin, from the securities industry for making
unsuitable recommendations to his customer, a National Football League (“NFL”)
player, to invest in illiquid high-risk securities issued in connection with a now-
bankrupt casino in Alabama. The customer lost US$3.5 million. The broker also
recommended the investment to 30 other NFL players, who collectively lost approxi-
mately US$40 million. In exchange for recommending the investment, Rubin received
a 4 percent ownership stake in the casino and a US$500,000 referral fee. The matter
was settled with Rubin consenting to the entry of FINRA’s findings without admitting
or denying the charges.12
In another recent action that resulted in a settlement, FINRA ordered David Lerner
Associates, Inc. (“DLA”), a New York firm, to pay approximately US$12 million in
restitution to affected customers who purchased shares in Apple REIT Ten, a non-
traded US$2 billion Real Estate Investment Trust that DLA sold. FINRA alleged that
DLA targeted unsophisticated and elderly investors, that it failed to perform adequate
due diligence to determine whether the investment was suitable, and that it used
misleading marketing materials that presented misleading and incomplete performance
results. FINRA also fined DLA’s founder, President and CEO, David Lerner,
US$250,000 and suspended him from the securities industry for one year, followed by
a suspension from acting as principal for two years, because he personally made false
claims regarding the investment. FINRA also sanctioned DLA’s head trader, William
Mason, US$200,000 and suspended him from the securities industry for six months.
Finally, FINRA required DLA to retain independent consultants to review and propose
10
“FINRA Weighs Tougher Stance” (The Wall Street Journal, 19 June 2014) <http://
online.wsj.com/articles/wall-street-watchdog-finra-under-pressure-to-toughen-sanctions-1403219
509> accessed 29 July 2014.
11
Id.
12
“FINRA Bars Florida Broker for Unsuitable Recommendations and Unapproved Secur-
ities Transactions Involving 31 NFL Players” (FINRA 7 March 2013) <https://www.finra.org/
Newsroom/NewsReleases/2013/P218417> accessed 29 July 2014.
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changes to its supervisory systems and training and DLA agreed to revise its
advertising procedures.13
IV. ANTI-MONEY LAUNDERING (“AML”) LAWS

Money laundering is generally defined as engaging in acts designed to conceal or
disguise the true origins of criminally derived proceeds so that the proceeds appear to
be derived from legitimate origins or to constitute legitimate assets. Money laundering
covers a wide range of activity including cash or currency transactions, money orders,
money transfers, and other financial transactions.
Generally, money laundering occurs in three stages: Cash first enters the financial
system at the “placement” stage, where the cash generated from criminal activities is
converted into monetary instruments, such as money orders or traveler’s checks, or
deposited into accounts at financial institutions. At the “layering” stage, the funds are
transferred or moved into other accounts or other financial institutions to further
separate the money from its criminal origin. At the “integration” stage, the funds are
reintroduced into the financial system and used to purchase legitimate assets or to fund
other criminal activities or legitimate businesses.
US financial institutions are required to monitor customer activity to detect money
laundering and also to identify terrorist financing. Unlike money laundering, terrorist
financing may not involve the proceeds of criminal conduct, but rather an attempt to
conceal the origin or intended use of the funds, which will later be used for criminal
purposes. Terrorist financiers may obtain the funds legitimately through, for example,
charitable donations, business operations, or government sponsors. Although the
motivation differs between money launderers and terrorist financiers, both may use the
same methods to achieve their goals.
V. PURPOSE OF AML LAWS

The purpose of the AML laws is to detect and prevent money laundering, facilitate
public confidence in the US financial system, and preserve the US’s international
reputation as a global financial center.
The AML laws ensure that banks play an integral role in combating money
laundering and terrorist financing. To accomplish this end, AML laws require financial
institutions to adhere to strict standards when developing and implementing AML
compliance programs. While the strict standards are an important tool in preventing and
detecting money laundering, increasingly, financial institution AML programs are the
subject of intense regulatory scrutiny.
13
“FINRA Sanctions David Lerner Associates $14 Million for Unfair Practices in Sale of
Apple REIT Ten and for Charging Excessive Markups on Municipal Bonds and CMOs” (FINRA
22 October 2012) <http://www.finra.org/Newsroom/NewsReleases/2012/P191729> accessed 29
July 2014.
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VI. OVERVIEW OF AML LAWS AND REGULATIONS

US AML laws are enforced criminally and civilly. For example, 18 USC §1956
provides criminal penalties, including imprisonment, for persons (both individuals and
entities) who engage in, or attempt to engage in, money laundering. Here, however, we
focus on civil AML laws, which impose an obligation upon financial institutions to
employ a system of controls to detect and prevent money launderers from using the
financial institution to facilitate their criminal activity.
The main US AML law directed at financial institutions is the BSA. In addition, after
11 September 2001, Congress enacted the USA PATRIOT Act, which enhanced the
BSA and strengthened the US government’s ability to regulate and enforce AML laws.
We discuss these laws and regulations below.
a. Bank Secrecy Act of 1970
The BSA (codified as 12 USC §1818(s) and 12 CFR §21.21) requires US financial
institutions to develop and implement a system of controls designed to detect and
prevent money laundering. Specifically, the BSA requires financial institutions to make
and keep records of certain financial transactions, including cash purchases of
negotiable instruments and cash transactions exceeding US$10,000 (daily aggregate
amount), and to report suspicious activity indicative of money laundering, tax evasion,
or other criminal activities.
b. USA PATRIOT Act
Title III of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (known as the USA
PATRIOT Act) enhances law enforcement agencies’ ability to investigate and prosecute
international money laundering and terrorist financing. The Act strengthens existing
AML requirements for financial institutions, with an emphasis on bolstering communi-
cation between law enforcement agencies and financial institutions; subjecting foreign
jurisdictions, foreign financial institutions, and certain types of vulnerable accounts to
specialized scrutiny; and strengthening record keeping and reporting requirements. Of
particular interest for financial institutions is section 311, which identifies jurisdictions
and financial institutions of “primary money laundering concern” for which enhanced
due diligence and monitoring controls are required.
c. FINRA Rule 3310
Broker-dealers are subject not only to BSA requirements, but also to FINRA Rule
3310, which includes additional standards for broker-dealer AML compliance pro-
grams. Specifically, Rule 3310 requires firms to develop and implement a written AML
compliance program that is approved in writing by a member of senior management
and reasonably designed to achieve and monitor the firm’s ongoing compliance with
the requirements of the BSA and the implementing regulations promulgated thereunder.
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VII. AML VIOLATIONS

Financial institutions may violate AML laws and regulations when they fail to
adequately maintain an AML compliance program. At a minimum, an effective AML
program must: (i) incorporate written policies, procedures, and internal controls
reasonably designed to assure compliance with AML laws and tailored to the financial
institution’s specific money-laundering risks, including controls to verify customer
identification, file reports, create and retain records, and respond to law enforcement
requests; (ii) designate an AML Compliance Officer to assure day-to-day compliance
with the AML compliance program and BSA regulations; (iii) provide appropriate
training and education to personnel, including training in the detection of suspicious
transactions; and (iv) provide for independent reviews or audits to ensure the financial
institution maintains an adequate AML program. Enforcement actions are generally
triggered by deficiencies in a financial institution’s AML compliance program. Thus,
civil enforcement actions, which are generally remedial in nature, seek to deter future
misconduct and improve AML compliance overall.
VIII. ENFORCEMENT EXAMPLES

AML civil enforcement actions are often brought by the OCC in conjunction with other
civil enforcement agencies. For example, the OCC may, together with FinCEN, assess
a fine against a financial institution for its failure to implement an effective AML
compliance program as required by the BSA. It is also common for criminal
proceedings to be brought in parallel with the civil action.
As part of a larger attempt to eradicate money laundering in the US financial markets
in the last decade, banks have come under increasing pressure from regulators and law
enforcement to strengthen their AML efforts. As a result, there has been an un-
precedented increase in AML enforcement actions and record fines have been assessed
against financial institutions. Below we review recent and significant AML civil
enforcement actions.
a. HSBC Holdings PLC
In December 2012, HSBC Holdings PLC agreed to pay US$1.92 billion to US

authorities for allowing Mexican cartels to launder money through the bank.14 This
civil penalty was the highest fine ever levied against a financial institution for AML
violations. In addition to the substantive money-laundering charges, the US authorities
found that HSBC had failed to maintain an adequate system of AML controls that
would have prevented, detected, and reported this activity. As a result, HSBC entered
into a Deferred Prosecution Agreement15 with the DOJ and paid restitution of
14
Deferred Prosecution Agreement, US v HSBC Bank USA, NA, No 12-CR-763 (EDNY
2012) <http://www.justice.gov/opa/documents/hsbc/dpa-executed.pdf> accessed 29 July 2014.
15
A “deferred prosecution agreement” or “DPA” is a mechanism by which an entity can
avoid prosecution for violations of law by promising to fix the problem that led to the violations.
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US$1.256 billion. In addition, HSBC paid a fine totaling US$665 million to the OCC,
the Federal Reserve, and the Treasury Department.
b. Brown Brothers Harriman & Co
In February 2014, FINRA assessed an US$8 million fine against Brown Brothers
Harriman & Co (“Brown Brothers”) for AML compliance failures, including the failure
to monitor and detect suspicious activity related to penny stock transactions (stocks that
trade at low prices outside the major exchanges and that may be easily manipulated by
fraudsters).16 The fine represents the highest fine ever levied by FINRA. In another
unprecedented action, FINRA also found the former Global AML Compliance Officer
of Brown Brothers responsible for the AML compliance program failures and imposed
a fine of US$25,000 and a one-month suspension from engaging in business activities.
c. TD Bank, NA
In September 2013, FinCEN, the OCC, and the SEC brought an enforcement action
against TD Bank, NA (“TD Bank”) under the BSA for failing to report almost
US$1 billion in suspicious money-laundering transactions. FinCEN and the OCC
assessed a combined fine of US$37.5 million against TD Bank.17 The SEC assessed a
separate fine against TD Bank for US$15 million. FinCEN found that TD Bank’s failure
to implement proper training for its employees as part of its AML compliance program
contributed to TD Bank’s failure to detect and timely report the suspicious activity.18
d. JPMorganChase, NA
In January 2014, JPMorganChase, NA (“JPMorgan”) entered into a DPA and agreed to

pay a US$2 billion fine to both civil and criminal authorities at the DOJ and the OCC
for BSA/AML compliance deficiencies in failing to identify and report suspicious
activity relating to the Ponzi scheme run by the renowned Bernard L Madoff, who was
sentenced to 150 years in prison for the massive fraud.19 The OCC assessed a US$350
million fine against JPMorgan, while DOJ assessed a US$1.7 billion penalty.
A DPA may require an entity to submit to a monitor who is charged with overseeing the entity’s
efforts to fix the problem. A DPA is often accompanied by the payment of a fine and an
acknowledgement of wrongdoing.
16
Brown Brothers Harriman & Co and Harold A Crawford, FINRA Letter of Acceptance,
Waiver, and Consent, No 2013035821401 (30 January 2014). <http://www.finra.org/web/groups/
industry/@ip/@enf/@ad/documents/industry/p443448.pdf> accessed 29 July 2014.
17
Jonathan Stempel, “TD Bank to Pay $52.5 Million in U.S. Settlements over Ponzi
Scheme” (Reuters, 23 September 2013) <http://www.reuters.com/article/2013/09/23/us-tdbank-
settlement-ponzi-idUSBRE98M10Y20130923> accessed 28 July 2014.
18
Press Release (FinCEN, 23 September 2013) <http://www.fincen.gov/news_room/nr/html/
20130923.html> accessed 29 July 2014.
19
JPMorgan Chase Bank, NA, Deferred Prosecution Agreement (6 January 2014) <http://
www.justice.gov/usao/nys/pressreleases/January14/JPMCDPAPR/JPMC%20DPA%20Packet%20
(Fully%20Executed%20w%20Exhibits)%20-%20downloaded%20from%20online.pdf> accessed
29 July 2014.
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CONCLUSION
As business becomes more global and financial institutions expand their operations into
new emerging markets, financial institutions face greater regulatory scrutiny under the
banking and securities laws. Such increased scrutiny, it may be argued, is necessary to
protect the investing public and maintain confidence in the US markets, especially as
the securities and banking markets become more accessible to an increasing number of
participants.
On the other hand, the current regulatory environment in the US encourages financial
institutions to minimize their risk of violating AML and securities laws. One way
financial institutions attempt to mitigate this risk is by developing more elaborate and
costly compliance programs. For example, HSBC’s compliance costs have increased
exponentially since its 2012 settlement with the government, and CitiBank and
JPMorgan have also indicated a significant increase in compliance costs.20
Financial institutions may protect themselves from enforcement actions by refusing
to do business with customers from countries or particular industries or sectors
perceived to be “high risk.” Not only will this “de-risking” likely result in the closing
off of access to the US banking and securities markets for large swaths of global
customers, but it also forces these customers to turn to banking and securities markets
outside the US that may not be as secure or protective. Foreign customers are thereby
exposed to predatory risks and manipulative practices that the US laws, and the broad
civil authority to enforce these laws, aim to eradicate.
20
Fitch Ratings (5 April 2013) <http://www.justice.gov/usao/nys/pressreleases/January14/
JPMCDPAPR/JPMC%20DPA%20Packet%20(Fully%20Executed%20w%20Exhibits)%20-%20
downloaded%20from%20online.pdf> accessed 29 July 2014.
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58. The practical issues in tracing and freezing in the

context of civil recovery proceedings
Peter Gray and Nooree Moola1
1. INTRODUCTION
Many of those unfamiliar with asset recovery assume that civil actions have little
relevance in the world of financial crime. They assume that the recovery of assets is
only carried out through cooperation of interested prosecutors bringing anti-money
laundering actions in support of some foreign nation’s claim over assets in their
jurisdiction.
While international cooperation continues to improve, it remains the case that some
jurisdictions are slow or unwilling to act on mutual legal assistance requests. The speed
and diligence in pursuing any criminal claim is also out of the victim’s hands, unless of
course the victim is a state. Civil actions can be the most effective, and sometimes the
only, way to recover stolen assets.
The most powerful weapons in the litigator’s armoury are freezing and search orders.
Such orders are only known in the common law (excluding the United States), although
in civil law countries, there may often be equally effective remedies.
Many fraudsters rely upon international financial centres to dissipate and hold their
ill-acquired wealth. Many of those, particularly Cayman Islands, British Virgin Islands
(BVI), Channel Islands, Isle of Man, Hong Kong, Singapore and Dubai International
Finance Centre (DIFC), are common law jurisdictions, broadly adopting and adapting
the law of England and Wales.
As such, this chapter focuses on English law. As civil law jurisdictions also play a
significant role, French, German and Dutch law are also referred to.
The chapter first discusses a number of practical issues arising in the tracing of assets
– that is the exercise in finding where they are or what they have become, rather than
the equitable remedy of tracing. It then discusses matters to consider when seeking to
freeze them.
2. FINDING THE ASSETS

Obtaining a freezing order can be very effective, in many cases bringing the alleged
wrongdoer to the negotiating table at an early stage. Even if it does not, the claimant
will have some assurance that assets will remain to be recovered once (as they hope)
1
Any views expressed in this chapter are personal. The authors thank Aurelie Kahn for
providing French law assistance
703
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the substantive claim leads to a judgment in their favour. It may well also put the
defendant under significant financial pressure.
However, it can end badly if the application is made in undue haste (as well as after
undue delay), damaging the prospects of recovery in the substantive claim and leading
to damages claims and costs orders against the claimant. The courts are mindful that
while freezing orders are necessary to make civil recovery effective, they are also
misused by litigants seeking to disadvantage a defendant for the wrong reasons.
Self-evident as it may appear to seasoned practitioners, it is vital to have an
understanding from the outset of where the misappropriated funds are likely to be
found. This is where asset tracing comes into play. To begin with, the claimant would
use the factual evidence they already possess (such as emails or other documents left
behind in the wrongdoer’s office) to form an idea as to where to start. Most fraudsters
were at one stage in a position of trust, and often leave behind a documentary trail – it
is rare to be in a position of trust and generate no paper. The claimant would then need
to enlist the help of appropriate investigators (international lawyers, forensic account-
ants and private investigators) to find out what they can from available public records.
Witnesses may also help. In any case, the claimant will need to put together a rough
picture of (1) what was misappropriated and (2) how.
Of course, much of the information and evidence needed to prosecute a fraud case is
not easily found or publically available. It will not take long to hit the wall of nominee
shareholders and opaque trusts. The civil courts can be particularly effective in
allowing access to this information.
For instance, claimants can apply for a third party disclosure order (formerly
‘Norwich Pharmacal’ orders).2 These orders require a third party, who has facilitated
wrongdoing (whether innocently or not) to disclose information that will assist in
identifying the wrongdoer and allow assets to be traced.3 Banks through which
misappropriated funds are believed to have passed are the obvious target for these
orders. They are commonly used to obtain disclosure of a fraudster’s bank account
details – information ordinarily protected by a bank’s duty of confidentiality.
Claimants must demonstrate compelling evidence of fraud, the need for urgent
action, focused disclosure, and notice.4 While these orders are relatively rare, in a clear
case of fraud they should be relatively straightforward to obtain. They are particularly
helpful as a pre-freezing injunction remedy; especially when sought in combination
with gagging orders so the defendant is not tipped off.
The claimant will also be able to access a raft of (hopefully) detailed and helpful
information about the defendant’s asset position through the disclosure order, which is
almost always obtained alongside a freezing injunction. In some cases, claimants can
seek the more extreme measure of a search order. This is discussed further in sections
3.6 and 4.1 below.
The importance of developing a detailed understanding of where and in what form
the misappropriated assets lie cannot be understated. While claimants are often
2
CPR 31.18.
3
Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133.
4
See Rugby Football Union v Consolidated Information Services Limited [2013] 1 All ER
928 for a recent example.
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Tracing and freezing in the context of civil recovery proceedings 705
impatient to start the freezing injunction and substantive proceedings, practitioners

must balance the risk of dissipation (and information leakage) with the need to prepare
thoroughly and accurately.
3. FREEZING THE ASSETS

The next step is to seek a freezing order (or a ‘Mareva’ injunction). The freezing order
will freeze the fraudster’s assets, preventing him from dissipating them in an effort to
render himself judgment-proof. It is a common law invention,5 which as discussed in
Part 5 below, is unavailable in many non-common law jurisdictions as well as in the
United States.
The freezing order mounts a particularly powerful blow to the defendant. It can
quickly and without notice leave a fraudster financially hamstrung. Its aim is to prevent
the defendant from frustrating the claim by doing something that would put assets out
of reach – for example by transferring assets to a third party or moving them out of the
jurisdiction. It is therefore often granted ex parte and on an interim basis, until the
return date of the application for final injunctive relief. (In some cases a ‘short notice’
application is now made.)
Timing is critical. The interim freezing order can and should be sought as soon as
reasonably possible after clear evidence of fraud becomes known. Indeed, in suitable
circumstances an interim freezing order may be granted before substantive proceedings
have been instituted.6
To obtain a freezing order, an applicant must establish that: (1) there is a good
arguable case; (2) there is a real risk that the respondent will dissipate his assets if the
order is not granted; and (3) the order is just and convenient.7
The applicant must take great care in proving points (1) and (2). In the authors’
experience, this is sometimes forgotten. In the desire to make a quick application, some
claimants act in haste only to repent at leisure. They forget that any injunction granted
without notice will only last until the return hearing.8 At that hearing they will nearly
always be met by a defendant keen to point out the flaws in their claim. Of course,
sometimes, rapid action is unavoidable and the courts will understand if the claimant is
placed in a difficult position.
Although claimants often have their story in order, it can be overlooked that they
need to prove a breach of the relevant local law on the facts. This may require expert
evidence. An additional and vital issue is choosing which jurisdiction is the most
5
It is named after Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2
Lloyd’s Rep 509, but was first granted months earlier in Nippon Yusen Kaisha v Kara Georgis
[1975] I WLR 1093.
6
Fourie v Le Roux [2007] 1 WLR 320 [32].
7
CPR 25.1(1)(f). The American Cyanamid test for interim injunctions must also be
satisfied.
8
A freezing order upheld at the return hearing will remain in place throughout the litigation
unless discharged earlier.
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‘convenient’ forum – there are usually a number of courts that may have jurisdiction.
Not all will grant freezing orders.
Likewise, while it is not necessary (and indeed is often impossible) for the tracing
exercise to be entirely complete, it would normally be unwise to commence action
without having made significant efforts to do so.
3.1 Real Risk of Dissipation
It can be challenging to prove that there is, objectively, a real risk or ‘solid likelihood’
of dissipation of assets.9 It is rare in practice to find direct evidence that a respondent
is about to dissipate his assets (for example, that he has put key real estate up for an
urgent auction). Generally, the risk of dissipation is intrinsically linked to the nature of
the claim – fraud. Meaningful evidence of dishonesty will generally suffice,10 however,
the court will carefully scrutinise whether the evidence justifies an inference that assets
will likely be dissipated.11
The court will consider, inter alia, the nature of the assets (the more liquid, the easier
to dissipate); the ease with which enforcement over the assets can take place; and any
evidence of the respondent moving assets out of the jurisdiction or manipulating assets
through sophisticated corporate structures and international accounts.12 The respond-
ent’s conduct is key. Applicants should consider whether the respondent has previously
evaded service, refused to attend for cross-examination, perjured themselves or
otherwise failed to comply with court process.13 The aim is to demonstrate the
respondent has a general propensity to dissipate assets.14
3.2 Full and Frank Disclosure
As freezing orders are generally obtained ex parte, the court places a great deal of trust
in the applicant to tell the full story – not just the facts that support its case. The
applicant must make full and frank disclosure of any matters relevant to the application,
including those harmful to its case. This includes the arguments and facts likely to be
relied upon by the defendant (the applicant can of course counter these points). This is
a very important part of the application. It must be dealt with clearly and comprehen-
sively.
Full and frank disclosure is an area where freezing orders may come undone.
Applicants should consider whether the respondent has previously been investigated for
and cleared of any wrongdoing; whether, in the case of alleged corruption by a
government official, the defendant is likely to argue that there was government
knowledge of the alleged corruption, or political motivation for the allegations made;
9
Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272.
10
Rosen v Rosen [2003] EWHC Civ 309.
11
Ibid, [28].
12
Stronghold Ins v Overseas Union [1996] LRLR 13.
13
Thane Investments v Tomlinson [2003] EWCA Civ 1272.
14
Gorunova v Berezovsky [2013] EWHC 76 (Ch).
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and whether some aspect of the respondent’s background or character would militate
against any alleged dishonesty.
Applicants should consider their own conduct, including whether evidence has been
obtained improperly. The extent of the applicant’s investigations may also be scrutin-
ised – the duty of disclosure covers not only the facts known to the applicant, but also
additional facts that should have been known had proper enquiries been made. This can
be a difficult area for a party’s lawyer to investigate.
If it transpires that full and frank disclosure was not made, there is a presumption
that the court will set aside the freezing order.15 The court will, however, bear in mind
the need to act proportionately.16 Freezing orders are known to have been discharged
where the applicant relied upon improperly obtained evidence; failed to identify
weaknesses in its own case; and/or failed to address arguments likely to have been
raised by the respondent.17 This has often resulted in significant adverse cost awards,
granted on an indemnity basis.18
Clearly, this duty can provide fertile grounds for challenge by a defendant.
Applicants faced with a challenge should consider whether the discharge application is
being made for tactical purposes – courts are very much alive to this.19 Regardless of
tactics, applicants should carefully consider the basis of the challenge, cure any errors
and explain how they arose.
3.3 Amount to be Frozen
The freezing order will generally cover the value of the claim together with likely legal
costs and interest.20 The defendant can deal with any surplus assets as he sees fit. Note
that the court will want evidence of all of the respondent’s known assets – this is where
the tracing exercise mentioned above comes into its own.
The freezing order’s purpose is to prevent the respondent from evading the court
process by unjustifiably disposing assets – thus it will not prevent the respondent from
legitimately spending money, and is not intended to act as security for the claim and/or
costs. Respondents can spend money on ordinary living expenses (to be construed
subjectively by looking at the respondent’s lifestyle)21 and legal costs (for the instant
claim and for others brought or defended by the respondent),22 carry out ordinary
business transactions and pay debts when they fall due. However, if the applicant can
15
Brinks MAT v Elcombe [1988] 1 WLR 1350. This is so even if the omitted fact would not
have affected the court’s view on the merits.
16
Memory Corporation v Sidhu [2000] 1 WLR 1443.
17
See e.g. Franses v Somar Al Assad and Ors [2007] EWHC 2442 (Ch).
18
Ibid.
19
Worldcom International v Home Communications Ltd (Unreported, 16 September 1998,
Walker J).
20
The quantum can be higher if, for example, the applicant does not know the extent of the
fraud at the time of the application.
21
A v C [1981] QB 961.
22
Halifax v Chandler [2001] EWCA Civ 1750.
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show that the respondent has access to other unfrozen funds from which expenses can
be met, an order may be granted without these exceptions.23
The respondent’s lawyers will quickly consider whether there are grounds for a
variation. The usual arguments are that the sum frozen is too high; the weekly
allowance is insufficient or would be better paid on some other basis; or that a variation
is necessary to allow the respondent to trade effectively. Applicants should be mindful
of this at the outset.
3.4 Worldwide Freezing Order
If the defendant has insufficient assets within the jurisdiction, the court can grant a
worldwide freezing order. While these are exceptional orders, they are often granted in
corruption cases.
Since the English court has no jurisdiction over overseas parties, the worldwide order
must be recognised or enforced by the relevant foreign courts to be effective (the court
cannot grant any order without having jurisdiction).24 Not all jurisdictions recognise
English orders and judgments. Many jurisdictions will, however, grant local interim
relief to give effect to an English worldwide freezing order, including the United States
(even though it does not grant such orders itself), Jersey, BVI, Cayman Islands,
Singapore, Hong Kong, Canada, Australia, DIFC and, pursuant to the Brussels
regime,25 Switzerland, Norway, Iceland, Denmark and all EU member states. Enforce-
ment may be granted even if no other relief is sought locally. The claimant will need to
obtain the English court’s consent to commence proceedings overseas, so that the court
can maintain oversight.
The applicant must generally wait until the freezing order is upheld following an
inter partes hearing before seeking overseas enforcement – it is usually difficult if not
impossible to enforce an ex parte interim order overseas.26 Of course, the alternative to
waiting is to seek a freestanding interim injunction overseas, and to put relevant
overseas third parties on notice through a Mareva by letter (discussed below).
There are a number of countries, such as China and Russia, which are not known to
enforce English worldwide freezing orders. It is crucial, therefore, to consider where
the respondent’s assets are located at the outset. Litigants should also be aware that
worldwide freezing orders are not binding on foreign third parties until enforced by
their local court.
3.5 Effect on Third Parties
Once a bank or other third party within the jurisdiction has been served, they become
under a specific obligation (1) to comply with the freezing order and (2) not to permit
23
See e.g. Parvalorem v Oliveira and others [2013] EWHC 4195 (Ch).
24
It nonetheless remains effective against the defendant.
25
Comprising the Brussels Regulation (Council Regulation (EC) No 44/2001) and the 1988
Lugano Convention.
26
See e.g. Brussels Regulation I, articles 33, 34(2) and 38 and D’Hoker v Tritan Enterprises
Limited [2009] EWHC 948 (QB).
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the respondent to breach it.27 If a third party knowingly assists in the disposal of assets
subject to the freezing order, then like the respondent, it may be in contempt of court.
3.6 Asset Disclosure
In almost all cases, a freezing order will be accompanied by a disclosure order,

directing the respondent to file an affidavit containing information about the location
and value of any relevant assets anywhere in the world.28 This is an extremely useful
tool in identifying the assets against which a judgment could be enforced, the
whereabouts and form of misappropriated funds, and the third parties that should be
notified of the order.
3.7 Mareva by Letter
Claimants can put into place a ‘Mareva by letter’ as a stopgap before a freezing order
is sought. The claimant should inform all relevant institutions (chiefly, the defendant’s
bank/s), by letter, that the defendant is alleged to have committed a wrongdoing. Under
the common law Royal Brunei Airlines v Tan29 principle, if the financial institution
assists the fraudster in committing a further crime or act of money laundering (e.g. by
allowing them to move the money) while under reasonable suspicion of the wrong-
doing, it may be guilty of reckless or dishonest assistance, and liable as an institution.
Banks will therefore generally freeze the defendant’s bank accounts, at least to allow
time for them to do their own investigations. Practitioners should ensure that the letter
gives sufficient cause to render the bank ‘reasonably suspicious’. A well-researched
letter is of course more likely to be effective than a rushed missive. In reputable
jurisdictions, this tool can be particularly effective.
3.8 Freezing Orders against Third Parties
Where there is good reason to believe that assets ostensibly held by third parties in
reality belong to the respondent, the court may grant a freezing order against a third
party.30 This is known as the Chabra jurisdiction,31 useful where, as is often the case,
the fraudster’s affairs are structured through sham trusts, offshore corporate groups or
other opaque vehicles designed to distance the fraudster from the asset. In the authors’
experience it is possible to obtain these orders where there is clear evidence of
collusion, impropriety or participation by the third party.
27
Her Majesty’s Commissioners of Customs and Excise v Barclays Bank plc [2006] UKHL
28.
28
See JSC BTA Bank v Ablyazov & others [2010] EWHC 2352 (Comm) for a good
overview of the process and requirements.
29
[1995] 2 AC 178.
30
TSB Private Bank International SA v Chabra [1992] 1 WLR 213.
31
Ibid.
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4. OTHER INTERIM REMEDIES
4.1 Anton Piller Order
A more extreme order that can assist in the tracing and freezing process is the search
order (formerly the ‘Anton Piller’ order).32 They are by their nature intrusive, and allow
a victim of fraud to search an alleged fraudster’s premises to obtain evidence relevant
to the case. The aim is to preserve evidence that a fraudster might otherwise destroy in
an effort to frustrate the case. Refusal to comply will be contempt of court, punishable
by a fine or imprisonment.33
Search orders are not granted lightly. They are invasive – often involving the imaging
of computers and handheld devices to secure relevant evidence – and will immediately
put a defendant on the back foot. Because they are made without notice, as with a
freezing order, the claimant must make full and frank disclosure and provide a
cross-undertaking in damages.
4.2 Passport Order
Another extreme tool is the passport order, appropriate where there is a real risk that
the respondent will flee the jurisdiction in an effort to frustrate the court process.34
These orders require the delivery up of the respondent’s passport. They are a potent
tool, particularly where the respondent is an overseas national who cannot return home
during the asset disclosure process. As such, they are not granted lightly.
4.3 Cross-Examination
If the respondent has been evasive or the tracing process unfruitful, the applicant may
choose to seek an order requiring the respondent to attend for cross-examination. The
respondent’s answers will not only assist in shedding further light on the whereabouts
of his ill-gotten gains, but can lead to powerful character and conduct evidence against
him if he refuses to respond or perjures himself.
4.4 Other Orders
The claimant can also seek orders preserving property,35 securing a specified fund,36 or
appointing a receiver to hold the defendant’s assets.37
32
CPR 25.1(1)(h). See Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55 for the
requirements. See also Lock International plc v Beswick [1989] 1 WLR 1268.
33
Contempt may extend to third parties on notice who assist in or permit the breach.
34
Bayer AG v Winter [1986] 1 WLR 497.
35
CPR 25.1(1)(c).
36
CPR 25.1(1)(l). The American Cyanamid test applies. See also Sports Network Ltd v
Calzaghe [2008] EWHC 2566.
37
Senior Courts Act 1981, s 37. The freezing injunction alone must be insufficient and there
must be a measurable risk it will be breached: JSC BTA Bank v Ablyazov [2010] EWCA Civ
1141.
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5. OVERSEAS CASES
Freezing orders are widely granted in common law countries such as Canada, Australia,
Hong Kong, New Zealand, Cayman Islands, Jersey and BVI. Each of these jurisdictions
has been prepared to grant ‘freestanding orders’ – where the only relief sought in that
jurisdiction is a freezing order. Freezing orders have also been granted in numerous
African jurisdictions with common law heritage, including South Africa, Kenya,
Nigeria, Ghana and Botswana.
5.1 Where Freezing Injunctions Are Not Available
However, there are many jurisdictions that do not grant freezing orders at all –
including various parts of Asia, the Middle East and some civil law African juris-
dictions. It is noteworthy that the Federal Courts of the United States do not have the
power to grant freezing orders (they can, of course, grant attachment orders over
particular assets within the jurisdiction – see e.g. Deckert v Independence Shares
Corp38). In the 1999 case of Grupo Mexicano de Desarrollo v Alliance Bond Fund,39
the US Supreme Court found that it lacked the power to grant pre-trial freezing
injunctions. It emphasised that England’s adoption of the freezing injunction was a
‘dramatic departure from prior practice’, and that ‘the requirement that the creditor
obtain a prior judgment is a fundamental protection in our debtor–creditor law’.40 The
Court held that it had ‘no authority to craft a ‘nuclear weapon’ of the law’ and that ‘the
debate concerning this formidable power over debtors should be conducted and
resolved where such issues belong in our democracy: in the Congress’.41
The United States has made progress in terms of legislating a power for its courts to
grant freezing orders. In July 2012 (some 13 years after the Grupo Mexicano decision)
the US Uniform Law Commission approved and recommended for enactment in all
states the Uniform Asset-Freezing Orders Act, designed to create a uniform process for
the grant of pre-trial asset freezing orders. It has not yet been adopted by any state.
While the New York District Court has been prepared to grant freezing orders, it cannot
do so in respect of non-local assets, so this scope is limited.
5.2 Civil Law Equivalents
While their appearance and formulation are vastly different to the common law freezing
order, civil law jurisdictions such as France, Germany and the Netherlands have long
granted pre-trial attachment orders under the systems of ‘référé’ (in France),42 ‘arrest’
38
311 US 282 (1940).
39
527 US 308 (1999).
40
Ibid, 322.
41
Ibid, 329.
42
French Code of Civil Procedure, articles 808, 809, 872 and 873.
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or ‘einstweilige Verfügung’ (in Germany),43 and ‘conservatoir beslag’44 (in the Nether-
lands). The technicalities of these procedures are beyond the scope of this chapter, but
the key points are that protection can be sought both before and during the substantive
proceedings, granted against the defendant and/or a third party, and in certain
circumstances obtained ex parte. The protection granted is in rem rather than in
personam. Similar provisions exist in Swiss and Belgian law.
French and Dutch (but not German) civil courts can grant ‘protective attachment
orders’, similar to common law freezing orders, save that they are in rem. The orders
can attach all movable assets – most commonly bank accounts – subject to a prescribed
limit set by the court. Their effect is to make it impossible for the defendant to dispose
of assets bound by the order.45 When judgment is obtained in the claimant’s favour, the
attachment becomes seizure and the seized assets will vest in the plaintiff (who takes
priority over other creditors).
French, German and Dutch courts can also grant attachment orders, targeting specific
assets that are the subject of the dispute. These orders are the civil law’s answer to
common law proprietary injunctions. While there is no concept of the assets being held
on ‘constructive trust’, civil law courts can nonetheless ring-fence a portion of the
defendant’s total assets, which are then made the subject of an asset guarantee in favour
of the claimant.
More limited asset preservation orders are also available in other civil law European
countries, as well as in China, Japan and Russia. Unfortunately the limited scope of this
chapter does not permit discussion of these jurisdictions.
5.3 English Freezing Orders in Support of Foreign Cases
If a litigant is unable to obtain a freezing order in proceedings conducted outside

England, then provided there is some jurisdictional link with England, the English
courts may be able to step in and grant a local or worldwide freezing order. This
jurisdiction arises from section 25 of the Civil Jurisdiction and Judgments Act 1982,
which empowers the English courts to grant interim freezing injunctions in support of
foreign proceedings.
While this jurisdiction is generally invoked to locally protect England-based assets in
connection with foreign proceedings, it can also be used to grant a worldwide freezing
order where the foreign court has no power to do so.
English courts are careful not to grant these orders where to do so would unduly
overlap or be inconsistent with the approach taken by the primary court. The test is the
‘expediency’ of making these orders, having regard to all the circumstances.46 The
court will consider, inter alia, whether the primary court had the power to grant a
43
Zivilprozessordnung § 916 to 945.
44
Dutch Code of Civil Procedure, article 700 et seq.
45
See e.g. Dutch Code of Civil Procedure, articles 718–723.
46
See e.g. Credit Suisse Fide Trust v Cuoghi [1998] QB 818; Mobil v Petroleos de Venezuela
[2008] 1 Lloyd’s Rep 684.
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worldwide freezing order but declined to do so;47 whether the primary court will be
affronted by the decision; and whether it will be making an order which it cannot
enforce.48
While there must be a jurisdictional link between England and the primary
jurisdiction,49 this requirement has been applied quite robustly. In Royal Bank of
Scotland plc v FAL Oil Company Ltd [2012] EWHC 3628, the High Court held that it
had jurisdiction to grant worldwide freezing and disclosure orders despite the respond-
ents not being resident in or having any assets in England, and the substantive
proceedings being brought in the United Arab Emirates (where freezing injunctions are
unknown outside the DIFC). A jurisdictional link was found on the basis that the
respondents had (overdrawn) credit facilities in England, and that the loan agreements
underpinning those facilities were subject to English law and contained English court
exclusive jurisdiction clauses.
Likewise, in Motorola Credit Corporation v Uzan [2004] 1 WLR 113(CA), the fact
that the US court was constitutionally prohibited from making a pre-judgment freezing
order was interpreted not as a decision not to make that order, but rather, a situation
where it would welcome the English court’s assistance. This robust approach is
particularly adopted in fraud cases, where the English courts have generally been less
concerned about comity and more concerned about fighting dishonest behaviour.50
5.4 Other Factors to Consider
In multi-jurisdictional fraud proceedings, applicants should coordinate local and foreign

applications for freezing orders and other interim relief. They should also be mindful of
the timeframes within which orders can be obtained. English, Canadian and Australian
orders tend to be the quickest to obtain. As noted above, the United States will not
grant a freezing order at all. Litigants should consider obtaining permission to delay
service pending the resolution of overseas applications. If the order must be served on
third parties to prevent dissipation before the foreign applications have been consid-
ered, applicants should consider applying for gagging orders.
Applicants may wish to use information obtained in one jurisdiction to support
concurrent applications in another jurisdiction. In that case, they should inform the
court in the first jurisdiction and request that the standard undertaking be varied.
Finally, and to reiterate, applicants should be sure to prepare properly and thoroughly
complete their fact-finding groundwork. The early tactical advantage of a successful
freezing injunction application simply cannot be overstated.
47
This will militate against making the order, but will not necessarily be prohibitive: Credit
Suisse Fide Trust v Cuoghi [1998] QB 818.
48
Motorola Credit Corporation v Uzan [2004] 1 WLR 113 (CA).
49
Mobil v Petroleos de Venezuela [2008] 1 Lloyd’s Rep 684.
50
See e.g. Haiti v Duvalier [1989] 2 WLR 261 (CA): there was no apparent link between
the former Haitian President or his assets and England, but his English solicitors were presumed
to have knowledge of the whereabouts of his assets.
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59. Disqualification of those engaged in the

management of companies and financial
institutions
Adrian Walters
INTRODUCTION
This chapter gives an introductory account of the disqualification regime in the UK’s
Company Directors Disqualification Act 1986 (‘the CDDA’).1 The CDDA is a
paradigm example of a mature ‘disqualification’ system having the following charac-
teristics:
1. Ex post regulation of directors and managers based on proven misconduct in

connection with the management of companies or cognate entities rather than ex
ante regulation in the form of barriers to entry (such as training and qualifica-
tions).
2. The use of civil powers of disqualification in addition, or as an alternative, to
criminal sanctions.
3. The ability to target and sanction ‘unfit’ conduct that encompasses but is broader
in scope than criminal misconduct.
4. Investigation of misconduct and commencement of court proceedings by a state
agency.
5. Sanctions that not only prohibit the disqualified person from being or acting as a
company director or manager without the court’s permission but also restrict that
person from engaging in an extensive range of other professional roles and
activities.
Several jurisdictions have developed similar regimes that share some or all of these
features. Examples include: Australia;2 Ireland;3 Hong Kong;4 New Zealand;5 Singapore;6
1
For a more comprehensive account of the CDDA than space allows here, see A Walters &
M Davis-White QC, Directors’ Disqualification and Insolvency Restrictions (Sweet and Max-
well 2010) (hereinafter ‘Walters & Davis-White’.
2
Corporations Law (Cth), Pt 2D.6.
3
Companies Act, 1990, Pt VII.
4
Companies (Winding Up and Miscellaneous Provisions) Ordinance, Pt IVA.
5
Companies Act 1993, ss 151(2), 382–385.
6
Companies Act (2006 revision), Pt V.
714
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Disqualification of those engaged in management 715
South Africa;7 Sweden;8 and various offshore jurisdictions.9 Other jurisdictions take a
more limited approach.10
OVERVIEW
The United Kingdom has had disqualification legislation since 1928. On the recom-
mendation of the Cork Committee in 1982,11 the miscellaneous provisions then on the
statute book were consolidated and strengthened by the enactment of the CDDA. The
CDDA applies to England and Wales and Scotland.
The CDDA Gateways
The courts have the following powers under the CDDA:
1. Power to disqualify a person convicted of an indictable offence in connection

with the promotion, formation, management, liquidation or striking off of a
company (section 2).
2. Power to disqualify a person who has been persistently in default in relation to
the provisions of companies legislation requiring the filing of returns, accounts,
documents or notices with the Registrar of Companies (sections 3, 5).
3. Power to disqualify a person where, during the course of the winding up of a
company, it appears either that he has been guilty (whether convicted or not) of
an offence of fraudulent trading or has otherwise been guilty while acting as an
officer, liquidator or receiver of the company, of any fraud in relation to the
company or of any breach of duty in any of those capacities (section 4).
4. Power to disqualify a person whose conduct as a director of a company that has
become insolvent makes him unfit to be concerned in the management of a
company (section 6).
5. Power to disqualify a person whose conduct in relation to a company that has
been the subject of a statutory investigation or inspection makes him unfit to be
concerned in the management of a company (section 8).
6. Power to disqualify a person, on the application of a competition regulator, where
the company of which the person is a director has committed a breach of
7
Companies Act 71 of 2008, ss 69, 162.
8
Trading Disqualification Act, Lag (1986:436) om näringsförbud.
9
For example, the Channel Islands and the Isle of Man: see further Walters & Davis-White,
ch 16.
10
For example, in the United States, the Securities and Exchange Commission has power
under federal securities law to ban individuals from serving as an officer or director of a public
corporation on grounds of unfitness: see Jayne Barnard, ‘SEC debarment of officers and
directors after Sarbanes-Oxley’ (2004) 59 Business Lawyer 391. CDDA disqualifications are not
limited to public companies.
11
Report of the Review Committee, Insolvency Law and Practice (Cmnd 8558, 1982), paras
1761–1766, 1810–1825.
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competition law and his conduct as a director makes him unfit to be concerned in
the management of a company (section 9A).
7. Power to disqualify a person whom the court declares liable to contribute to a
company’s assets on an application of the company’s liquidator under sections
213 or 214 of the Insolvency Act 1986 (fraudulent or wrongful trading).
In addition, individuals who enter a personal insolvency regime are automatically

disqualified under CDDA s 11.
Accordingly, the CDDA provides a number of gateways all of which lead to
disqualification. Disqualification under the gateways in sections 2–9A is triggered by
some defined past misconduct in relation to a specified company or companies, the
rationale being that the misconduct casts doubt on the disqualified person’s fitness to
participate in corporate governance.12 Automatic disqualification under section 11 is
triggered by status rather than misconduct per se. Here, the law – somewhat at odds
with modern notions of debtor rehabilitation – rests on the assumption that individual
insolvents do not make effective corporate managers.
Meaning of ‘Company’ in the CDDA
The meaning of ‘company’ in the CDDA’s gateway provisions extends to a wide range
of entities. Disqualification jurisdiction can be exercised to sanction managerial
misconduct in limited companies, unlimited companies,13 banks,14 building societies,15
incorporated friendly societies,16 National Health Service foundation trusts,17 open-
ended investment companies,18 limited liability partnerships,19 community interest
companies20 and insolvent general partnerships.21
Scope and Duration of Disqualification
A disqualification imposed under the gateway provisions is a comprehensive ban which

prohibits the disqualified person for a specified period up to a maximum of 15 years
from acting as a company director and in various other capacities without the court’s
12
The UK government proposes to extend the reach of the CDDA so that misconduct in
connection with overseas companies could also provide grounds for disqualification: Department
of Business, Innovation and Skills, Transparency & Trust: Enhancing the Transparency of UK
Company Ownership and Increasing Trust in UK Business – Government response (April 2014),
57–59.
13
CDDA ss 22(2)(a), 22(9) read alongside Companies Act 2006 s 1(1).
14
CDDA ss 21A–21B.
15
CDDA ss 21C and 22A.
16
CDDA s 22B.
17
CDDA s 22C.
18
CDDA s 22D.
19
Limited Liability Partnerships Regulations 2001 SI 2001/1090 reg 4(2).
20
Companies (Audit, Investigations and Community Enterprise) Act 2004 ss 26, 32–38;
Companies Act 2006 ss 1, 2(1)(b).
21
Insolvent Partnerships Order 1994 SI 1994/2421 arts 3 and 16.
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permission.22 The court is obliged to disqualify a person whose conduct is found to

make him unfit under section 6 for a minimum of two years.
In terms of visible enforcement the core provisions of the CDDA are those in
sections 6–9A which empower the court to disqualify a person on the ground that his
conduct as a director of a company makes him unfit to be concerned in the
management of a company. As sections 6–9A have emerged as the principal mechan-
ism in UK law through which the public interest in the investigation of the causes of
corporate failure and the sanctioning of managerial misconduct in relation to com-
panies and other entities is advanced, the focus in the rest of this chapter is on law and
practice under those provisions.
Investigation, Evidence Gathering and Enforcement
Disqualification proceedings are civil proceedings brought in the public interest. Using
the powers in sections 6–8, the Secretary of State for Business, Innovation and Skills
commences the vast majority of CDDA proceedings. Sections 6–8 expressly direct the
Secretary of State to determine whether disqualification would be ‘expedient in the
public interest’ before proceedings are commenced.23
The system for investigating and sanctioning corporate misconduct through the
gateway of CDDA s 6 illustrates how the CDDA works as a whole. Official receivers in
the pursuit of their public functions24 and private sector insolvency practitioners
appointed as liquidators, administrators or administrative receivers are obliged to report
misconduct to the Secretary of State.25 These reporting mechanisms are the channels
through which those responsible for investigation and enforcement within the Depart-
ment of Business, Innovation and Skills gather evidence. In some cases, the conduct
under investigation may support enforcement action in the public interest both under
the criminal law and under the CDDA. The process under sections 8 and 9A is
similar.26
POLICY AND THEORY

According to the case law, the CDDA’s primary purpose is public protection sought to
be achieved in two ways: (1) by prohibiting those who are unfit from taking part in the
management of companies and related entities; and (2) by deterring those who are unfit
from future misconduct and encouraging other directors and corporate managers to
behave properly. Disqualification therefore operates as a form of legal incapacitation –
a statutory injunction which restrains the disqualified person from acting in various
capacities on pain of further criminal and civil penalties, thereby taking that person ‘off
22
CDDA s 1(1)(a).
23
CDDA ss 7(1), 8(1).
24
Insolvency Act 1986 s 132; Re Pantmaenog Timber Co Ltd [2004] 1 AC 158, [43]–[45].
25
CDDA s 7(3). Insolvency practitioners are also obliged to report on criminal misconduct:
see eg Insolvency Act 1986 s 218.
26
CDDA ss 8(1A), 9C.
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the road’27 – and as an individual and general deterrent.28 The approach to regulation is
ex post. Consistent with the idea that the law should be facilitative of enterprise, UK
corporate law does not impose any specific ex ante training or qualification require-
ments on directors. The principal sources of legal accountability are the statutory duties
in the Companies Act 2006 and the threat of disqualification under the CDDA for
directors who behave irresponsibly or improperly.
Abuse of Limited Liability
It is frequently said that the rationale of the CDDA is the protection of the public from
abuse of the privilege of limited liability29 and one effect of CDDA disqualification is
to prohibit the disqualified person for a defined period from trading through the
medium of a limited company without the court’s permission. However, the legislation
is not exclusively concerned with regulating abuse of limited liability. We saw earlier
that disqualification jurisdiction is not restricted to limited companies but extends to
unlimited companies and insolvent general partnerships. In theory, the CDDA targets
not only those who abuse limited liability, but also those who (more broadly) act
improperly in the management of companies, financial institutions, investment vehicles
and other specified entities.
Disqualification as a Civil Sanction
Disqualification jurisdiction is exercised primarily by civil courts. There has been some
debate over whether civil disqualification proceedings should properly be classified as
quasi-criminal proceedings. One theory advanced in support of such a classification is
that disqualification is a form of punishment that severely restricts the liberty of the
disqualified person. The UK courts have generally resisted the idea that civil courts
exercising disqualification powers are exercising quasi-criminal jurisdiction, preferring
instead to emphasize the protective rather than the penal aspects of disqualification.30
The courts instead tend to emphasize the protective rather than the penal aspects of
disqualification.
To say that the CDDA is ‘protective rather than penal’ does not get us very far as
public protection and punishment are not mutually exclusive. We incarcerate violent
offenders to punish their offences and to prevent them from harming the public.
Nevertheless, the judicial emphasis on protection over punishment implies that the
courts regard disqualification as a civil regulatory rather than a criminal proceeding.
Were the courts to adopt the view that CDDA disqualification is a quasi-criminal
jurisdiction, there would be implications for the manner in which proceedings are
conducted, especially as regards such matters as the formulation of the allegations
27
A phrase used by Woolf LJ in connection with the CDDA in Re Westmid Packing Services
Ltd [1998] 2 All ER 124, 132.
28
See, in particular, Re Grayan Building Services Ltd [1995] Ch 241, 253, 257–258.
29
Ibid, 257; Re Pantmaenog Timber Co Ltd [2004] 1 AC 158, [78].
30
Re Lo-Line Electric Motors Ltd [1988] Ch 477, 486 and, see further, Walters &
Davis-White, ch 2.
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against the director, the standard of proof, the admissibility of evidence (notably
hearsay evidence, character evidence and compelled evidence), the approach to
statutory interpretation (notably whether the statutory prohibitions should be broadly or
narrowly construed)31 and costs.
Judicial resistance to the importation of criminal procedural norms into civil
disqualification proceedings has been reinforced by a series of rulings by the European
Court of Human Rights to the effect that CDDA disqualification proceedings affect
‘civil rights and obligations’ but do not involve a ‘criminal charge’ for the purposes of
the fair trial guarantee in Article 6 of the European Convention on Human Rights.32
The classification of disqualification proceedings as a form of civil regulatory rather
than criminal process can therefore be regarded as largely settled. That said, however,
the courts recognize that civil proceedings brought by the Secretary of State acting in
the public interest differ in character from ordinary civil litigation between private
parties.33
THE ‘UNFIT CONDUCT’ TRIGGER

Before the court can make a disqualification order under the core provisions in CDDA
ss 6–8 it must be satisfied that the director’s conduct ‘makes him unfit to be concerned
in the management of a company’. The conduct in question must be conduct in the
capacity of a director and not conduct in a personal or other capacity.34
The Standard of Probity and Competence
In arriving at its determination the court must: ‘… decide whether [the relevant]
conduct, viewed cumulatively … has fallen below the standards of probity and
competence appropriate for persons to be fit to be directors of companies’.35 If the
director’s conduct is criminally culpable it will almost certainly fall short of the
standard expected of directors.36 However, the Secretary of State need not establish that
the director’s conduct was criminally culpable in order to prove unfitness. The general
31
It is a well-established canon of construction that penal legislation should be strictly
construed in the defendant’s favour: see eg R v Allen [1985] AC 1029, 1034; R v Clarke [1985]
AC 1037, 1048.
32
EDC v United Kingdom [1998] BCC 370; Wilson v United Kingdom (1998) 26 EHRR
CD195; DC, HS and AD v United Kingdom [2000] BCC 710; WGS and MSLS v United
Kingdom [2000] BCC 719.
33
Re Finelist Ltd, Secretary of State for Trade and Industry v Swan [2004] BCC 877.
34
Re Crystal Palace Football Club (1986), Secretary of State for Trade and Industry v
Golberg [2004] 1 BCLC 597, [46].
35
Re Grayan Building Services Ltd [1995] Ch 241, 253.
36
See eg Re Vintage Hallmark plc [2007] 1 BCLC 788.
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standard is one of probity and competence. A director whose conduct is not dishonest
but demonstrates ‘incompetence or negligence in a very marked degree’37 will be found
unfit.38
The CDDA does not require the application of a single fixed ‘one size fits all’
standard to all directors. The enquiry is, to a large degree, contextual and fact sensitive
without being entirely subjective. The courts have laid down a series of irreducible and
non-delegable minimum standards and, in particular, an expectation that all directors
should inform themselves as to the company’s affairs and finances regardless of
whether or not they are actively involved in the day to day running of the company’s
business.39 Beyond minimum standards of participation in governance and supervision
of delegates, what is expected of a director will depend on his role, functions and
responsibilities in the particular corporate setting. Thus, while the courts have used the
CDDA to fashion minimum standards of competence, the precise nature and intensity
of a director’s responsibility in relation to a given company will ultimately depend on
the facts of each case.40
Schedule 1 to the CDDA
In determining whether a director’s conduct makes him unfit, CDDA s 9 requires the
court to have regard in particular to the matters listed in Part 1 of Schedule 1 and,
where the relevant company has ‘become insolvent’,41 in addition, to the matters listed
in Part 2 of that Schedule. These matters include ‘any misfeasance or breach of any
fiduciary or other duty by the director in relation to the company’ and so bring
directors’ core fiduciary duties and duties of care, skill and diligence squarely within
the scope of the CDDA. Otherwise, the Schedule summarily restates a series of specific
statutory obligations under the Companies Acts and the Insolvency Act that place
particular emphasis on proper record keeping, financial reporting and filing obligations.
As the Schedule is neither exclusive nor exhaustive,42 the courts often pay it lip service.
The Schedule underscores the point that the statutory concept of unfit conduct has
within its purview a wide range of directorial obligations under corporate law,
corporate insolvency law and the general law. Disqualification therefore provides an
alternative and additional sanction to the ordinary civil and/or criminal sanctions that
flow from a breach of these legal obligations.
At the same time, unfit conduct is an overarching concept that has a life of its own.
It is neither necessary nor sufficient to establish a breach of an underlying fiduciary or
statutory obligation in order to establish unfitness. The courts consider each matter of
37
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, 184.
38
Examples include Re Melcast (Wolverhampton) Ltd [1991] BCLC 288; Re Austinsuite
Furniture Ltd [1992] BCLC 1047; Re Linvale Ltd [1993] BCLC 654; Re Thorncliffe Finance Ltd
[1997] 1 BCLC 34.
39
Re Barings plc (No 5) [1999] 1 BCLC 433, 489.
40
Re Barings plc (No 5) [1999] 1 BCLC 433, 482–489.
41
Meaning that the company has entered liquidation, administration or administrative
receivership: CDDA s 6(2).
42
Re Migration Services Ltd [2000] 1 BCLC 666. It is also out of date and ripe for reform:
see Department of Business, Innovation and Skills, note 12 above, 52–56.
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misconduct and determine whether on its own, or taken cumulatively with other matters
alleged and proven, that matter is sufficient to make the director unfit.43 Thus, section
6 allows for a broad enquiry unshackled from the specific requirements of any
underlying civil cause of action or criminal offence.44
Subject to the important caveat that the question whether a director’s conduct makes
him or her unfit is highly fact dependent, it is possible to identify specific instances of
misconduct that the Secretary of State has consistently targeted and which have often
led to a finding adverse to the director. The list that follows is illustrative rather than
exhaustive:45
1. Causing or permitting a company to continue trading while financially insolvent

to the detriment of unsecured creditors generally.46
2. Causing or permitting a company to withhold payments to Crown and other
non-pressing creditors thus discriminating unfairly against such creditors.47
3. Causing or permitting a company to continue trading while financially insolvent
at the expense of pre-paying customers.48
4. Failing to maintain proper accounting records and/or exercise financial respons-
ibility.49
5. Causing or permitting a company to produce accounts that are materially
misleading to investors or creditors.50
6. Causing or permitting a company to enter into transactions detrimental to
creditors.51
7. Failing to co-operate with the official receiver or an office-holder.52
8. Fraud.53
43
Re Copecrest Ltd [1996] 2 BCLC 477, 485.
44
For example, in order to recover damages from a director for breach of his or her duty of
care and skill, it is not sufficient for the claimant to establish a breach of the applicable standard
of care. It must also be established that the breach caused loss. A director could therefore
conceivably escape ordinary civil liability for want of causation but find that his or her conduct
comes under scrutiny if section 6 or 8 of the CDDA is triggered.
45
See further Walters & Davis-White, ch 5.
46
Re Bath Glass Ltd [1988] BCLC 329, 333. Compare Re World of Leather plc [2006] BCC
725.
47
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164; Re Copecrest Ltd [1996] 2 BCLC
477.
48
CDDA Sch 1 Pt II para 7; Re City Pram & Toy Co Ltd [1998] BCC 537. Compare Re
World of Leather plc [2006] BCC 725.
49
CDDA Sch 1 Pt I paras 4(h), 5(a); Re Swift 736 Ltd [1993] BCLC 896.
50
Re Transtec plc [2007] 2 BCLC 495.
51
CDDA Sch 1 Pt II para 8; Re Grayan Building Services Ltd [1995] Ch 241; Re Funtime
Ltd [2000] 1 BCLC 247.
52
CDDA Sch 1 Pt II para 10; Re Copecrest Ltd [1992] 2 BCLC 477.
53
Re Vintage Hallmark plc [2007] 1 BCLC 788; Re Plazoo Pipe Systems [2008] 1 BCLC
120.
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Duration of Disqualification
If a director is found liable to disqualification the court, as a general rule, may

disqualify him or her for a maximum of 15 years.54 In practice, the courts determine
the length of disqualification having regard to the following broad guidelines:55
1. Over 10 years for ‘particularly serious cases’, including cases where a director
who has already had one period of disqualification imposed on him in the past, is
disqualified again.
2. Between six and 10 years for serious cases that do not merit more than 10 years.
3. Five years or less for cases that are, relatively speaking, not very serious.
The courts therefore take what amounts to a tariff-based approach, analogous to a

criminal sentencing exercise,56 and they pay particular attention to the nature and extent
of the harm suffered by creditors and investors.57
DISQUALIFICATION ORDERS AND UNDERTAKINGS
Orders
When the court disqualifies a person, it makes an order in the terms of CDDA s 1 for
a specified period of time up to the statutory maximum. A disqualification order
provides that the disqualified person (1) shall not be a director of a company, act as a
receiver of a company’s property or in any way, whether directly or indirectly, be
concerned or take part in the promotion, formation or management of a company
unless (in each case) he or she has the permission of the court and (2) shall not act as
an insolvency practitioner.58 The prohibition on acting as an insolvency practitioner
cannot be relaxed by the court during the currency of the order.
Undertakings
Where a director consents to being disqualified under CDDA ss 6 or 8 and agreement

is reached on the appropriate period of disqualification, the case can be disposed of
without the involvement of the court by means of a statutory undertaking equivalent in
54
A court that makes a finding of unfitness under CDDA s 6 is obliged to disqualify for a
minimum of two years: CDDA s 6(4). A five year maximum applies in certain circumstances:
CDDA ss 2(3)(a), 3(5), 5(5).
55
Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, 174.
56
Re Westmid Packing Services Ltd [1998] 2 All ER 124.
57
The UK government proposes to give the Secretary of State and the courts additional
powers to make compensation orders against disqualified directors where the misconduct has
caused identifiable loss: Department of Business, Innovation and Skills, note 12 above, 66–67.
58
Within the meaning of Insolvency Act 1986 s 388.
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all other respects to a disqualification order.59 The CDDA provides that the Secretary of
State may accept an undertaking offered by a director if it appears expedient in the
public interest to do so instead of applying for, or proceeding with, an application for a
disqualification order. The Secretary of State can lawfully refuse to accept an
undertaking unless the director agrees to an accompanying schedule of unfit conduct
setting out the factual basis of the disqualification.60 Around 75–80 per cent of
disqualifications are arrived at by way of disqualification undertakings.61 Undertakings
have therefore become a widely used and effective mechanism for disposing of
disqualification cases.
Publicity for Orders and Undertakings
Disqualification orders and undertakings are entered on a searchable register of

disqualified directors maintained by Companies House.62 The register records the
length of duration and the CDDA provision under which the person was disqualified.
Disqualification outcomes are also commonly publicized by press release.63
Legal Consequences of Disqualification under Other Legislation
Disqualification triggers extensive prohibitions under other legislation. For example, a

person disqualified by order or undertaking under the CDDA is automatically disquali-
fied from acting as a charity trustee,64 a trustee of an occupational pension scheme,65 a
member of a police authority,66 a governor of a maintained school,67 and as a member
of various health and social care bodies.68
59
CDDA ss 1A, 7(2A). There is similar facility for disqualification cases based on
competition law breaches to be settled on undertakings: CDDA s 9B.
60
Re Blackspur Group plc (No 3), Secretary of State for Trade and Industry v Eastaway
[2002] 2 BCLC 263; Walters & Davis-White, ch 9.
61
Walters & Davis-White at 9.10; Insolvency Service, Annual Report and Accounts
2011–12, 30.
62
CDDA s 18; The Companies (Disqualification Orders) Regulations 2009 SI 2009/2471.
The register is accessible online at http://bit.ly/1oRmuiu and http://bit.ly/1eEx9GH.
63
See eg, ‘Leeds director disqualified for failure to pay business rates’, 19 May 2014,
http://bit.ly/1roVnQk.
64
Charities Act 1993 s 72(1)(f).
65
Pensions Act 1995 s 29(1)(f).
66
The Police Authority Regulations 2008 SI 2008/630 reg 14(1)(c).
67
The School Governance (Constitution)(England) Regulations 2012 SI 2012/1034 reg 17
and Sch 4 para 11(a).
68
See eg The Council for Healthcare Regulatory Excellence (Appointment, Procedure etc.)
Regulations 2008 SI 2008/2927 reg 2(c)(ii); The Care Quality Commission (Membership)
Regulations 2008 SI 2008/2252 reg 4 and para 13(a) of Schedule.
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LEGAL CONSEQUENCES OF ACTING IN BREACH OF A

DISQUALIFICATION ORDER OR UNDERTAKING
Criminal Liability
A disqualified person who acts in breach of CDDA prohibitions commits an offence

under CDDA s 13. If convicted on indictment, he or she is liable to imprisonment for
up to two years or a fine, or both. If convicted summarily, he or she is liable to
imprisonment for up to six months or a fine not exceeding the statutory maximum, or
both. The offence is one of strict liability.69 The sentencing court may also make a
further disqualification order under the CDDA and a confiscation order pursuant to the
Proceeds of Crime Act 2002 in respect of any benefits that the convicted person
received as a result of the offence.70
Civil Liability
A person is liable to pay a company’s debts if he or she is involved in the management

of that company in contravention of a disqualification order or a disqualification
undertaking.71 Debts for this purpose are debts and other liabilities of the company
incurred when the disqualified person was involved in the management of the
company.72 A creditor owed a relevant debt may proceed either against the company or
the disqualified person for the whole amount of the debt.73 The company has a right of
contribution against the disqualified person who, by operation of the statute, is the
company’s co-debtor.74 A disqualified person’s unlawful participation does not affect
the enforceability of contracts entered into by a company.75
PERMISSION TO ACT NOTWITHSTANDING DISQUALIFICATION

A disqualified person can act as a director and in various other capacities in connection
with companies with court permission.76 Whether or not a disqualified person should
be granted permission to act in a prohibited capacity is a matter of court discretion. The
question for the court is whether, in all the circumstances of the case, permission
should be granted. The courts are conscious of the fact that too generous an approach
69
R v Brockley [1994] 1 BCLC 606.
70
R v Seager [2010] 1 WLR 815.
71
CDDA s 15(1)(a).
72
CDDA s 15(3)(a).
73
CDDA s 15(2).
74
Re Prestige Grindings Ltd, Sharma v Yardley [2006] 1 BCLC 440, [11]. The provision
also creates a form of accessory liability: CDDA s 15(1)(b).
75
Hill v Secretary of State for the Environment, Food and Rural Affairs [2006] 1 BCLC 601.
76
CDDA ss 1(1), 1A(1), 17.
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could undermine the protective purpose of the CDDA, especially its deterrence
function.77
While each case turns on its own particular facts, the court balances a range of
factors such as: the need of the disqualified person to earn a living; the need of the
company in relation to which permission is sought to have the applicant involved in
management; and whether the public will be adequately protected from harm having
regard to78 the nature and seriousness of the misconduct that resulted in disqualifica-
tion, the trading prospects and governance of the company in relation to which
permission is sought and the likelihood of repetition of the previous misconduct.79 The
applicant must satisfy the court that there is unlikely to be any repetition of the
previous misconduct and must demonstrate that conditions within the company in
relation to which permission is sought are such that it is not a breeding ground for
recurring misconduct.80
The court rarely grants an application for permission without imposing conditions.
Common conditions include: requirements that publicity be given to the order granting
permission; the appointment of independent monitors to the board to oversee the
applicant’s conduct; the institution of general financial controls and specific controls
designed to prevent the recurrence of previous misconduct; and limitations on the
amount of remuneration the applicant may receive.81 These safeguards are invariably
drafted in a form that makes continuing permission conditional on the applicant abiding
by the conditions. Thus, if the applicant fails to comply with any of the conditions,
permission is automatically withdrawn and the applicant is automatically in breach of
the original prohibitions and exposed to the full gamut of criminal and civil liability in
CDDA ss 13 and 15.82
77
Re Tech Textiles Ltd [1998] 1 BCLC 259, 267.
78
Re Streamhaven Ltd [1998] 2 BCLC 64.
79
Re TLL Realisations Ltd [2000] BCC 998; Re Tech Textiles Ltd [1998] 1 BCLC 259.
80
Re Dawes & Henderson Ltd [1999] 2 BCLC 317; Re TLL Realisations Ltd [2000] 1 WLR
634; Re Westminster Property Management Ltd (No 2) [2001] BCC 305; Re Servaccomm
Redhall Ltd [2006] 1 BCLC 1; Re Morija plc [2008] 2 BCLC 313.
81
Re Gibson Davies Ltd [1995] BCC 11; Re Tech Textiles Ltd [1998] 1 BCLC 259; Re
Amaron Ltd [1998] BCC 264; Re Hennelly’s Utilities Ltd [2005] BCC 542.
82
Secretary of State for Trade and Industry v Rosenfield [1999] BCC 413, 419; Re TLL
Realisations Ltd [2000] BCC 998, 1018.
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60. Strategic tools – for now and perhaps the future?

Barry Rider
An attempt to proffer predictions even of a most tentative character as to the ways in

which the form and character of financial crime, and particularly economically
motivated crime, will develop, is a task for those who get paid exorbitant amounts of
money in the risk industry.1 While the man or woman in the street appreciates the ever
increasing relevance of technology and the fact that we might be approaching a point
where the ability to communicate and interact with each other and the environment
changes beyond our dreams, how these opportunities are likely to be exploited by
criminals is perhaps best perceived in works of fiction. What this author will attempt,
however, taking the exemplar of corruption, is a forward looking discussion of
strategies that might be best advocated to address its prevention and control.
There is something that resembles controversy among comparative lawyers as to
when the study of law on a comparative basis became sufficiently acknowledged as a
distinguishable process different from other areas of juristic inquiry to be considered a
discipline in itself. Of course, comparisons between the manner and detail in which
societies order their affairs is nothing new and, indeed, both Plato and Socrates2
engaged in what some would see as comparative constitutional analysis. That the
comparative study of law, particularly in the European tradition, is now well established
as a respectable contribution to legal scholarship cannot be questioned. However, for
such study to have any real purchase in the minds of those who seek to predict, with
any certainty, the application of a particular law in another jurisdiction, then the inquiry
must go much further than simply the form and content of the rule. The political, social
and economic environment within which law operates must be taken into account, if for
no other reason than that they impact on the very institutions that serve and apply the
law. Consequently, in relatively new areas of legal intervention regard needs to be given
by the comparative commentator all the more to the environment within which the law
and its administration operate.3 The study of corruption and its control, while not
always a modern concern, particularly requires the development of law, its application
and the institutions that serve its enforcement to be looked at in this wide context.4
1
See generally T. Kaiser and P. Merl (eds), Reputational Risk Management in Financial
Institutions (2014) Risk Books and R. Saleuddin, ‘Reputation risk management on financial
firms’ 22 Journal of Financial Regulation and Compliance (2014) 287.
2
See K. Zweigery and H. Kotz, An Introduction to Comparative Law (1998, 3rd Ed)
Oxford University Press, Ch 5 p 49.
3
For an illustration of this see B. Rider and L. Ffrench, The Regulation of Insider Trading
(1979) Macmillan and S. Frommel and B. Rider (eds), Conflicting Legal Cultures in Commer-
cial Arbitration (1999) Kluwer.
4
B. Rider (ed), Corruption – The Enemy Within (1997) Kluwer.
726
Barry Rider - 9781783475780
Strategic tools – for now and perhaps the future? 727
Consequently, when looking at the efficacy of strategies from a comparative

perspective the sheer volume of factors and considerations can easily turn the exercise
into a morass of material that obscures and possibly serves little purpose other than to
attest to the diligence of the researcher. Therefore, in this final chapter, which seeks to
canvas – from a very personal and perhaps arrogant perspective – commended
strategies to combat corruption, those who search for a wealth of comparative citation
will search in vain.
The author has no special interest or skill in the study of matters relevant to the
categorisation and classification, from a criminological or for that matter any other
perspective, of financial crime or misconduct that is economically motivated. However,
for many years, essentially as a lawyer and investigator, he has been involved in the
more practical aspects of discovering and controlling economic crime, in all its
manifestations, in a number of jurisdictions. In looking forward in an attempt to
identify possible strategies for the better interdiction and control of such crimes, he has
taken as an exemplar corruption. Corruption is a close relative of money laundering in
that it is facilitative in design, object and purpose;5 and attempts to inhibit and interdict
corrupt activity throw up a host of issues which the present author offers as issues
possibly of wider relevance in the control of financial crime and, in particular, abuse
which is motivated by economic factors. In so doing, the present author takes the view
that, generally speaking, the problem facing those who seek to intervene against those
who engage in corrupt practices – in one form or another – is rarely the inadequacies of
the law.6 While it is no new thing that workmen are wont to blame their tools for
shoddy results, and lawyers are no different than other artisans, the majority of legal
systems, whatever their jurisprudential parentage, with a bit of diligence on the part of
the inquirer, have offences and devices adequate to the job in hand. The problem is
only too often, whether in developed economies or those of the so called third world,
the ability in practical and resource terms to mobilise and then devote sufficient
commitment, over time, to a meaningful resolution. Consequently, in this chapter the
author has attempted to address issues which are primarily, albeit not exclusively,
relevant to the institutions and procedures of enforcement rather than the crafting and
practice of law, let alone the worthy activities of criminal scientists and criminologists.
5
See D. Chaikin and J. Sharman, Corruption and Money Laundering: a Symbiotic
Relationship (2009) Palgrave and more generally B. Rider and M. Ashe (eds), Money
Laundering Control (1996) Sweet & Maxwell and B. Rider, ‘The wages of sin – taking the profit
out of corruption – a British perspective’ Dickinson Journal of International Law (1995) 391. It
is also worth noting that in many jurisdictions the control of insider dealing is often associated
in time and in legislation with money laundering, see B. Rider, ‘The control of insider trading –
smoke and mirrors!’ 1 International and Comparative Corporate Law Journal (1999) 271.
6
For a discussion of the institutional aspects see B. Rider, The Promotion and Development
of International Co-operation to Combat Commercial and Economic Crime (1980) Common-
wealth Secretariat, London, B. Rider, ‘Policing the City – combating fraud and other abuses in
the corporate securities industry’ 41 Current Legal Problems (1988) 47 and B. Rider ‘Blindman’s
bluff – a model for securities regulation’ in J. Norton and M. Andenas (eds), Emerging Financial
Markets and the Role of International Financial Organisations (1996) Kluwer.
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CORRUPTION – WHAT DO WE MEAN?

There was a time – not too long ago – when it was acceptable to observe that in
different parts of the world corruption was not always seen to be the same thing or for
that matter to raise the same implications. Colonialism afforded many individuals with
an opportunity for promoting themselves through bribery and other corrupt dealings
which they would never have had if they had remained in their own societies. Indeed,
there is an argument that this contributed to the perception that bribery and corruption
was something that only happened overseas and inevitably in those countries which had
not developed a structure of government and society that would be recognised as such
by the so called metropolitan powers. In other words, the very corruption that officials
were exposed to was part and parcel of someone else’s problem. The notion that
colonial officers took their corruption with them and to some degree even imported it
into other societies would have been a heresy. Having said this, the form and content of
corruption in, for example, the then Royal Hong Kong Police Force, was not inherited
from a pre-existing Chinese establishment.
Today it is unacceptable to express the view that some societies operate in ways that
are inherently corrupt or even conduct their affairs in a manner which, while accepted
as normal, indeed, even commendable, by them would be characterised as corrupt by
others. Today, in the world of international standards of behaviour expressed in what
we like to call, because it is rather more comfortable, soft international law, there is
little room for the peculiarities of societies where gratefulness and respect is manifested
in at least the expectation of a gift or a token of esteem. Today we require the conduct
of everyone with whom we do business, albeit increasingly remotely and electronically,
to conform to a standard such that it can be checked off against a uniform international
compliance programme. In the modern world, banks and others who by their very
business operate trans-nationally cannot accommodate oddities of behaviour in their
proven compliance procedures. One size must fit all, and as has so clearly been shown
in the ‘crusades’ against money launderers and those who do business with people
branded subversive, if you do not manage to comply you will in practical terms be
excluded from direct access to the western financial system.
Therefore, in this chapter the author will not attempt to do what a sound academic
should, and test our very understanding of corruption as something worthy of being
branded evil and anti-social.7 Nor will he seek to raise the arguments of some that
corruption at certain levels and at certain stages in development is, if not an
inevitability, to be expected and perhaps even ignored. Having consigned thereby our
discussion to the realm of practicality, we will none the less presume to raise one issue
that has clear implications for control and enforcement: that of transparency.
7
See B. Rider, ‘Probing probity: a discourse on the dark side of development’ in S.
Schlemmer-Schulte and K. Tung, International Finance and Development Law (2000) Kluwer
and in regard to the similar issues that arise in regard to insider abuse, B. Rider and M. Ashe,
Insider Crime (1993) Jordans and B. Rider, ‘The control of insider trading: smoke and mirrors’
in E. Lederman and R. Shapira, Law, Information and Information Technology (2001) Kluwer.
Barry Rider - 9781783475780

TRANSPARENCY
It has been argued that one of the most significant dangers presented by corrupt activity
is that it is done in secret. Indeed, as in the case of fraud and other crimes of
dishonesty, what is done is done in secret. The desire to create and maintain secrecy
itself gives rise to what some criminologists describe as ‘slippery slope’ crimes.8 In
other words, to hide what has been done, records may be distorted and others brought
into the web of corruption. Transparency has often been invoked as a weapon to deal
with conduct that might not survive the glare of publicity and possibly attendant public
criticism. Indeed, the famous observation of Louis D. Brandeis, that ‘sun light is the
best disinfectant and electric light is the best policeman’, has much to commend it.9 In
practice, disclosure of relevant details might not only focus opprobrium – particularly
in a democracy – but also empower those who deal with the relevant individuals or
organisations to re-evaluate the terms upon which they continue their relationship or,
indeed, discontinue it.
Disclosure also assists in enforcement in that it either provides those responsible for
policing with a ‘red flag’ indicating the need for action or, if there is a failure of candid
disclosure, a preliminary offence, which may in practice be much easier to sanction.
For example, as in other areas of self-dealing such as insider trading, it is often easier
to prosecute persons who have failed to make a report than proceed to the investigation
and proof of often complex substantive offences.
There are, however, obvious limitations to the effectiveness and efficacy of the so
called fish bowl philosophy. Perhaps most importantly it assumes that disclosure of
certain types of conduct will throw up concerns on the part of those to whom disclosure
is made. In other words, those who are made aware of the relevant facts must not only
be of the view that they are abusive or at least objectionable, but also they must be
empowered to take some form of action to denounce and hopefully correct and punish
such conduct as it is revealed. It is only on this basis that transparency can be an
effective control mechanism against self-interested and corrupt dealings.
While in some societies the mere fact that what is considered to be unethical conduct
is revealed will, given the homogeneity of moral attitudes, be a sufficient disincentive
to abuse, there are others where perhaps the value of reputation is less or is more
equivocal. Indeed, there are some societies and situations where the ability to secure
personal or, in particular, benefits for members of one’s family or supporters is seen
primarily as confirmation of status and power, which itself is applauded or at least
condoned by members of that society or group. For example, a recent survey conducted
in China10 among senior business executives revealed that most retained what they
considered to be Confucian values. Consequently, in the conduct of their businesses,
8
For an excellent discussion of this see M. Levi, The Phantom Capitalists (2008, Rev Ed)
Ashgate.
9
L. Brandeis, Other People’s Money and How the Bankers Use It (1914) Harpers, Ch V.
10
R. Chan, D. Ho, A. Lau and A. Young, ‘Chinese traditional values matter in regulating
China’s company directors: findings from an empirical research’ 34 Company Lawyer (2013)
146. See also B. Rider, H. Yan and Li Hong Xing, The Prevention and Control of International
Financial Crime (2010) China Financial Publishing House, Chs 1 and 2.
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even though they involved at least in part the management and use of other people’s
money, advancement of personal and family interests came first. Indeed, there was little
knowledge of the ‘fiduciary’ obligations on directors and officers imposed by China’s
Corporations Act, and several respondents went as far as saying that if these impeded
the advancement of family interests the law needed to be changed! It is also the case
that there are still many societies where the giving of a gift is considered a mark of
respect and is not necessarily given in the expectation of a specific benefit. In such
cases, a failure to acknowledge this expectation might even be a justification for
criticism.
MAKING TRANSPARENCY WORK

Before we move on, there is another consideration. This is the medium of disclosure
and the mechanisms which are in place to ensure that those who are considered to be
the ‘control’ element are in fact enabled to understand properly what has occurred. For
example, if those who are required to report their own or another’s conduct are able to
ensure that the disclosure is either in practical terms meaningless or unintelligible, the
underlying abuse is in effect compounded. The protection that transparency might
otherwise afford is rendered a delusion.
Indeed, in practical terms the majority of disclosure mechanisms in the business
world assume that disclosure is effected through the medium of mandatory corporate
financial reporting. Even if the laws and regulations requiring continuous and timely
reporting are actually and properly complied with, which of course in many cases and
countries they are not, there are real issues as to the ability of ordinary investors and
others to understand and interpret the relevant information. In relation to what might be
considered integrity-related disclosures, much will in practice depend upon the exist-
ence and ability of intermediation. The vast amounts of information that are available
need to be analysed, monitored and rendered intelligible and understandable by those
who may be expected to act upon it. Hence the need for professional analysts, the
media and pressure groups to process such disclosures and target and filter information.
In practice few societies, particularly in the developing world, have these luxuries.
Consequently, while it is certainly arguable that at least some of the concerns relating
to corruption are addressed by greater transparency, it is clear that disclosure is no
panacea. In some cases the fact that there is adequate disclosure might well result in the
relevant conduct not being, at least in law, objectionable. For example, in those
countries that have embraced the traditions of the common law and, in particular,
equity, persons in a fiduciary position might not be considered to have breached the
duties that would otherwise attach to their status if they make full and effective
disclosure and obtain the consent of those who might otherwise have a basis for calling
them to account.11 This is a complex area of the law, but in most jurisdictions that
would require a fiduciary to yield up to the person with whom he is in a fiduciary
11
See generally B. Rider, K. Alexander, L. Linklater and S. Bazley, Market Abuse and
Insider Dealing (2009) Tottle, Chs 1 and 2 and B. Rider and M. Ashe (eds), The Fidiciary, the
Insider and the Conflict (1995) Brehon Sweet & Maxwell.
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relationship any benefit that has come to him by virtue of that relationship – often
referred to as the secret profits rule – full disclosure and the consent of the other party
will in effect render what would otherwise have been a breach of the duty of loyalty
unobjectionable. It is probable that in most cases the same rule would apply to the
taking of a bribe, although it is possible that as the rules are applied in certain
jurisdictions the two situations might not be entirely the same.12 This is something that
we will return to.
Before we do move on, however, there is a point that is worth making in regard to
the involvement of corporations in corruption and unethical conduct. In recent years
much has been made of the importance of ensuring good governance structures and
procedures in companies.13 Indeed, until the recent financial crisis many argued that in
large measure such closer internal systems of control had much to commend them over
the costly one size fits all approach. Of course, governance, while still of value, was
seen to be a very weak barrier to the rampant greed and self-interest that characterised
the conduct of many in the financial industry leading up to the near collapse of the
western banking system after the so called sub-prime fiasco.14 While governance can
never replace competent and effective external and public policing, it can still assist. It
has at least an educative role and proper procedures may throw up earlier misconduct
particularly if reinforced with sound compliance. It is also far more recognised that the
reputation of corporations is a valuable asset which management has a responsibility to
protect. We are near to judges finding directors of companies personally responsible in
the discharge of their duties to their companies for failing to adequately protect this
asset of the business. Indeed, in one case in England an employee of a bank that had
collapsed in large measure due to the frauds and abuses that it facilitated around the
world was in fact permitted to proceed with a claim seeking compensation from the
bank’s directors for their failure to run the bank properly and thereby safeguard
the employability and reputation of its staff.
THE FORMS OF CORRUPTION

The way in which people in positions of authority and trust improperly take advantage
of their position will inevitably be influenced by the manner in which opportunities
present themselves. Thus, the social, political and economic environment within which
12
See B. Rider, ‘Blunting the sword of justice’ 19 Journal of Financial Crime (2012) 324
and B. Rider, ‘The practical and legal aspects of interdicting the flow of dirty money’ 3 Journal
of Financial Crime (1996) 234, and for a discussion of similar issues in Shar’ah see B. Rider,
‘Corporate governance for institutions offering Islamic finance’ in C. Nethercott and D.
Eisenberg (eds), Islamic Finance: Law and Practice (2012) Oxford University Press.
13
See for example, B. Rider and C. Nakajima, ‘Corporate governance and supervision’ in S.
Archer and R. Karim (eds), Islamic Finance: The Regulatory Challenge (2007) Wiley Finance;
C. Nakajima, ‘Responsible business’ 20 Journal of Financial Crime (2013) 256 and C. Nakajima,
‘The importance of legally imbedding corporate social responsibility’ 32 Company Lawyer
(2011) 257.
14
See in particular N. Ryder, The Financial Crisis and White Collar Crime: The perfect
storm? (2014) Edward Elgar.
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the conduct occurs will impact on and shape the form of misconduct in question.
Indeed, this will also be reflected in the laws that are invoked to address it. In
developing countries, particularly where the state is rather more involved in the conduct
of activities, which in a developed economy might be rather more in the hands of the
private sector, there will be greater opportunity to engage in misappropriation and
diversion of state assets. This is a particular issue in countries which still have a
significant public business economy such as China. In fact it was recognised by the
Nanking National Government in China in 1927 that, given the greater degree of
involvement of officials in making or participating in decisions which made a material
impact on the fortunes of economic actors, there is a greatly enhanced opportunity for
insider dealing by officials. Indeed, it is interesting that this recognition resulted in the
imposition of law to address this problem. Article 41 of the Revised Stock Exchange
Law 1935 specifically outlawed speculation on the markets by officials, and all this was
well before the development of the communist state.
The greater involvement of government in fostering entirely beneficial programmes
such as those relating to the protection of the environment and natural resources has
similarly provided opportunities for officials to in effect take advantage of information
on the design and implementation of their own policies. It is also relevant that the more
the state is involved in the ownership and control of enterprise the more likely that it
will interpret such misconduct as an offence against the state. It has been said, for
example, that in the USSR, because of the degree of state and collective involvement in
the economy, more fraudsters and other economic criminals were executed than in any
other country.15 Their misconduct was clearly identified as a crime against the state’s
interests. It is important to note that this might still have important implications in
addressing the control of corruption. For example, in one recent case in China the
execution of an individual who had misappropriated funds from a state owned
enterprise in Jilin and then laundered the money through Hong Kong, Singapore and
Italy, effectively prevented satisfactory legal assistance from the country where the
money had ended up.
WHY DO WE DO CORRUPTION?
Over the years a considerable amount of discussion has taken place in the academia as
to the nature and implications of corruption. While we need not rehearse this here, it is
desirable in modelling more efficacious responses to the threats associated with
corruption, to recognise the practical significance of Edwin Sutherland’s explanation of
deviant white collar behaviour.16 In a nutshell and grossly simplistic terms, Sutherland
15
‘Russia ranks first in use of death penalty’ Los Angeles Times 5 February 1972. China
regularly uses the death penalty for serious cases of economic crime, but see B. Rider, ‘A tale of
two cities’ 19 Journal of Financial Crime (2012) 4 and B. Rider, ‘When Chinese whispers
become shouts’ 20 Journal of Financial Crime (2013) 136.
16
See E. Sutherland, White Collar Crime (1949) Dryden Press; E. Sutherland, White Collar
Crime: The Uncut Version (1983) Yale; and E. Sutherland, ‘Is White collar crime crime?’ 10
American Sociological Review (1945) 132.
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recognises that in the case of certain forms of economically motivated activity we are
all susceptible to temptation. The determination of whether we actually engage in
conduct that might be characterised as criminal or abusive will in large, perhaps
determinant, measure be resolved by our own cost benefit analysis. In other words, we
will assess the rewards as compared with the risk of something unpleasant happening to
us. There will in any given situation be a host of factors which influence our subjective
determination of this balance and where the tipping point is encountered.
Morality and education will have a role to play, as will the efficiency of detection
and the mechanisms of punishment. However, it is important to take on board that the
moral and ethical aspects might vary,17 and in many cases of what might be described
as financial crimes there may well be a perception that they reflect no great moral
principle and are essentially technical offences. The perception in a society that
undertaking the activity in question is commonplace or that most would – given the
opportunity – engage in it, will be powerful factors. Indeed, this was all powerfully set
out in the context of Filipino society in an article recently published in Planet
Philippines (Eight Ways Filipino Politicians Justify Corruption, September 2013).
The potential for ambiguity in designing the controls, and certainly in policing them,
is perhaps best illustrated again by reference to a form of misconduct that is quite
closely related to corruption, namely insider dealing. While arguments based on the
abuse of loyalty may in the circumstances be relatively strong or weak, the justification
often invoked in the criminalisation of the misuse by insiders of privileged information
is the adverse impact that this may have on investor confidence. It is argued that
investors will be less attracted to markets where there is not a semblance of equality of
opportunities to profit. For many reasons this simplistic contention is not always
convincing. However, it is the case that few individuals are likely to see a profound
moral imperative here. Their castigation of insider trading as an abuse, at this level, is
probably rather more associated with their jealousy that someone else who is in a
privileged position is able to take a benefit which they are unable to access.18 Indeed,
the same argument is manifest in regard to some of the excesses that we have seen on
the part of bankers in the lead up to the recent global financial crisis. As a result, it is
possible that morality may play less of a role in the balance of opportunities and risks
than some think and hope for. The prime issue may be simply at what price is the risk
of punishment and possibly loss of reputation worth taking.
Consequently, the level of detection and likelihood of effective enforcement action
consequent upon detection is, on this analysis, a significant if not determining factor.
The more that can be done to render the risk of detection and the certainty of effective
policing and punishment, the higher will be the financial threshold to wrongdoing.
17
See for a perspective on this issue, Siti Faridah Abdul Jabbar, ‘Corruption: delving into the
muddy water through the lens of Islam’ 20 Journal of Financial Crime (2013) 139 and B. Rider,
‘Back to basics’ in The Changing Landscape of Islamic Finance: Imminent Challenges and
Future Directions (2010) Islamic Financial Services Board and also in Strategies for the
Development of Islamic Capital Markets (2011) Asian Development Bank and IFSB in Ch 3.
18
See B. Rider and H. Ffrench, ‘Should insider trading be regulated? Some initial
considerations’ 95 South African Law Journal (1978) 79 and B. Rider, ‘Insider trading – a crime
of our times’ in D. Kingsford Smith (ed), Current Developments in Banking and Finance (1989)
Stevens.
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Thus ‘soft’ and early – essentially extra-legal – procedures and devices, such as
compliance, transparency and whistle blowing have a real role to play in fixing the
tipping point. None the less, given the efficacy, or rather the lack of efficacy, in
bringing economic criminals and those involved in corruption to justice, the threshold
may be rather lower than we assume. Having regard to the nature of the likely offender
it may not be necessary to invoke the full panoply of criminal justice that is more
usually encountered for other forms of crime and misconduct. By definition we are
dealing with more or less the elite in a given society, or at least those who have a
privilege the exercise of which is worth influencing. One does not bribe people for the
sake of it – there will always be a purpose and usually one that has economic
significance.
EXPOSURE AND DETECTION

It is in the analysis of the viability of detection and effective enforcement that there is
perhaps the clearest distinction between so called ‘grand’ corruption and, shall we say,
‘ordinary’ corruption. In the former, those involved will hold some of the most
powerful positions in the relevant society. They will, while they remain in power, often
be able to ensure that their corrupt activities are shielded and, even if known generally
or within specific circles, are in practical terms ignored, perhaps even condoned.
Indeed, in extreme cases the culprit – if this is a meaningful description in this context
– may even be able to change the very character of what has occurred by effectively
authorising or seeking the authorisation of what would otherwise be a misappropriation
or act of corruption. The examples of this occurring are sadly not exceptional. The
extent to which as a matter of law, even within the relevant domestic jurisdiction,
self-authorisation is practicable is a matter of debate. For example, even under, in this
respect, the most facilitative construction of a constitution it may be assumed that there
is only authority to act within the law. As a very senior English judge once put it, albeit
in another context, ‘this is a matter of legal theory and bears no resemblance to fact’.
Regardless of the law – and there is certainly room for jurisprudential debate – while
those in power remain in power they are often in a position to effectively close down
inquiries and ensure that no action is taken. Once they leave office, they may be more
vulnerable, but even then it is extra-ordinarily difficult to pursue, almost inevitably in a
foreign jurisdiction, those who have effectively exercised the sovereign authority. To
such individuals and their associates the threat of unpleasant consequences attaching to
their conduct has, at least until relatively recently, been at best a remote possibility.
There are indications, however, that the balance might be tilting. While we have a
long way to go before it could convincingly be argued that corruption, or for that
matter money laundering, has become an international crime in the sense we under-
stand that term in international law, there have been significant developments in the
efficacy of trans-national criminal justice in large measure spurred on by important
international instruments such as the UN Convention against Corruption.19 The ability
19
United Nations Convention against Corruption was adopted by resolution 58/4 of the UN
General Assembly 31 October 2003 and came into force on 14 December 2005.
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of states within their own domestic law to provide meaningful assistance to other states
and even private actors in pursuing the proceeds of corruption and other crimes has
increased dramatically. Also, the willingness and capacity of states acting within their
domestic laws to move promptly and effectively to interdict and freeze tainted wealth is
infinitely greater today than it has even been. This was illustrated in the rapid response
of many European countries to the requests of new governments to identify and freeze
the assets of former leaders and their families during the so called Arab Spring. There
are many examples of cases in the past where it has taken years to trace and then
initiate steps, often without success, to interdict wealth ‘stolen’ and diverted from
countries such as the Philippines, Pakistan, Haiti and Indonesia. On the other hand, the
British government was able to effectively respond to a request received from the
Egyptian government in regard to Mr Hosni Mubarak within minutes. The system of
and for international mutual assistance today in this respect bears no resemblance to
that even five years ago. A prerequisite to this is an effective request from the relevant
lawful authority in the state concerned, and this may well constitute a problem where it
remains unclear exactly where authority actually does reside in a state that has gone
through turmoil. The provision, perhaps from other governments, intergovernmental
organisations and even the private sector, of timely technical assistance and support
may prove in practical terms to be crucial.
CRIMES OF THE POWERFUL

In considering economic crimes – and for that matter perhaps crimes generally of the
powerful – it is important to recognise the practical realities. The ability of those in
positions of influence, who may already have disproportionate authority as a result of
their scant regard for the law and good governance, to discourage criticism, let alone
effective investigation, within their society is a reality. Those who have, in this context,
amassed power and wealth for themselves are unlikely to play by the rules. Indeed,
they will do whatever is necessary to protect their interests and those of their
associates. As organised crime ‘survives on fear and corruption’, so do such individuals
and their coterie of confederates. Their ability over time to almost institutionalise this
protection through further patronage and domination presents an almost insurmountable
barrier to effective action within their society or state.
The present author, having had the privilege of working for many years in this field,
has witnessed, on innumerable occasions, direct interference in the proper operation of
the law and, where this has failed to secure their objective, the assassination and
intimidation of witnesses and those who attempt to stand up for justice. Indeed, it is a
sad but true comment that few if any champions of justice, in this context, retire happy
or for that matter retire at all! On countless occasions, including in some of the more
developed countries which pride themselves on their seeming adherence to the rule of
law, there is evidence of black propaganda campaigns designed to discredit testimony
and place those who have acted corruptly beyond the reach of such systems as may
exist to render them accountable. In a number of such cases these perverse initiatives
have drawn the support of organised crime, naive or possibly corrupt journalists and
even renegade intelligence officers. The failure of societies to recognise the risks faced
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by those taking on those in power and authority, let alone seek to assist and protect
them, is in my opinion one of the greatest threats to the efficacy of the law.
Of course, it is not always the case that those in power will be so bold to stoop to
intimidation, violence and misinformation. Perhaps an even more shocking response is
to attack the standing and resources of the agencies that have been set up specifically to
promote integrity and police the relevant law. Although politicians are inclined, often
with the support of the media, to bemoan the inadequacies of agencies responsible for
promoting integrity in, for example, the financial markets or discovering and pursuing
financial crime and corruption, there are again too many examples where as a result of
the perceived effectiveness of such agencies their budgets have been slashed and their
recruitment curtailed. Whether this be predicated on the notion that such have become
too overbearing and powerful – undermining the very values that they are tasked to
protect – or simply on the basis that they have done their job, it is not hard to find
examples of the virtual emasculation of, in particular, the enforcement and surveillance
capabilities of these agencies throughout the world.
ELITE ENFORCEMENT
On the other hand, it has also to be recognised that there are too many examples around
the world of elite prosecutorial and investigative agencies, set up specifically to
spearhead the fight against corruption and economic crime, themselves becoming
tainted by the very ills that they are addressing. There have been real examples of such
agencies being undermined from within as a result of penetration by criminals and the
corruption of key personnel. One need only consider the example of the Commercial
Crime Unit in Hong Kong and its corrupt director, Warrick Reid. As Lord Templeman,
then one of the most distinguished judges in the Privy Council, observed: ‘bribery is an
evil practice which threatens the foundations of any civilised society. In particular,
bribery of policemen and prosecutors brings the administration of justice into disrepute
… in [this] case the amount of harm caused to the administration of justice in Hong
Kong … cannot be quantified.’20 Indeed, even in that bastion of propriety, Singapore, a
similar agency established to fight economic crime and corruption had problems, albeit
less dramatic. Sadly there are many other examples.
In the view of the author the ever present danger of specialised law enforcement
agencies, and in particular those established to fight really serious economic criminals
and the most corrupt and powerful members of our societies, becoming part of the
problem is exacerbated by a failure on the part of politicians and the media to properly
understand and appreciate the real problems in doing the work they do. In some,
perhaps the majority, of cases where such agencies, and in particular their directors,
have stepped over the line and become associated with the problem rather than the
solution, the initial reason has been a desire, perhaps even a laudable desire, to meet the
expectations of those who have appointed them and set them their task. The reality is
that in all systems of law – whether common law, civilian, Roman Dutch, or as in the
Philippines, an intriguing mix thereof – it has proved over time incredibly difficult to
20
Attorney General for Hong Kong v. Reid (1994) 1 All ER 1.
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secure convictions through the traditional processes of the criminal justice system for
economic crime and in particular fraud and corruption. The reasons are many and
varied and a detailed discussion is beyond the scope of this chapter. It is not without
interest, however, that even the most developed and respected legal systems have in
reality fared little better when judged in terms of convictions. For example, back in
1986 an eminent senior criminal judge, Lord Justice Roskill, appointed to make
recommendations for the improvement in England of the trial of fraud cases, reported
that ‘the public no longer believes that the criminal justice system can effectively and
efficaciously bring the perpetrators of fraud to book. The overwhelming evidence
brought before us suggests that the public is right’.21 Despite many new laws,
procedures and agencies, few in the UK would have any confidence that the situation
has got any better.22
The record elsewhere, including in the USA, is little better. Indeed, it is largely as a
result of the criminal justice systems’ profound inability to deliver results – in terms of
convictions, or for that matter the seizure and interdiction of the proceeds of crime –
that many law enforcement agencies around the world have redefined their objectives
as the disruption of crime rather than the traditional investigation and prosecution of
crime. The emphasis now placed on the disruption of organised crime – including
terrorist organisations and serious economic criminality – has inevitably impacted on
the way in which we attempt to deliver justice. There is, for example, a much greater
emphasis on the role of intelligence, and in particular financial intelligence thrown up
by our anti-money laundering systems.23 On the other hand, the more we involve
the spy rather than the traditional policeman in these tasks, and move away from the
discipline of a traditional prosecution, the greater the risks to human rights and the
greater the risks of justifying actions on the basis of their empirical results.
Experience appears to demonstrate that the temptation to meet the unrealistic short
term expectations of politicians has resulted in a tendency to bend the rules and
procedures to achieve what appear to be results – recognised as justifying the special
powers, budgets and status that these agencies are given. Elitism breeds an ambition for
21
Report of the Fraud Trial Committee (1986) HMSO para 1. See also B. Rider,
‘Combatting international commercial crime’ Lloyd’s Maritime and Commercial Law Quarterly
(1985) 217, B. Rider, ‘Policing the international financial markets’ in C. Lye and R. Lazar (eds),
The Regulation of Financial and Capital Markets (1990) Singapore Academy of Law and B.
Rider, ‘Policing the international financial markets – an English perspective’ XVl Brooklyn
Journal of International Law (1990) 179.
22
It is reported that of some 81,631 reports of suspected fraud by businesses in London in
2013 to 2014 there were only nine successful convictions. Of some 103,000 suspected cases of
business-related crime only 758 were considered solvable by the police, H. Warrell, ‘Police
urged to crack down on business crime’ Financial Times 23 July 2014. The UK police also fail
to identify a suspect in three quarters of property related crimes, R. Ford, The Times July 18
2014, albeit the Home Secretary asserts ‘criminal gangs are running swathes of Britain’ R. Ford,
The Times 12 June 2014.
23
See B. Rider, ‘Intelligent investigations: the use and misuse of intelligence – a personal
perspective’ 20 Journal of Financial Crime (2013) 293. See also S. Keene, Threat Finance,
Disconnecting the Lifeline of Organised Crime and Terrorism (2012) Gower. See generally K.
Hinterseer, Criminal Finance, the Political Economy of Money Laundering in a Comparative
Context (2002) Kluwer.
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a level of success that a proper and responsible administration of law cannot in all
probability achieve. Consequently, the very real pressures within the organisation in
terms of career security, development and esteem, as well as externally in terms of
continued support and standing, become almost irresistible. The inclusion of evidence
that has been procured in dubious circumstances, perhaps even illegally, is a step
towards fabrication and manipulation of evidence – the ends justify the means. The fact
that this corrupts the very fabric of the legal system and makes justice a delusion is
obscured by expediency and pragmatism.
Having said this, specialisation in the investigation and pursuit of corruption is vital.
To identify and then recruit or to foster similar skills and specialisations within the
confines of more traditional law enforcement structures, and in particular police
organisations, is problematic. Traditional justice agencies do not provide the career
structures that can comfortably accommodate the sort of specialisations that are
required for the effective investigation of, for example, economic crime and corruption.
Of course, if there is the political will then it is conceivable that significant
organisations capable of supporting highly specialised skills can be established and
operated. A good example of this is the Independent Commission Against Corruption
(ICAC) in Hong Kong. However, the very considerable resources that have been placed
at the disposal of the ICAC over the years are in practical terms beyond the reach of
most countries, and those that have attempted to emulate the experience of Hong Kong
with lesser resources have on the whole not fared as well as it was hoped. The ICAC,
in terms of its structure and operations, has to be considered in the historical context of
Hong Kong and the political imperatives that gave it so much significance in the
political system such as it was and is. For example, for much of its life the ICAC
operated within a colonial environment, which had implications for, in particular,
accountability and its independence. There are those who wonder whether its perceived
strengths will, or indeed can, survive – at least as they are – in the modern reality of
Hong Kong.
PROSECUTORIAL INDEPENDENCE
To remain firmly within what we regard as the rule of law, the role of prosecutors is
vital, not only constitutionally and in terms of due process, but also in achieving a fair
and focussed investigation tailored to the production of admissible evidence. There may
be debate as to the desirability and, in some jurisdictions, the acceptability of
prosecutors directing case development and, in particular, investigation, but the benefits
for investigators of access to prosecutorial advice cannot be denied. Indeed, this is one
of the particular strengths of the US justice system. The civilian system provides, at
least in form and structure, greater support and focus in terms of the magisterial
involvement, but is essentially different to the common law procedure. The coming
together of both systems provides a number of advantages, but is perhaps idealistic.
The special powers accorded to prosecutors, for example, in the UK in the Serious
Fraud Office (SFO), while criticised by some as starting down the inquisitorial path, in
practice have not resulted in an appreciable improvement in the efficacy of traditional
prosecution. Of course, as we have seen, there are real dangers in prosecutors being
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placed in control of specialised enforcement agencies given their natural desire as

lawyers to achieve results before the courts and, in the main, their lack of managerial
experience. Consideration might better be given to the appointment of those with
judicial experience, such as in South Africa and even Australia, although this itself may
give rise to issues in some cases of constitutionality.
Thus, while there are real advantages in providing specialised and focussed agencies,
independent of government, to combat serious economic crime, and in particular
corruption, there are also real dangers. Indeed, even their independence might result in
their isolation from other law enforcement agencies and, in particular, damage the flow
of information and intelligence. It is in practice rare to encounter a significant case of
corruption, for example, that does not have implications for other areas of law
enforcement. We have already noted that most forms of corruption are essentially
facilitative of some other primary objective, which may well be criminal. Even in the
case of the ICAC in Hong Kong it soon became apparent that it was necessary to allow
the ICAC to pursue other criminal offences in addition to corruption. In practice this is
not unusual, so, for example, the English courts allowed the former Financial Services
Authority to bring charges of money laundering and even fraud in policing the
anti-insider dealing laws and the specific offences under its relevant statute.
Where constitutional arrangements in a jurisdiction do not permit specialised
agencies to bring prosecutions themselves but to refer matters to independent prosecu-
tors, there is perhaps less risk of special agencies becoming too focussed on their own
objectives and, potentially, self-esteem. Of course, in a number of jurisdictions which
favour prosecutorial independence, it may be practical to second prosecutors, who then
acquire specialised skills, to the relevant agency. This is what has happened, for
example, in Hong Kong, Singapore and Malaysia. The downside of this is that unless
there is proper management, individual prosecutors may become captured by the
culture of the agency within which they work. There is, of course, another factor,
namely that given the real problems in successfully prosecuting economic crime and
corruption, ambitious prosecutors are reluctant to take such cases or pursue them with
the requisite degree of commitment and diligence.
CIVIL ENFORCEMENT
Indeed, the perception, and probably the reality, that Federal prosecutors in the USA
were unenthusiastic in prosecuting securities offences led to the development within the
US Securities and Exchange Commission (SEC) of its own civil enforcement juris-
diction. Frustration with the traditional criminal process encouraged enforcement
lawyers within the SEC to develop a relatively effective process of civil enforcement
based on seeking injunctive relief in the Federal courts. The efficacy of using
essentially civil law procedures in fighting economically motivated crime, with the
attendant practical and evidential advantages, has resulted in administrative enforce-
ment assuming a very significant role in the USA in the enforcement of not just the
securities laws but increasingly those concerned with integrity, such as the Foreign
Corrupt Payments Act. As the use of civil enforcement has become more widespread in
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the courts, Congress has imposed certain constraints and to some degree regularised the
processes and sanctions in statute.
Obviously, there is not the opportunity to explore civil enforcement in more detail
here,24 although it is a very important additional weapon in the arsenal of those seeking
to fight economic crime and corruption. On the other hand, there is a need for
circumspection as the procedures that have been developed in the USA, while effective
and relatively efficient, are the product of US legal history and jurisprudence. They are
not easily transportable into other systems. For example, the attempt by statute to
emulate the SEC’s jurisdiction in regard to market abuse in the UK has not been
entirely successful. The English courts have also been unimpressed with attempts by
regulators, and in particular the SFO, to utilise civil processes when what has occurred
is clearly criminal. Judges have deplored the use of the ‘soft’ option of civil
enforcement and effectively ‘agreed’ penalties where crime is involved. Judges in other
jurisdictions, such as Hong Kong, have declined to recognise and give effect to US
court orders in regard to civil enforcement25 on the basis that what is at issue is
essentially a criminal matter dressed up as a civil one. Having said this, the
development of the US law in regard to tracing and forfeiture of criminal property
through a civil process in rem has met with a great deal more support in foreign courts.
CIVIL RESTITUTION AS A REMEDY

The United Nations Convention against Corruption places a great deal of emphasis on
alternatives to the traditional criminal law in policing corruption. In articles 1 and 51 of
the Convention it is made absolutely clear that one of the principal objectives of the
Convention is the recovery and restitution of the proceeds of corrupt practices. In
addition to significantly facilitating the effectiveness, on a trans-national basis, of
domestic anti-money laundering and criminal property provisions, the Convention
specifically recognises the importance of states being able to bring proceedings in their
own and other jurisdictions to pursue the ill-gotten gains of those who have engaged in
corruption. Of course, much depends upon the vitality and efficacy of domestic law
and, in particular, the law relating to restitution.26
We have already touched upon this in the context of the obligation of fiduciaries in
the common law tradition to eschew conflicts of interest and be accountable for the
24
See B. Rider, ‘Civilising the law – the use of civil and administrative proceedings to
enforce financial services law’ 3 Journal of Financial Crime (1995) 11 and, in particular, S.
Bazley, Market Abuse Enforcement: Practice and Procedure (2013) Bloomsbury Professional.
25
For example, Nanus Asia Co v. Standard Chartered Bank (1990) 1 HKLR 396. However,
the Hong Kong courts, as have most common law jurisdictions, have been prepared to recognise
and support in rem orders by US courts in regard to proceeds of crime.
26
See K. Stephenson et al, Barriers to Asset Recovery, Stolen Assets Recovery Initiative
(2011) World Bank and UNODC and B. Rider, ‘Pursing corruption – civil weapons: old law in
new bottles!’ in Legal Studies in the Global Era: Legal Issues beyond the Boarders (2010) Chuo
University Press.
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taking of ‘secret profits’.27 These principles have been applied not merely to those in
private relationships but also those in positions of trust in government. Examples
include ministers, senior officials and even members of the armed forces, who use their
position to exploit others. The importance of these principles is much wider than it
might at first seem. They are of practical importance not just in those jurisdictions that
embrace the pragmatism of the common law.28 For example, it is common to find in
corporation laws the statutory incorporation of the duties of loyalty upon which this
liability to account is based. A good and pertinent example of this is sections 31 to 34,
and in particular section 34, of the Corporation Code of the Philippines, or articles 21,
116, 148 and 149 of China’s Companies Statute. Furthermore, the courts in a number
of common law jurisdictions have held that the principles of fiduciary accountability,
and in particular the imposition of a constructive trust, apply where the money ends up.
Therefore, a Singapore court had no hesitation in invoking these principles in regard to
the proceeds of corruption in Indonesia held in a Japanese bank in Singapore.29
It is, however, the ability of the law to trace the proceeds of corruption and fraud into
other property and to then regard it as belonging to the person with the equitable claim
that is perhaps the most significant weapon. In a series of cases involving corruption
and breaches of fiduciary duty, invariably committed overseas, English courts, in
common with those in many other common law countries, have been prepared to trace
such property and impose on it a constructive trust.30 Anyone who comes into
possession of the property or who exercises control over it will – if they have
knowledge of the circumstances or are reckless – be held equally liable to the same
extent as the wrongdoer.31 Such third parties will only escape liability if they have
acted in good faith and given proper consideration for the property before they
appreciate the true facts or before parting with it.
Indeed, there will be similar civil liability on those who dishonestly assist in the
laundering of such property. Thus, those who provide accounting, legal and banking
services might well be exposed to liability. The state of knowledge required for this
form of liability includes wilfully turning a blind eye to facts that would have put an
27
See supra at n 11, and in particular Regal (Hastings) Ltd v. Gulliver (1967) 2 AC 134, and
generally R. Pearce, J. Stevens and W. Barr, The Law of Trusts and Equitable Obligations (2010,
5th Ed) Oxford University Press, Pt V and A. Burrows, The Law of Restitution (2011) Oxford
University Press, Ch 26.
28
See for example, B. Rider, ‘The regulation of insider trading in the Republic of the
Philippines’ 19 Malaya Law Review (1977) 355.
29
Sumitomo Bank Ltd v. Karitika Ratna Thahir (1993) 1 SLR 735. See also M. Ashe and B.
Rider, The International Tracing of Assets (2000) FT Law and Tax.
30
See FHR European Ventures LLP v. Cedar Capital Partners (2014) UKSC 45, noted B.
Rider, ‘A simple approach to justice’ 21 Journal of Financial Crime (2014) 379 and Attorney
General of Hong Kong v. Reid (1994) 1 All ER 1 contra Sinclair Investments (UK) Ltd v.
Versailles Trade and Finance Ltd (2011) 3 WLR 1153. See also B. Rider, Old Weapons for New
Battles (2009) Centre of Anti-Corruption Studies, ICAC, Hong Kong and B. Rider, ‘Corruption
– the sharp end of governance’ in S. Ali (ed), Risky Business: Perspectives on Corporate
Misconduct (2010) Caribbean Law Publishing Co. for these developments in context.
31
See Selangor United Rubber Estates Ltd v. Craddock (No 3) (1968) 1 WLR 1555,
Governor and Company of the Bank of Scotland v. A (2001) 3 All ER 58 and Armstrong DLW
Gmbh v. Winnington Networks Ltd (2012) 3 All ER 425.
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honest and reasonable person on notice that something improper was afoot. Thus, the
English courts have not hesitated to impose personal liability on an accountant in the
Isle of Man who incorporated English companies and then opened bank accounts for
these companies in London, on behalf of a crooked French lawyer and an employee of
an Italian company, without asking the questions that an honest and reasonable person
in his position should have asked.32 Indeed, in another case, the court held that even a
lawyer who had good grounds for suspecting that a client whose monies he had placed
into certain overseas trusts may be related to an investigation in the USA, if he wished
to escape personal liability was under an obligation to search out those who might have
a claim against these funds and inform them.33
COSTS AND BOUNTY HUNTING

A serious obstacle to developing countries utilising these laws to pursue those who
have raped their economies is the costs involved in conducting the investigation,
securing the evidence, freezing the suspect funds and then mobilising civil actions –
often in expensive foreign legal systems. The United Nation’s Convention provides that
countries should seek to assist each other in this, and there are potentially useful
provisions for technical assistance. Under the Convention and various other inter-
national instruments, such as those of the Organisation of Economic Co-operation and
Development (OECD) and Council of Europe, there are a number of potentially
significant initiatives. The Stolen Assets Recovery programme of the World Bank is of
particular note as is the OECD derived initiative in Basel to provide governments with
technical legal assistance. Under these programmes financial, legal and investigative
assistance is provided to countries seeking to recover the proceeds of corruption. While
very worthy and to be applauded, these initiatives are limited both in terms of their
mandates and the resources that they are able to offer. Governments wishing to pursue
wealth that has been stripped from their economies, often in difficult political
circumstances, still need to be able to do a great deal on their own. Paradoxically, it is,
as in cases of fraud, those who have been most damaged and abused that will in fact be
least able to mount a claim.
Consequently, much more thought is now being given to how the private sector may
be afforded an incentive to intervene and in effect take on these cases in collaboration
with the relevant government in the expectation of sharing in the property recovered.
Of course, lawyers in certain jurisdictions have long been able to provide professional
services on the basis of ‘no win no fee’. Indeed, even the UK, where such an approach
32
Agip (Africa) Ltd v. Jackson (1992) 2 All ER 451.
33
Finers v. Miro (1991) 1 WLR 35. Of course, this has implications for those who handle
and advise on the handling of other people’s wealth in the ordinary course of their business; see
for example, the Bank of Scotland case cited at n. 31, Shah v. HSBC (2010) All ER 477 and B.
Rider, ‘When risk becomes reality’ 13 Journal of Money Laundering Control (2010) 313, and on
the dilemmas faced by financial institutions B. Rider, ‘Compliance: an international perspective
on some of the challenges facing global compliance today’ (2014) Occasional Paper 72, Central
Bank of Sri Lanka.
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was considered improper, has in certain respects modified its views. However, in regard
to the sorts of cases that we are here discussing, the issue of attorney’s fees, while
crucial, is only one factor. There will be a need for covering considerable other costs –
primarily in regard to investigation and the freezing of suspect monies. There will also
in most cases be the need to conduct legal proceedings in a number of jurisdictions.
There are few lawyers and investigators who are able and willing to assume an almost
‘business’ interest in the matter and obtain independent funding for these additional
costs. In practice, however, few of these cases have so far resulted in significant levels
of recovery. The development of a class of international ‘bounty hunters’ is something
which may in time occur, and there are many in the development community that
would welcome it.
It is perhaps worth making the observation here that while commendable for a
number of reasons – and not least that those who abuse their positions should not be
allowed to retain the benefits and nor should their families – procedures that at best are
capable of taking back what should never have been stolen might not present a
significant disincentive to those who are contemplating the risk and rewards. Ideally,
such procedures should never trump the application of the criminal law and the
prospect of a criminal penalty. Having said this, there is room for debate as to how the
imposition of criminal penalties might be modified and mitigated by meaningful
co-operation on the part of those under investigation. In cases where corrupt individuals
have willingly made restoration, there is scope for the amelioration of the defendant’s
position. Indeed, in the USA it is not uncommon to condition civil penalties and even
fines on the basis of co-operation. It is also not uncommon in similar circumstances,
particularly in the context of taxation, to compound conduct that might otherwise result
in serious criminal sanctions.
While there is no doubt that things have improved jurisprudentially, there are still
many governments and agencies that remain cautious as to what information they share
with other governments. This is exacerbated by the approach of some countries which
allow their agencies to retain some of the property seized either as an incentive or to
facilitate further enforcement. While the US authorities have for many years been
prepared to share seizures, after deduction of their expenses, with other states, few
other governments have in practice done this – Switzerland being a notable exception.
The UN Convention specifically provides for this and hopefully this will herald a more
constructive approach.
EMPOWERING THE CITIZEN

The above discussion to some extent is based on only part of the picture and perhaps,
in the case of other than the grandest of corruption, a relatively small part at that. We
have been considering the circumstances where a state or an organisation with the
requisite capacity is able to assert a claim on the basis that its property has been
misappropriated or someone in a position of trust (responsibility recognised by law) has
taken a benefit that they should not have. The basis of the claim will therefore be
predicated on a notion of fiduciary accountability or a provision in a domestic statute.
The fact is, of course, it may well be that those with such a claim have not really
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suffered any direct harm other than the violation of the duty of loyalty owed to them. In
fiduciary law it is enough that the fiduciary has improperly benefited from his position
irrespective of whether the benefit in question could have gone to or even been taken
by the principal. It is the violation of stewardship upon which the liability is predicated.
Given this, it is not always clear that the state, or in particular a corporation, will have
a sufficient incentive to embark on possibly expensive and unpredictable litigation. It is
also the case that there may well be reservations about ‘washing their dirty linen in
public’. Indeed, with the emphasis that is increasingly being placed on ‘control’
liability – particularly in the USA and the UK – it might not be in the interests of
anyone in a corporation, for example, to draw attention to acts of corruption. Not only
might shareholders consider that directors and others were asleep on their watch, but
there might be the prospect of regulatory and legal liability for a failure in compliance
such as under section 7 of the UK Bribery Act 2010.
While the development of control liability, especially for misconduct relating to
integrity, has been regarded as a means of improving compliance and attributing
responsibility, it is a double-edged sword. Senior management may well be reluctant to
report suspected violations of provisions possibly giving rise to control liability or in
co-operating with the investigation of the predicated wrongdoing. Indeed, in some
societies the arguments are at best evenly balanced. However, there is another and
perhaps even more pertinent consideration. There is a real risk in demonising
businesses and their managements. This concern is perhaps best illustrated in regard to
the cases that have arisen in the USA and the UK in particular, in regard to economic
sanctions violations and money laundering. There have been a number of cases where
major international financial institutions, such as the Hong Kong and Shanghai Bank,
Barclays Bank and the Standard Chartered Bank, have been accused of significant
failures in compliance in regard to such issues. Very large fines and costly settlements
have resulted. There has been a very high level of criticism of the management of these
and other institutions in the media. The problem with all this is that it remains to be
convincingly seen whether the relevant underlying laws relating to the identification
and interdiction of suspect funds work and have any real value within the legal system.
If one considers the level of successful enforcement in regard to criminal and suspect
property in the vast majority of jurisdictions, then one might be excused for doubting
the efficacy of such laws and the cost that they impose both directly and indirectly, in
terms of risk, on ordinary financial institutions which provide a vital service to the
economy.
Considering all this, who else might have an incentive to complain and initiate action
in cases of corruption? Perhaps the most likely candidates will be those who have
suffered loss as a consequence of the corruption. Of course, in most cases their damage
will be a result of what the corruption has facilitated rather than the corrupt act itself –
for example, those who have lost relatives or sustained injury when, as in China, a
major road bridge collapsed as a result of the failure of inspectors to properly monitor
its construction. In many cases, perhaps the vast majority, those who have been harmed
will not under their domestic law have a particularly clear cut claim to compensation.
Here we are talking about a claim for the damage and losses that have resulted from the
corrupt action, rather than restitution of the illicit payments. The UN Convention does
place an obligation on states to facilitate such actions. Providing a new cause of action
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is one thing; actually empowering those who have been harmed to bring such is a very
different matter. Without a litigation-friendly environment with the possibility of class
actions and contingent attorney fees, it is hard to see that in many countries this would
be a meaningful and viable strategy. In the USA the False Claims Act has long enabled
citizens to bring civil claims on behalf of the state based on allegations of fraud and
misconduct against the government. Litigants and their lawyers are then, if successful,
permitted to share in the recovery.
A real problem in practice, where there are multiple causes of action and the
prospect of regulatory and disciplinary action, civil enforcement and criminal prosecu-
tion – possibly in a number of jurisdictions, more or less at the same time – is that of
managing parallel proceedings. The ‘best evidence’ rule which permeates the laws of
most jurisdictions will necessitate the deployment of the best evidence in each and
every proceeding. There is also the primacy of causes and actions. Should the criminal
case proceed first, albeit it may well take a very long while to be resolved? If not, is
there not a real issue in a subsequent criminal case of unfair prejudice? The imposition
on an individual of the need to defend multiple actions involving disproportionate
resources surely also raises issues of human rights? These and many other practical
issues have not been adequately considered domestically, let alone in the context of the
various international initiatives.
CRIMINAL CULPABILITY
There are those who argue that the gold standard in combating serious corruption must
involve the robust use of criminal law. We have already touched upon this in the
context of institutional and procedural considerations. Over the last few years many
states have revised their criminal laws to improve the drafting of the primary offences
relating to corruption and, in particular, the taking and giving of bribes. This is not the
place to attempt a discussion of the substantive law. However, while very few cases
have so far been brought under it, the author has no hesitation in commending as a
good model the UK’s Bribery Act 2010. Before its enactment, the UK’s anti-bribery
law was antiquated and inefficient. In practice, in the UK, as in a number of common
law countries, it is other provisions in the ordinary criminal law that have been utilised
with some effect. The re-shaping of the law relating to fraud in the UK, in the Fraud
Act 2006, and especially the creation of a ‘new’ offence of criminal breach of trust, is
particularly welcome in this context.34 Perhaps of most significance, however, has been
the use of anti-money laundering laws and provisions for confiscating and taxing
criminal property.
34
Another issue relevant to the discussion is the standard of culpability that is considered
acceptable for the imposition of responsibility in the criminal law. An example of this is the
discussion that has surrounded the creation of a new offence for senior managers of relevant
financial institutions in the UK whose reckless decisions result in the failure of the institution,
section 36 Financial Services (Banking Reform) Act 2013. Similar concerns have manifested
themselves in the law relating to directors duties in the civil law, see B. Rider, ‘Amiable lunatics
and the rule in Foss v. Harbottle’ 37 Cambridge Law Journal (1978) 270.
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Having said this, the efficacy of anti-money laundering laws in the context of
corruption control has yet to be proved. For such provisions to be able to bite there is
a need for the conduct that is considered corrupt to be, had it occurred within
jurisdiction, a criminal offence. In part this is why it was desirable to provide clearly in
UK law that the bribery of a foreign official anywhere in the world by an agent of a
British company or a company with a defined relationship with the UK is a specific and
serious offence. While it is the domestic law where the anti-money laundering law is
invoked that is relevant, it is the case that the approach of other jurisdictions is not
uniform, particularly in regard to such issues as facilitation payments and the conduct
of independent actors. It is also the case that the record of most countries in actually
forfeiting or confiscating the proceeds of crime is far from impressive. For example, in
the UK, the amount of criminal property that has been confiscated is a miniscule
proportion of the assumed whole. Even in the relatively clear cut case of drugs-related
crime, it is guessed that in the UK we are confiscating less than 0.001 per cent of the
suspect wealth involved.35 Indeed, there are those who consider that this ‘guestimate’ is
significantly over-estimated. In the case of fraud and corruption, the amounts that have
been confiscated are ridiculously small. Indeed, as we have seen, our record in policing
the predicate crime is also far from impressive. The fact is that even in the USA the
proportions are not vastly different. In most countries they are far worse.
As we have indicated earlier in our discussion, when one considers the considerable
cost involved in creating and maintaining compliance in this context and the impact,
particularly in terms of legal, regulatory and ‘reputational’ risk, on the banks and other
intermediaries, of in effect placing them in the front line in the ‘war’ against organised
crime, terror and now corruption, it is far from clear how proportionate our strategies
are. Of course, it is misguided to attempt to judge the efficacy of such laws on the basis
of convictions or, for that matter, the amounts of criminal property taken out of the
criminal pipeline. In the modern world the information and intelligence thrown up by,
for example, suspicion-based reporting systems is arguably of considerable significance
to other areas of law enforcement and not least those concerned with proactively
protecting our integrity and security. Sadly, it is difficult to judge how effective
disruption as a policing tool is, particularly in the context of our current discussion. It
is probable that disruption as a strategy in law enforcement is better suited to dealing
with organisations and structures that require a consistent and timely flow of funds.36
35
The UK National Audit Office estimated that the UK confiscation of criminal assets was
no more than 26 pence in every £100 of criminal property and that in only 2 per cent of cases is
the full amount of the confiscation order actually collected, NAO Confiscation Orders, 17
December 2013. See also Report of the House of Commons Committee of Public Accounts,
Confiscation Orders, 21 March 2014, SO. See also B. Rider, ‘Taking the profit out of crime’ in
B. Rider and M. Ashe (eds), Money Laundering Control (1996) Sweet & Maxwell and B. Rider,
‘Recovering the proceeds of corruption’ 10 Journal of Money Laundering Control (2007) 5,
particularly p 26 et seq, and A. Kennedy, ‘An evaluation of the recovery of criminal proceeds in
the UK’ 10 Journal of Money Laundering Control (2007) 33.
36
See A. Leong, The Disruption of International Organised Crime (2007) Ashgate and supra
at n 18. See also B. Rider, ‘The enterprise of crime’ in B. Rider and M. Ashe (eds), Money
Laundering Control (1996) Sweet & Maxwell.
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INTELLIGENCE – DOUBLE-EDGED SWORD

The role of intelligence in discouraging corruption and assisting in its control is a dark
area. Indeed, it is often said that intelligence agencies themselves are privy to and
perhaps occasionally involved directly in corruption. The UK Bribery Act 2010
specifically exempts the intelligence agencies in the UK, in certain and limited
circumstances, from its provisions.37 Indeed, it was not that long ago that agencies and
even government departments in Europe offered advice to businessmen on who to bribe
and what the going rates were – and boasted that their information gathering facilities
would be used to advance the business and commercial activities of their nationals.
Indeed, it was only relatively recently in the UK that the payment of overseas bribes
ceased to be a tax deductible item for UK taxation. Ignoring this somewhat unpalatable
albeit probably necessary activity, there is clear evidence that intelligence agencies
have, when it was thought appropriate, assisted in the exposure of corrupt officials,
albeit mostly overseas! More recently, some have played a very significant and positive
role in assisting in the tracing of missing and stolen assets, particularly from North
Africa.
On the other hand, anti-corruption agencies have been wary about having a too close
connection with the intelligence community. They have, in particular, feared being used
or rather misused, as against the benefits that might arise as a result of information
passed to them. This attitude is changing, in particular as a result of the value of the
information being provided from financial intelligence units (FIUs). The extent to
which profiling of potential targets and highly vulnerable persons actually takes place
in the context of anti-corruption policing varies enormously from country to country.
The inclusion of politically exposed persons, particularly pursuant to the UN Conven-
tion, within the mechanisms and procedures for financial monitoring, has vastly
increased the potential for agencies to, on an almost real time basis, obtain valuable
intelligence. The political advantages of this – especially in the context of international
relations – have not been missed by the traditional intelligence agencies and their
governments. However, few if any purely anti-corruption agencies have the capacity or,
at present, the mandate – let alone the inclination – to do this. Sadly, however, this
might serve to further differentiate the capacity and relevance of agencies in the
developed and developing world. This is an area where there has been relatively little
discussion or perhaps realisation as to the quite profound implications.
37
Bribery Act 2010 section 13. See also on this R (on the application of Corner House
Research) v. Director of the Serious Fraud Office (BAE Systems plc, interested party) (2008)
EWHC 714 and (2008) UKHL 60 in regard to the legality of halting corruption-related
investigations and proceedings on the basis of national security, and see R. Norton-Taylor and R.
Evans, ‘No national security issue says agency’, The Guardian 16 January 2007 and M. Evans et
al in The Times 17 January 2007.
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CONTROL AND FACILITATOR LIABILITY

Mention has been made of the strategy of throwing the legal or at least regulatory net
over persons who are in a position to control or at least influence the conduct of others
and, in particular, those who are more likely to engage in corruption or facilitate it. We
have long realised that in the case of serious economic crime, and particularly
organised economic crime, it is rare that the primary perpetrators can effectively be
brought to justice in conventional terms. They will often be in a position, as we have
seen, to protect themselves because of their power and/or ability to corrupt others.
While not always untouchable, few can be effectively pursued during the currency of
their power. Hence, the argument goes that it makes sense to focus enforcement on
those who are needed to perfect the criminal and anti-social objectives of these elite
and powerful individuals. This is not simply going after the little guys because the
bosses are too smart, but rather a strategy designed to increase the costs and risks of
engaging in corruption and abuse. There will become a point at which the costs are just
too great and are disproportionate to any assumed rewards. In the context of the
financial services industry, we can achieve this in part through policies of ring-fencing
access to the industry and markets and then imposing compliance, recording and
reporting obligations on those concerned. In effect we create new types of responsibil-
ity on the facilitators to vouch for the integrity of their clients and their transactions.
This is one of the cardinal strategies within anti-money laundering systems whereby
compliance risk and costs are placed firmly on those who, in the ordinary course of
their business, mind other people’s money. We have already touched on a possible
down side to all this.
Quite early in the development of probity-related legislation in the USA, attempts
were made to impose liability on those, for example, in the financial services industry
who could not show that they had taken reasonable steps in the supervision and
management of those under them to prevent such persons engaging in fraud and other
abusive conduct, including corruption. These provisions have been refined and devel-
oped into a comprehensive strategy imposing the threat of legal responsibility on those
in control positions. Obviously, there are issues of proportionality and, indeed, fairness
in terms of allocating risk and responsibility for culpable acts.38 In the UK there has
been some hesitation in proceeding down this path. There are decisions of the House of
Lords and the Privy Council which allow the actions of an employee acting within the
scope of his employment – notwithstanding those actions being outside the authority
he has and the fact that his employer has done everything reasonable to prevent the
conduct in question – being attributed to the corporate employer as its acts for the
purposes of criminal liability.39 However, in practice there has been reluctance among
prosecutors to use these cases to develop a form of control liability, outside the areas of
consumer and, to a lesser degree, investor protection. On the other hand, a recent
38
See n 34 supra.
39
Re Supply of Ready Mixed Concrete (No 2) (1995) 1AC 456 and Meridian Global Funds
Management Asia Ltd v. Securities Commission (1995) 2 AC 500.
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proposal for improving our approach in prosecuting fraud and corruption in the UK by
the shadow Attorney General has advocated a far more robust use of such principles.40
Section 7 of the UK’s new Bribery Act 2010 in this sense is somewhat revolutionary,
albeit not quite as draconian as some would have liked. This provision accords criminal
responsibility to a company for the acts of an agent who, notwithstanding having no
authority, has committed the offence in section 6 of bribing an official of an overseas
government. The company is entitled to a defence if it can show that it put in place
‘adequate arrangements’ to prevent such misconduct. In certain cases directors and
others of a company that is so convicted can be held personally liable, provided they
had knowledge of what was going on. Given the very wide and all-encompassing
definition in the statute of what amounts to bribery, there has been widespread concern
in the commercial and business sectors as to what is said to be an unfair and
unreasonable exposure to criminal liability. However, it is clear that the enactment of
this offence has greatly increased the concern of managements to ensure that they have
in place adequate compliance and training programmes. Thus, this provision has
already had significant beneficial results.
It is also not without interest that the UK Financial Conduct Authority (which has
taken over from the defunct Financial Services Authority) considers that it would be a
breach of General Principle 3 of their rules and regulations for a financial institution in
the UK not to have tailor made compliance procedures aimed at the giving of bribes, or
facilitating of bribery and other forms of financial misconduct. In such circumstances
the FCA is empowered to impose unlimited fines and take other action, including
against persons in control and those responsible for compliance. There is a palpable
change of attitude in the management of British businesses, in the financial sector and
generally, in regard to the risks thrown up by these laws and regulations.
BLOWING THE WHISTLE

This also comes at a time when rather more attention is being given to the significance
of whistle blowers in promoting integrity and due compliance. Indeed, the UK Home
Office has recently established a working party to inquire into whether the UK’s laws
protecting whistle blowers need to be further strengthened. In particular, there is
interest in the extent to which whistle blowers feature in US strategies for exposing
financial misconduct and in facilitating investigation and enforcement action. The most
recent legislation in the USA relating to the financial industry, in addition to increasing
the legal protection for whistle blowers, provides that they may be awarded bounties of
up to 30 per cent of the fine eventually imposed by regulators for violation of the law.
Given the size of some of the fines imposed by US financial regulators, the rewards for
informing might be very significant indeed.
Of course, those complicit in wrongdoing themselves are not generally entitled to
whistle blower status. Given that many acts of corruption are consensual and are in
secret, anything that can be done to persuade one of the parties to the corrupt act to
co-operate with the authorities is desirable. The prosecutorial policy within countries
40
Labour’s Policy Review: Tackling Serious Fraud and White Collar Crime (2013) Labour.
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varies greatly on this. Some are prepared to waive prosecution and on the basis of full
co-operation regard the repentant party as an informer and even a competent witness.
Indeed, in such circumstances they might even be brought into a witness protection
programme – something that is often needed in serious cases of corruption, particularly
involving allegations against those still in office and especially those in law enforce-
ment. The position in England is usually that the prosecution will not agree to barter
away the possibility of a conviction, but will attempt to assist in mitigation of sentence.
The area of plea bargaining is one that is equally controversial. Again, in the USA
plea bargaining plays a major role in securing convictions for economic crime cases
and, in particular, those involving continuing enterprises. In Britain there has been
reluctance to adopt this approach, and recent attempts by the SFO to do so, without the
involvement of the court, and ‘agree’ levels of financial penalty (in collaboration with
the US authorities) have been declared unlawful and wholly unacceptable.41 On the
other hand, it has been accepted that encouraging in particular corporations that
discover misconduct has occurred to ‘self-accuse’ themselves to the authorities is
desirable and to be encouraged. The SFO in such cases is able, with the agreement of
the court, to enter into a deferred prosecution agreement with the ‘defendant’ under the
terms of which no prosecution will be initiated within a period provided agreed steps
are taken to remedy what has occurred and make restoration. If these conditions are
properly observed, under monitoring, then the case will be dropped.42 In the USA
considerable reliance is now being placed on similar procedures.
41
In R. v. Innospec Ltd (26 March 2010, Southwark Crown Court) Lord Justice Thomas
censured the SFO for failing to adhere to the rule of law. In his remarks on sentencing the
learned judge stated, ‘it is clear that the SFO cannot enter into an agreement under the laws of
England with an offender as to the penalty in respect of the offence charged’. He emphasised
that such deals had no effect and, indeed, in a subsequent case Bean J specifically rejected the
recommendation of the SFO for a suspended sentence on the basis that the accused had
co-operated fully and had done a ‘deal’ with the UK and US authorities. Thomas LJ considered
that a traditional fine was the appropriate financial penalty and emphasised that there should be
no difference, given the seriousness of the offence of corruption, between the UK and USA. In
previous cases the SFO had settled a much smaller financial penalty than the millions imposed,
albeit also by settlement, in the USA. Thomas LJ thought that ‘if the penalties in one state are
lower than in another, businesses in the state with lower penalties will not be deterred so
effectively from engaging in corruption in foreign states whilst businesses in states where the
penalties are higher may complain that they are disadvantaged in foreign states’. He also noted
the very considerable fines that were imposed in cases involving allegations of wrongdoing
under competition law and made the point that corruption could have an even more serious
impact on trade and business. He was not impressed by the argument that the SFO and the USA
had brokered their deal because they did not want to put the business out of business. In his
opinion, if the business was corrupt it should be sanctioned. Indeed, Thomas LJ stated that it was
improper for the SFO to try and do deals with the American authorities. See C. Nakajima,
‘Mabey may be the bridge we need’ 19 Journal of Financial Crime (2012) 124.
42
Deferred prosecution agreements are now authorised pursuant to Schedule 17, Crime and
Courts Act 2013. See Deferred Prosecution Agreements Code of Practice, 2013, Serious Fraud
Office and Crown Prosecution Service.
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UNEXPLAINED WEALTH
Perhaps a rather more controversial suggestion for strengthening the hands of those
who are concerned with discouraging and pursuing corruption is the development of
procedures that identify unexplained wealth. Again, the UN Convention contains a
provision basically commending such an approach without actually obliging countries
to enact such laws.43 The British colonial governments, in imposing criminal codes on
many parts of the Empire, were concerned about misconduct in public office, albeit the
same degree of concern appears not to have been felt at home! The Bribery Ordinance
in Hong Kong is of particular interest in this respect. Section 10 in effect creates a
statutory presumption that any wealth over and above the lawful remuneration of a
public official is the proceeds of corruption. In addition to the offence of having
excessive unexplained wealth, there are provisions for its recovery and also for the net
to be thrown over close relatives and associates. Similar provisions were enacted in
other parts of the Commonwealth. Today in many countries, and even in Hong Kong,
there has been concern as to whether such laws comport with human rights.
It is also the case that in not a few developing countries there is an express or
implicit desire to see some degree of reallocation of wealth. South Africa is a good
example of this. Consequently, the strict operation of such a provision is unlikely to
find political favour. None the less, it is probable that the identification of unexplained
wealth will play an increasingly important role in the identification of those suspected
of tax fraud and evasion and possibly other acquisitive crimes. At the intelligence level,
net worth analysis has always been an important and useful tool. Now that there is so
much more information available it is certain to become even more effective. It is also
the case that under the laws relating to identification and interdiction of criminal
property, we are increasingly adopting procedures which focus on unexplained wealth.
For example, in the UK two convictions within a period will enable the court to
presume that wealth in the hands of the defendant is the proceeds of a lifestyle of crime
and to avoid confiscation the defendant will be required to explain the source of this
wealth. Indeed, in civil proceedings against assumed criminal property it is possible to
allege that unexplained wealth is likely to be the proceeds of crime on a civil burden of
proof. Indeed, given the practical problems in establishing the nexus to a specific crime
it makes a lot of common sense to focus simply on unaccounted for wealth.
Even if there is reluctance to bring into law specific consequences, as a result of
holding unexplained wealth it may well be possible to achieve at least some of the
practical advantages of such a strategy through contract law and, in particular,
employment law. The incorporation of obligations to declare wealth and explain
unearned income and to provide for monitoring within compliance systems has much to
commend it if the relevant activity is such as to carry high risks of temptation.
Similarly, appropriate provisions can be included in transactional contracts – although
43
Article 20 provides that ‘subject to its constitution … each state party shall consider
adopting such legislation and other measures as may be necessary to establish as a criminal
offence, when committed intentionally, illicit enrichment, that is a significant increase in the
assets of a public official that he or she cannot reasonably explain in relation to his or her lawful
income.’
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this may in practice be rather more difficult to negotiate. Of course, control and
compliance provisions have long been used in procurement contracts.
INVESTIGATIONS AND SECRECY

Finally, we come to the efficacy of investigation, something that is often held out as the
reason why cases have not been pursued. At the end of the day, to bring any case before
a court there must be admissible evidence. Intelligence, let alone mere information, is
not evidence. Intelligence might assist in locating evidence and deciding how to
manage it, but for a legal result the court will need to be presented with convincing and
admissible evidence.
Given that so many cases of abuse and corruption are perpetrated in secrecy, often
between conniving parties, and, in a good many, those involved are able to control and
manipulate the records, it is perhaps not surprising that investigators, often coming to
the matter years afterwards, experience so much difficulty in identifying, securing and
then protecting evidence of sufficient weight and credibility. During the commission of
the crime and its aftermath, including the hiding of the proceeds, the culprits are in
control and may well also be able to effectively frustrate any form of external
interference, let alone criticism. In practice, it is often only where there is an
unexpected and significant event, or a change of government in the case of a state or
change of management in the case of a company, that there is any chance of an
investigation being initiated. The very facts resulting in the initiation of this opportunity
for action may well themselves obviate the need or the justification. There are, as we
have seen, many reasons, some more justified than others, dissuading those now in a
position to question what has occurred from doing so with any real commitment. In a
good many cases where there is a change in government, there are likely to be other
urgent and compelling priorities. Furthermore, it is assumed in this analysis that there
are in fact competent and honest investigators with the requisite authority and resources
to undertake the required investigation.
There will always be in the case of serious corruption an international aspect, even if
it is simply that the relevant ill-gotten wealth is salted away overseas. Even though
there have been, as we have noted, fundamental improvements in mutual legal
assistance between states, the fact is that most law enforcement agencies are parochial
in terms of their mandate, resources and priorities. The ability for investigators, let
alone prosecutors, to reach out and conduct inquiries on a timely and efficient basis in
different and perhaps uncooperative jurisdictions is exceptionally limited.44
Those who have acted corruptly will not give up easily. They will have structured
their actions to make it difficult to detect, let alone investigate, and they will have used
experts to hide their wealth and discourage inquiries. Of course, this is nothing new:
the same techniques are used by those who wish to hide the proceeds of serious crime
and terrorist-related finance. Today, the number of countries willing to prostitute their
sovereignty by deliberately facilitating money launderers and the like are much fewer.
44
See B. Rider, ‘The war on terror and crime and the offshore centres: the new perspective’
in D. Masciandaro (ed), Global Financial Crime (2004) Ashgate.
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However, they do still exist and there are jurisdictions, such as Taiwan, that have very
few procedures for co-operation with other states. Furthermore, it cannot always be
assumed that the government and its agencies are willing to co-operate with those of
other states. They may have some sympathy, where there has been a change in
government, with the former leadership. Or they may have been corrupted. This is not
fanciful. There are examples of governments and their central banks that have been
willing, for a price, to become essentially money launderers for organised crime and
other criminals. In one case involving a Commonwealth country in the Caribbean, the
corruption encompassed the then Prime Minister and Attorney General, and investiga-
tors from the USA were simply murdered. In such cases there is no justice or realistic
prospect of justice.
While governments were apparently reluctant to give up the benefits of providing
bank secrecy and other offshore-related services to suspected criminals simply on the
basis that they might be assisting them in laundering their wealth and allowing them to
re-invest it in further criminal activity, there was a sea change after 9/11. The concern
of President Bush, albeit perhaps in retrospect misguided, to turn the financial weapons
that had been developed to deal with drug dealers on terrorists, meant that countries
were in reality either part of the solution or part of the problem! While even the
Republican Party had been loath to expose itself to the glare of the US Internal
Revenue Service the financial arrangements that numerous leading US corporations had
developed with certain Caribbean jurisdictions and Bermuda, the fear – that turned out
to be more or less groundless – that these jurisdictions were being used to launder
terrorist funds resulted in the near death of financial privacy. As a subsequent
Congressional Committee reported, attempting to identify terrorist funds in the same
way as drugs money was a nonsense and the mechanisms that were adopted were like
trying to ‘drain the ocean to find one kind of fish’. The more so because in practice the
unofficial underground banking systems such as the hawala systems were far more
significant for the terrorists, and in any case, where they did use banks, they were
invariably based in the Pacific or the USA itself!
Now that the ‘crusade’ has moved on from drug lords and terrorists to corruption we
see the same arguments being employed to expose the financial arrangements and
wealth of those who are suspected of corrupt practices or, perhaps rather more
worrying, those who are or who have been politically exposed, their families and their
business associates. A cynic might think that all this has perhaps more to do with
exposing financial records to the tax authorities than actually promoting integrity
worldwide! The financial crisis and the near collapse of western banking have focussed
governments’ attention rather more openly on tax evasion and revenue enhancement.
The recent meetings of the OECD have been concerned with tax havens and the like,
and have increasingly focussed on the facility that many jurisdictions offer for easy
corporate registrations. In almost any conceivable fraud or money laundering operation
there is a need for corporate and trust vehicles. The use of such companies and trusts
enables beneficial ownership to be hidden or at least obscured. Of course, perhaps the
prime offenders in terms of easy incorporation and the ability to hide beneficial
ownership are not in the main small island jurisdictions in the Caribbean and Pacific,
but the UK and USA. The OECD, G8 and G20 have agreed to severely limit the
opportunity that the corporate form affords those who wish to hide or complicate their
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financial transactions, and Mr David Cameron, the British Prime Minister, has gone as
far as to announce that legislation will soon be introduced to expose the beneficial
ownership of UK companies.45
While all this is obviously to be welcomed, it remains to be seen whether in practice
it will make much difference for those who are charged with the investigation of
corruption. In the end the transparency of the international financial system is only as
good as its weakest link. Finally in this regard, in the wholesale abandonment of the
virtues of privacy in financial matters, we should perhaps not forget why privacy was
invented, or at least called into aid, by the lawyers and bankers – namely to protect the
weak and legally vulnerable from the unjustified deprivations of governments and
tyrants. In all our deliberations about corruption and its malevolent cousins, it is
necessary to retain a sense of proportion and especially to be aware of unintended
consequences both in the conception of law and in particular in its application.
45
See G20 High Principles on Beneficial Ownership (16 November 2014), but see B. Rider,
‘The end of havens?’ 12 Journal of Money Laundering Control (2009) 213. English judges have
also done their bit – see B. Rider, ‘Exposing the modesty of companies’ 34 Company Lawyer
(2013) 263.
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Name index
Aaronberg, D. 382 Bardhan, P. 397

Abramova, I. 51–62 Barnard, J. 715
Aghnides, N. 364 Barrett, M. 246
Aguilera, R. 164 Bazley, S. 288–99, 730, 740
Ahmad, M. 365 Beale, K. 381
Ahmad, Z. 365 Beare, M. 47
Ailofi, G. 543 Beaton-Wells, C. 127, 129, 131, 141, 142
Al-Ali, Z. 440 Beaulieu, P. 622
Al-Kashif, A. 19, 20 Beck, J. 605, 611
Al-Qaradhawi, Y. 356, 357, 359, 360, 363 Becker, G. 527
Al-Rimawi, L. 19, 361 Beckstrom, R. 76
Alexander, R. 447–61 Benstead, J. 382
Ali, A. 613 Bergman, L. 48
Ali, S. 86–99 Bergsmo, M. 674
Alleyne, P. 613 Bergström, M. 603
Ambasta, K. 384 Berman, M. 17
Anderlini, J. 428, 432 Bernard, J. 622
Anderson, D. 193 Bernardi, R. 621, 622
Anderson, H. 202 Bester, H. 530
Anderson, M. 156, 672, 676 Bhargava, V. 397
Anderson, R. xxxiv Bianchi, A. 539
Andreas, P. 77 Bickel, B. 18, 19, 31
Andrews, M. 403, 605 Bierstaker, J. 618–19
Angell, I. 526 Billingslea, W. 82
Antonova, M. 57 Bishara, N. 157
Aono, J. 620 Blair, M. 112, 156, 191
Appleman, L. 604 Blanchard, B. 423
Areeda, P. 140 Blazejewski, K. 522
Arief, B. 174 Blount, J. 607
Arlidge, A. 15, 27 Blowfield, M. 158, 161
Armour, J. 107 Boister, N. 670, 671
Armstrong, A. 583–601 Bolton, N. 493
Arnold, M. 519 Bond-Graham, D. 33
Arvedlund, E. 285–6 Bondi, B. 604
Ashe, M. 727, 728, 730, 741 Bonvin, J. 222
Ashworth, A. 27, 29 Booth, R. 486, 492, 494–5, 534
Atherton, L. 206–16 Bosworth-Davies, R. 14, 20, 222, 228
Attaran, A. 79 Botha, M. 194–5, 196, 198, 202
Aubert, V. xxxiv Bowden, P. 599
Austin, R. 108 Bowman, F. 253
Boynton, W. 615
Baber, G. 239–49 Bradley, C. 602–11
Bacarese, A. 507–19 Brafman, O. 76
Baldwin, F. 221, 222–3, 225, 542–50 Braithwaite, J. 15
Balotti, F. 187, 188 Brantingham, P. and P. 639, 641
Barboza, D. 434 Bratton, W. 108
755
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Columns Design XML Ltd / Job: Rider-Research_Handbook_International_Financial_Crime / Division: NameIndex /Pg. Position: 1 / Date: 9/10
Brazel, J. 620 Conforti, B. 83

Breslin, B. 382 Cornish, D. 639, 641
Brewer, E. 137 Coulson, N. 360
Brickey, K. 193 Craswell, A. 623
Brooks, G. 174 Crawford, J. 670–71
Brown, A. 591, 592, 600, 604 Crentsil, G. 15–31
Brown, G. 280 Crew, M. 222
Brown, R. 612 Croall, H. 4–5, 10, 34
Brunelle-Quraishi, O. 672, 673 Cropp, N. 382
Bryant, J. 473–84 Cross, F. 157, 158, 163
Buchanan, J. 396 Cuellar, M. 527
Buckland, W. 24, 27 Cui, Q. 276
Buhmann, K. 163
Bukovansky, M. 405 Davids, L. 192
Burrell, P. 87 Davies, T. 400
Burrows, A. 22, 741 Davis-White, M. 714, 715, 718, 721, 723
Button, M. 367 de Koker, L. 520–31
Dean, G. 176
Cadwallader, F. 28 DeAngelo, L. 623
Caldwell, R. 17 Dehne, G. 596
Camp, P. 486, 488 Dejnozka, J. 191, 194
Campbell, A. 485–95 Delebecque, P. 344
Campbell, E. 485–95 Delston, R. 525
Campos, J. 397, 406 Dembinski, P. 222
Carey, A. 371 Demetis, D. 526
Carsten, P. 430 Denning, A. 381
Cartwright, P. 30 Dien, M. 358
Cassella, S. 458, 496–506, 658 DiPerna, T. 543
Castilla, S. 672 Doi, A. 356, 358, 362, 363
Cave, M. 221, 222–3, 225 Doig, A. xxxi
Chaikin, D. 727 Donohue, L. 539
Chang, H. 401 Dorling, P. 585
Chattin, D. 254 Dourmaux, F. 340
Chau, G. 618 Doward, J. 82
Chene, M. 19 Doyle, C. 536
Cheng, T. 420 Drummond, K. 573–82
Cheung, R. 250–61 Du, Q. 275
Chia, D. 283 Durtschi, C. 621
Chon, G. 507 Duthie, T. 387
Chong, G. 617 Dworkin, T. 604
Choo, K. 372 Dye, R. 623
Chow, C. 621 Dyllick, T. 163
Clarke, M. 20, 176
Clarke, R. 375, 639, 641 Eckles, C. 538
Clarke, T. 155, 162 Edelman, J. 28
Clarkson, C. 384 Edwards, C. 71
Clough, J. 366–77 Eggers, P. 15, 16
Cockburn, P. 437, 441 Elkington, J. 163
Cohen, S. 81 Engstrom, D. 605
Collison, D. 156, 159 Enonchong, N. 23
Comair-Obeid, N. 361 Enrique, L. 187
Combs, P. 223–4 Ensign, R. 636
Comstock, M. 88 Epstein, M. 618
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Name index 757
Esposito, P. 381 Glover, H. 620

Evans, J. 49 Gong, T. 419, 420
Evans, R. 747 Goodwin, J. 622
Goubeaux, G. 339, 340, 350, 353
Fama, E. 164 Grabel, I. 407
Farrell, S. 27 Graff, J. 675, 676
Favarel-Garrigues, G. xxix Grantham, R. 106
Fentem, R. 338 Gray, A. 536
Ferguson, G. 198 Gray, L. 416
Fergusson, J. 437, 439 Gray, P. 703–13
Fern, L. 103 Green, S. 17
Ferraz, C. 402 Greenwald, D. 533
Ffrench, L. 726, 733 Gridel, J. 340
Filatotchev, I. 156, 164, 165 Gros, J. 666
Finan, F. 402 Guillaume, G. 539
Finkelstein, J. 187, 188 Gul, F. 612
Finklea, K. 367 Guo, A. 426
Firestone, T. 62 Guo, F. 277
Fischel, D. 533 Gupta, A. 406
Fisher, J. 315–27
Fisse, B. 127, 129, 131 Haas, B. 426
Fituni, L. 51–62 Haines, J. 220, 227
Fitzpatrick, D. 553–62 Halim, A. 356–65
Fitzpatrick, L. 612 Hall, P. 401
Fortson, R. 465 Halliday, T. xxx
Francis, R. 583–601 Handy, C. 159, 160, 162
Francois, J. 342, 343, 344 Hanna, R. 400
Frankel, A. 608 Hannigan, B. 273
Fraser, I. 622, 623 Hansmann, H. 103, 104, 156, 158
Freeland, C. 530 Harrell, E. 368
Fridman, S. 106 Harris, G. 533
Friedrichs, D. 174 Harrison, K. 387
Frommel, S. 726 Harry, W. 158, 160, 165
Fuller, R. 17–18 Harvey, J. 219–28
Fullerton, R. 621 Hauman, M. 191–205
Fumega, S. 400 Hayes, S. 358
Hayton, D. 328–37
Gale, M. 15, 16 Hecketsweiler, C. 84, 85
Gallagher, D. 281 Henning, J. 191–205
Gallant, M. 67, 532–41 Higgins, N. 382
Gallmetzer, R. 675, 678 Hill, D. 410, 411
Gannon, R. xxxi Hinterseer, K. 737
Gardner, J. 17 Hockerts, K. 163
Geiger, H. 529 Hoffman, W. 193
Geiger, M. 618 Holder, W. 522
Geis, G. 16, 20, 25 Holdsworth, W. 18, 20, 22, 24, 26, 31, 180
Gelemerova, L. 540 Holm, C. 615, 617
Genschel, P. 226 Horan, S. 558
German, P. 42–50 Hostettler, J. 25
Ghestin, J. 339, 340, 350, 353 Hovenkamp, H. 140
Gilligan, G. 32–41 Howard, M. 613
Gilmore, W. xxix, xxx 520, 521 Htay, S. 220
Glanville, M. 435–43 Huang, H. 278
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Hudson, A. 233, 235 Kerusauskaite, I. 405–18, 435

Hulbert, M. 147 Khan, J. 406
Humphrey, C. 618 Khan, M. 401, 408, 623
Hunton, P. 68 Kidwell, D. 174
Hurst, T. 144–54 Killough, L. 621–2
Hutchings, A. 367, 368, 369 King, K. 164
Kingah, S. 672
Ibrahim, S. 363 Kirk, D. 563–72
Ineichen, A. 146 Kirschner, S. 145
Ingle, J. 668–78 Kleindorfer, P. 222
Ismail, A. 359 Klitgaard, R. 395, 398, 409
Itani, D. 340 Kochan, N. 147
Iwai, K. 192, 193 Kokkinis, A. 387
Kraakman, R. 103, 110, 156, 158
Jabbar, S. 356–65, 733 Krambia-Kapardis, M. 612–24
Jackall, R. 16 Krehmeyer, D. 157
Jaffe, C. 147 Krueger, A. 397
Jamison, S. 669 Kumar, B. 42, 48
Jayasuriya, D. 279–87 Kwon, M. 606
Jefferson, M. 384
Jensen, E. 605 Laldin, M. 357, 358
Jensen, M. 110, 164 Lambert R. 296
Jeremie, J. 229–38 Lambsdorff, J. 399
Jesperson, S. 71 Lang, L. 428
Jestaz, P. 344 Langton, L. 368
Jewkes, Y. 223 Larenz, A. 339
Jiang, N. 275 Lastra, R. 240
Joga Rao, S. 549 Lawler, D. 387
Johnsøn, J. 394–404 Lederman, E. 191, 192, 193, 194, 195
Johnson, R. 615 Lee, J. 108, 612
Johnson, S. 222 Lee, T. 613
Johnston, D. 179, 638–46 Leeson, N. 282
Johnstone, P. 20, 22, 26 Leigh, A. 638
Jomo, K. 406 Lemos, M. 605
Jones, K. 52 Lenaerts, A. 353
Jones, M. 87 Leong, A. 746
Jones, S. 154 Lessambo, F. 176
Jorna, P. 368, 369 Lessmann, C. 400
Joubert, W. 191, 193, 194, 195, 196, 198 Leung, P. 618
Joyner, C. 236 Levi, M. xxviii-xxxvi, 521, 522, 533
Levitt, M. 437
Kaal, W. 152 Levy, K. 507–19
Kaiser, T. 726 Lewis, A. 391
Kang, D. 407, 408 Lewis, C. 550
Karstedt, S. xxxii Lewis, M. 31
Keay, A. 109, 156, 158 Li, X. 419–34
Keene, S. 65–74, 737 Lin, F. 428
Kelly, C. 621 Lindblom, C. 403
Kennedy, A. 457, 746 Ling, M. 106
Kenny, K. 603, 604, 608 Liu, E. 419–34
Kerler, W. 621–2 Liu, Y. 273
Kerr, J. 368, 369 Lo, T. 421
Kersanti, R. 284 Lobban, M. 23, 24, 28
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Name index 759
Lok, J. 155 Merl, P. 726

Lopes, C. 29 Meron, T. 668
Loss, L. 36, 627 Messier, S. 621, 622
Loungani, P. 88 Miceli, M. 589, 591, 592
Lu, B. 420 Micheler, E. 107
Lukito, A. 166–77 Middlemiss, A. 691–702
Luneev, V. 56 Millard, D. 194–5, 196, 198, 202
Millett, P. 332
Macaulay, M. 389 Mills, H. 66
McConville, M. 672 Minsky, H. 226
McCormick, R. 627, 634 Minzner, M. 605
McCrary, S. 145 Mitchell, C. 331, 332, 335
McGrath, P. 15, 23, 25, 28, 29 Moberly, R. 605
Machen, A. 191, 194 Moliterno, J. 533
McKeever, G. 29 Monaghan, A. 61
McKenna, F. 612, 620–21 Monroe, G. 618
McMahon, K. 140 Monteith, C. 387
McMillan, J. 402 Montgomery, R. 613
McSkimming, S. 525 Moola, N. 703–13
Madinger, J. 543 Moore, T. 68
Madsen, F. 75–85 Moreno-Ocampo, L. 674, 678
Maguire, L. 440 Morris, S. 368
Maingot, A. 86 Morvillo, R. 543
Makkawi, B. 618, 619 Moshella, M. 225
Malaurie, P. 339 Mueller, F. 220
Mannan, M. 365 Mueller, S. 665
Manne, H. 250 Mulukutla, H. 507–19
Mansoury, A. 617, 623, 624 Mungiu-Pippidi, A. 400
Mansuri, M. 360, 362, 363 Munro, P. 600
March, J. 403 Murray, A. 158, 161
Markel, S. 607 Murray, I. 530
Markwardt, G. 400 Murray, K. 462–72
Marquette, H. 415 Myers, S. 110
Marsden, P. 437
Marshall, E. 222 Nadelmann, E. 527
Martin, D. 415 Nader, R. 583, 599
Martínez, M. 677 Nakajima, C. 4, 155–65, 731, 750
Marty, G. 344 Nathan, K. 19
Masciandaro, D. 527, 530–31 Naude, S. 193, 194, 195, 196, 198, 202
Mascini, P. 222 Nayar, G. 83
MasFerrer, A. 538 Near, J. 589, 591, 592
Mason, I. 390 Nelkin, D. 4
Mason, P. 416 Népote, J. 75
Massey, E. 627 Newman, C. 389
Massola, J. 585 Nicolaescu, E. 624
Masters, J. 679–90 Nolan, R. 106
Matinuddin, K. 437 Nordberg, D. 168, 174
Maurer, V. 382 Norington, B. 584
Mauro, P. 88, 406 Norton-Taylor, R. 747
Mayer, C. 220 Nyazee, I. 359
Meckling, W. 110, 164 Nye, J. 405
Meijer, A. 602
Menirav, J. 18, 19, 21 Obermaier, O. 543
Barry Rider - 9781783475780

O’Brien, J. 227 Rider, B. xxxvii-xl, 3, 14, 15, 16, 19, 20, 27,
Orcharton, E. 467 31, 42, 47, 92, 230, 281, 406, 419,
O’Sullivan, D. 330 726–54
Ottolenghi, S. 104 Roach, K. 539
Overhuls, C. 606 Robb, G. 38
Oyinlola, A. 613 Roberts, J. 251
Roberts, P. 592
Page, F. 22, 25, 26 Robinson, C. 222
Pai, H. 450 Robinson, J. 48
Pallissery, F. 177 Robinson, M. 399
Parker, C. 141, 163 Robinson, P. 668, 669, 670
Parlour, R. 300–312 Rose, F. 104, 105
Partnoy, F. 40 Rose-Ackerman, S. 398, 406
Pearce, F. 51 Rosenberg, H. 691–702
Pearce, R. 741 Rosenfield, B. 18, 19, 21
Peat, R. 390 Ross, D. 437
Pédamon, C. 338–55 Ross, S. 369
Penn, G. 232, 234 Rossbacher, H. 382
Peretti, K. 371 Rothe, D. 174
Persson, A. 400 Rothschild, D. 29
Peterson, R. 174 Roubaud, F. 406
Pettit, P. 222 Russenberger, M. 533
Philp, M. 7, 394 Ryder, N. 223, 381–93, 731
Picciotto, S. 220, 227
Pieth, M. 543 Sacerdoti, G. 386
Piety, T. 536 Saleh, N. 206–16
Platten, K. 180 Salehi, M. 617, 623, 624
Plumper, T. 226 Saleuddin, R. 726
Pogue, C. 543 Samantha, S. 381, 382
Ponemon, L. 622 Sanyal, R. 381, 382
Pong, C. 622, 623 Sathye, M. 529
Pope, T. 382, 387 Saunders, B. 111
Porter, B. 613, 615 Sautonie-Laguionie, L. 338, 339, 343
Posner, R. 157 Schaefer, A. 18, 19, 31
Power, M. 622 Schafer, D. 32
Pratt, M. 621 Scheuerman, W. 602
Prentice, R. 157, 158, 163 Schick, A. 618, 619
Pritchard, A. 605 Schipani, C. 157, 178–90
Schleifer, A. 222
Quillen, J. 527 Schloenhardt, A. 670, 672, 673, 674
Quo, S. 125–43 Schmidt, D. 399
Schneider, S. 47, 48
Rabkin, J. 604, 605 Schott, P. 89, 92, 94
Rafferty, A. 251 Schroeder, R. 622
Ramsay, I. 108, 111 Scott, D. 619
Raphael, M. 386, 563 Sen, A. 231
Rayner, S. 360, 361 Shah, A. 399
Razafindrakoto, M. 406 Sharman, J. xxix 541, 727
Reach, D. 617 Sharpes, D. 140
Reading, J. 658–67 Shavell, S. 17
Recanatini, F. 400 Shaw, M. 410–11, 412
Reuter, P. 528 Shaxson, N. xxix
Rhee, R. 605 Sheikh, S. 386
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Name index 761
Shepherd, K. 486 Turkington, M. 520–31

Sherer, M. 613 Turley, S. 613
Sheridan, L. 15, 16, 22, 23 Tyre, C. 486, 494
Sherman, T. 88
Simler, P. 344 Ulph, J. 23, 25, 28, 534
Sitorus, T. 619 Unger, B. 528
Sittlington, S. 5, 14 Urbas, G. 372
Slovac, B. 223–4 Uys, T. 603
Smith, E. 525
Smith, L. 92 Van de Ven, B. 226
Smith, R. 367, 369, 376, 592 Van den Wyngaert, C. 386
Spector-Naranjo, C. 691–702 Van Peursem, K. 621
Stallings, R. 224 Vandekekchhove, W. 585, 600
Stanley, C. 221, 226 Verreault, K. 622
Stears, C. 625–37 Vidal, J. 340, 350, 352
Stempel, J. 701 Vogel, F. 358
Stephen, J. 15, 25, 29 Vreeland, J. 411
Stephenson, K. 679, 688, 740
Sternlight, J. 605 Waddams, S. 23, 28, 30
Stessens, G. 384, 386 Walker, C. 538
Stewart, J. 675, 676 Walker, J. 528
Stiglitz, J. 231, 232, 280 Walker, L. 338
Stoufflet, J. 350 Wall, D. 367, 371
Stout, L. 111, 112, 156 Walls, S. 525
Stuart, R. 26 Walsh, T. 533
Stuart-Smith, E. 647–57 Walters, A. 714–25
Stucke, M. 142 Wan, W. 110, 111
Suffrin, S. 16 Wang, Y. 283, 419, 430
Sullivan, C. 525 Ward, A. 432
Sutherland, E. 4, 15, 732–3 Warde, I. 539
Sutherland, M. 113–24 Warrell, H. 737
Svensson, J. 398 Wearing, W. 589
Symington, J. 529 Webb, T. 382, 387
Szto, M. 179, 181, 182–3, 184 Weil, P. 602
Welby, J. 38
Tanzi, V. 88, 365, 527 Wells, C. 647–57
Taylor, M. 674 Wheatley, M. 391, 634
Taylor, R. 607 White, M. 151
Teasdale, S. 390, 391 White, T. 606
Tejan-Cole, A. 674, 676 Whittle, A. 220
Theodosiou, C. 203 Wilkinson, M. 193, 194, 196
Thomas, J. 607 Willebois, E. de xxix
Thompson, J. 32 William, C. 382
Throne, B. 29 Williams, R. 399
Tierney, J. 439 Withey, C. 27
Tjio, H. 103–12 Wood, G. 240
Tran, M. 449, 454 Woodhouse, E. 403
Troubat, F. 183 Woodliff, D. 618
Truman, E. 528 Worstall, T. 98
Tshuridu, E. 585, 600 Wroe, D. 585
Tsingou, E. 225 Wuensch, O. 529
Tullock, G. 396
Tupman, W. 3–14 Xing, L. 419–34
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Yang, W. 276 Zdanowicz, J. 525

Yao, K. 423 Zhand, J. 592
Ye, Z. 262–78 Zhang, Z. 271, 276
Yepes, C. 523 Zheng, S. 267, 276
Young, R. 382 Zill, O. 48
Zoido, P. 402
Zagaris, B. 672 Zopiatis, A. 619
Zalopany, S. 543 Zorkin, V. 54, 62
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Subject index
abuse of corporate form see corporate form, disqualification in companies and

misuse and abuse financial institutions
abuse of financial position 328–9 accountants see auditors
abuse of position, fraud as 6, 27, 322–3 advance-fee frauds 368–9
abuse of position of trust adjustment, insider see also computer related fraud
trading crimes, sentencing 255 advertising and click-frauds 369
abuse of rights and fraud, difference between see also computer related fraud
339 Afghanistan
accountability Afghan Public Protection Force (APPF) 438
breaches, and fiduciary duties 741–2 Afghanistan Reconstruction aid 501
international development assistance corruption and public policy 437–8,
413–14, 415 439–40, 442
principle, Indonesia 171 ‘Warlords Inc.’ report 439, 442
accountability and responsibility in financial agency law, fiduciary duty of loyalty 181–2
sector 239–49 agency relationship, South Africa, corporate
‘comply or explain’ system of corporate criminal responsibility 195, 196
governance (UK) 246–7 agency theory, and corporate governance 160,
consumer protection 248 164
cultural differences 729–31 aiding and abetting as criminal responsibility
directors and senior managers, governance mode 675–6
improvements 240–41, 243, 244–6, Amaranth Advisors collapse 149–50
247–9 see also hedge fund regulation development
EU legislation 244–5, 246–7 Angola, FATF Mutual Evaluation Report
Financial Stability Board (FSB) guidelines 476–7
239–40 anti-corruption see corruption
international organisations and financial anti-money laundering see money laundering
regulation 239–40 Anton Piller search order 710
monitoring and supervision requirements armed forces and corruption-related offences
241, 243–4, 248–9 60–61
personnel management processes and art crimes 79–81
succession plans 241–2, 247 see also trafficking crimes
regulatory shortfalls 243–4 assets and asset recovery
remuneration and incentive schemes 243 affirmative asset partitioning 103–4
risk management and culture 241, 242–5 civil asset recovery see civil asset recovery
shareholder pressure, dealing with 243 company as asset protection device,
systemically important financial institutions vulnerability of 105–6
(SIFIs), board responsibilities 240–42 and criminal property pursuit see criminal
UK, Financial Conduct Authority (FCA), property pursuit and asset recovery
risk management supervision 247–8, fraud in civil law 317
249 misappropriation 58, 59, 91, 97, 210–11,
UK, Parliamentary Commission on Banking 216, 252, 269, 395, 704–5
Standards, ‘special measures’ tool ‘proceeds of crime’, understanding of
248–9 537–8
see also corporate governance and UK, Department for International
responsibility; hedge fund regulation Development (DFID), asset recovery
development; management facilitation 415, 416
763
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Columns Design XML Ltd / Job: Rider-Research_Handbook_International_Financial_Crime / Division: SubjectIndex /Pg. Position: 1 / Date: 9/10
UK Proceeds of Crime Act (2002) see UK Privacy Act 594–5

Acts, Proceeds of Crime Act (2002) Public Information Disclosures Act 587–8,
World Bank, Stolen Asset Recovery 592, 594, 595, 598
Initiative (StAR) 415, 742 Public Interest Disclosure Act 586–7
see also confiscation; fraud and restitution Public Service Act 1999 (PS Act) 587, 593,
auditors 594
China, National Audit Office (NAO) 422 unfair competition 128–32, 135, 141, 143
company’s audit responsibilities 635 whistleblower protection see whistleblower
false accounting, UK criminal fraud 324 protection, Australian legislation
auditors and fraud detection 612–24 authoritarian rule and corruption 438–9
audit firm size and audit quality 623 see also corruption and public policy in
auditing methods 618–20
post-conflict states
auditing profession, criticism of 612–13
auditor principles 614–15
banking
clarification of auditing responsibilities
615–16 bank’s due diligence undertakings’ failure,
client integrity evaluation 621–2 UK 515
corporate culture effects 618, 620 Basel Committee on Banking Supervision
‘dirtier data-processing’ involvement 622, 235, 239, 279, 280
623 civil litigation risks 514–17
early court cases 613–14 crisis see financial crisis
European Commission Green Paper 617 Indonesia see Indonesia, corporate
financial statements, credibility of 617 governance and social responsibility in
firm’s responsibilities 635 banking institutions
fraud triangle model 617–18 US Bank Secrecy Act (1970) 509–10, 699
International Standards on Auditing (ISAs) see also financial crime headings
615–16 bankruptcy see insolvency
organisational structure and management bars to extradition see under extradition
style 618 process
professional scepticism 616, 620–22 Basel Committee on Banking Supervision
professional scepticism, audit risk levels 235, 239, 279, 280
621–2 beneficial ownership, hiding 681
professional scepticism, maintenance of 616 see also offshore issues in policing financial
public confidence, restoring 616–17 crime
training effects 621 benefit to defendant, determination of, UK,
see also businesses; corporate governance Proceeds of Crime Act 450, 451–2,
Australia 453–4
anti-money laundering regulation 536 ‘big business’ presence 52
Competition Act 125, 127–8 see also crimes of the powerful (CoP) and
Competition and Consumer Commission legitimisation
(ACCC) 127, 143 boards of directors see directors
corporate financial assistance rule 108 botnets 371–2, 642
corporate takeovers and shareholder see also computer related fraud
protection 111 bribery
Corporations Law 589 income creation through 451
criminalisation of cartel conduct 128–32, International Criminal Court, possible
143 future inclusion 672–3
‘data retention’ legislation 585 OECD Convention on Combating Bribery
Fair Work Act 592 of Foreign Public Officials 60, 386
fraudulent breach of trust 333 patronage and bribery in post-conflict states
insolvent trading 109 437–8, 439, 440–41, 442
leaking of sensitive information 585 receipt of secret commission or bribe 336
online fraud 368, 369 and terrorism 92
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Subject index 765
UK Bribery Act 281, 290, 292–3, 382, 387, whistleblower protection see whistleblower
560–61, 744, 745, 747, 749 protection
UK Bribery Act, extra-territorial jurisdiction see also auditors and fraud detection;
431–2 corporate governance; management
bribery and corruption, legal mechanisms to
control, UK 381–93 Canada
Anti-terrorism, Crime and Security Act anti-money laundering regulation 533–4
(2001) 386 chip and PIN technology effects on
Bribery Act effects 382, 387 computer related fraud 372
bribery extent 382 cybersecurity foreign policy plan 645
civil fines 391–2 police and financial services industry
corporate criminal liability introduction partnerships 49
384–5
Capital Requirements Regulations, EU 295
criminal offence types 383–4
capitalism, Standing Commission on
criminalisation of bribery, and legal reform
382–5 Responsible Capitalism suggestion
enforcement mechanisms 389–93 162–3
Financial Conduct Authority (FCA) capitalism and democracy, Russia 53–4
involvement 388–9, 390, 391–3, 749 capitalist system, inherent instability 225–7
financial sanctions 390–93 ‘carding’ 371
Financial Services Association involvement see also computer related fraud
387–8, 390–93 CARIN (Camden Assets Recovery
Financial Services and Markets Act (2000) Interagency Network) 472
387–8, 390, 391 see also confiscation and forfeiture
integrity objective and financial system cartels see under unfair competition and crime
protection 388 Cayman Islands, Criminal Procedure Code
international legislative measures 385–7 and confiscation of funds 681–2
Law Commission Report on bribery reform Chabra jurisdiction (freezing orders against
386–7 third parties) 709
law enforcement and regulatory agencies charismatic leadership influences and
387–9 corruption 436–7
sentencing 389–90 see also corruption and public policy in
Serious Fraud Office (SFO) involvement post-conflict states
387, 389 China
see also corruption Companies Statute and fiduciary
Bribery Ordinance and unexplained wealth accountability 741
identification, Hong Kong 751 Corporations Act and family interests 730
businesses insolvency-related crime 214
‘big business’ presence and crimes of the International Association of Anti-Corruption
powerful 52 Authorities (IAACA) role 411
business judgment rule 178 self-laundering 483–4
company as asset protection device, China, anti-corruption measures 411–12,
vulnerability of 105–6 419–34
continuity planning 301, 305, 311–12 Anti-Money Laundering Law 424, 434
employers as victims 10–11 Bank of China (BOC) investigation into
management disqualification see foreign exchange controls 431
management disqualification in Committees for Discipline Inspection
companies and financial institutions (CDIs) 421, 422, 424–5, 428–30
organisation types, and vulnerability Communist Party effect on 422–3
analysis 302, 303 corrupt officials relying on family and
organisational structure 296, 618 friends to seek payments 427–8
profits derived from criminal activity corruption risk focus 430–31
(undocumented workers) 450–51 death penalties 425, 426, 433
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economic reform effects 420–21, 425–6, integrity of capital market, protection of

431 265, 275
extradition treaty issues 432–3 Market Abuse Directive (2007) 267
future direction 431–4 Municipal regulations 264–5
history of 419–21 ‘person-connection’ test 266
initiatives 422–3, 428–31, 433 post-announcement waiting period 270
international collaboration 431–2, 433 prohibited conducts 272–4
intra-party rules and regulations 424–5 ‘publishable information’ test 269–70
‘naked officials’ (bureaucrats whose family sanctions 274–5, 277
members have emigrated) 430–31, securities, ‘effect on the price’ approach
432–3 271
National Audit Office (NAO) 422 Securities Law 267
National Bureau of Corruption Prevention ‘sensitive period’ 272–3
of China (NBCP) 422 stock market listings 262, 263
online reporting 429–30 ’suggesting’ to another person to purchase
People’s Procuratorate investigatory agency securities 273–4
421–2, 427 third party disclosure 273–4
political power involvement 422–3, 427, chip and PIN technology effects 372
433–4 see also computer related fraud
regulation and punishment 421–6 citizen empowerment 36–7, 743–5
regulation and punishment, Xi Jinping’s see also consumer welfare
anti-corruption initiative 422–3, civil asset recovery
428–31, 433 and confiscation see confiscation and
typologies and scale 426–8 forfeiture, UK
UK Bribery Act extra-territorial jurisdiction criminal property pursuit 457–61
431–2 non-conviction based see non-conviction
UN Conventions against Corruption based forfeiture
(UNCAC) signatory 432 reparations scheme, International Criminal
US Foreign Corrupt Practices Act Court 677–8
extra-territorial jurisdiction 431, 432, restrictions, anti-money laundering
433 regulation 537
whistleblower protection 423–4 and terrorism 89–90, 91, 96–7, 542–7
China, insider trading regulation 262–78 civil asset recovery, tracing and freezing, UK
administrative liability 266–7, 275 703–13
‘ban of market entry’ 274 Anton Piller search order 710
business activities of specific issuer of asset disclosure order 709
securities 271–2 asset tracing process 704
compulsory disclosure events 272 Chabra jurisdiction (freezing orders against
criminal liability 267, 274–5, 276 third parties) 709
direct purchase or disposal 273 cross-examination request 706, 710
enforcement programme assessment 275–7 discharge applications 707
Everbright Securities abnormal trading 277 dissipation of assets risk 706, 707
government officials, prohibition from fraud, evidence of 704, 707
speculating (1933) 263–4 freezing orders 703–9
history 262–7 freezing orders, effectiveness of 703–5
information disclosure methods 269–70, full and frank disclosure by applicant 706–7
272, 273 jurisdiction choice 705–6
‘information-connection’ test 268 Mareva injunction 705, 709
inside information definition 269–72 misuse by litigants seeking to disadvantage
Insider Dealing Directive (2007) 267, a defendant 704
272–3 passport order 710
insider dealing opportunities 732 property preservation order 710
insider identification 268–9 receiver appointment 710
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Subject index 767
third parties, effects on 708–9 securities and banking industries see

third party disclosure order 704 securities and banking industries, civil
timing, importance of 705, 713 enforcement, US
value and costs 707–8 strategic tools and future development
worldwide freezing orders 708, 713 739–40
civil asset recovery, tracing and freezing, UK, see also enforcement
overseas cases 711–13 civil fraud see fraud in civil law
civil law equivalents 711–12 civil litigation risks to banks and financial
countries where freezing injunctions not institutions 514–17
available 711 civil restitution as remedy, strategic tools and
English freezing orders in support of future development 740–42
click-frauds 369
foreign cases 712–13
see also computer related fraud
gagging orders 713
client identification and due diligence 300,
timing, importance of 713 306–7, 310
civil asset recovery, US 496–506 see also financial crime deterrence
Civil Asset Forfeiture Reform Act practicalities
(CAFRA) 503, 505 client integrity evaluation 621–2
“civil forfeiture” terminology 496 see also auditors and fraud detection
community protection measures 498 clients
cooperation between state and federal law indifference of some traders to well-being
enforcement agencies 498 of 39, 40
criminal property pursuit 457–9 legal profession and clients, relationship
as deterrent 497 between 533–4
due process concerns 502–5 collaboration see international cooperation
Eighth Amendment and Excessive Fines collective action principles 400
Clause 504 see also corruption, new strategies
innocent owner defence 503 collective offences 58
presumption of innocence and burden of see also crimes of the powerful (CoP) and
proof 503 legitimisation
property that can be forfeited 499 Colombia, black market peso exchange 48
reasons for 496–8 commercial and consumer fraud distinction
“restitution” and “restoration” processes 29–30
497–8 commercial espionage and recruitment policy
self-incrimination, right to a stay, and checks 303
adverse inferences 504–5 common law
Sixth Amendment Right to Counsel 505 criminal justice system see criminal justice
civil asset recovery, US, non-conviction based system and UK common law
forfeiture 498–502 fraud concept, English law history 22,
advantages 500–502 24–5, 27–8
criminal case prosecuted elsewhere 502 vicarious liability doctrine, South Africa
defendant has died 500 194–203
forfeiture uncontested 500 Community Cashback Schemes, UK 470
interests of justice do not require criminal see also confiscation and forfeiture
conviction 501 community protection measures, civil asset
property belongs to third party 500–501 recovery, US 498
wrongdoer is fugitive 501 companies see businesses
wrongdoer is unknown 500 Companies Statute and fiduciary
civil claim, injury suffered by state accountability, China 741
enforceable as 464–5, 468–9 compensation
civil disgorgement remedy, insider trading 251 fiduciary duties and reparation for loss
civil enforcement 331–2
bribery and corruption fines 391–2 South Africa, third party compensation 198
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UK, Proceeds of Crime Act (2002), victim hacking 370–71, 642, 644
compensation 326–7, 455–7 identity crime 369–71, 374–6
victim 326–7, 455–6 international cooperation 376–7
whistleblower protection, Australia 593–4 investment schemes 368
compensation, executive 160, 229, 232, 236, legal responses 372–6
237, 286 malware 370–71
competition, unfair see unfair competition and online payment mechanisms, misuse of 368
crime phishing 43, 370, 371, 642
Competition Act, Australia 125, 127–8 spam 371–2, 642
compliance, and control liability see control traditional offences, need for adaptation of
liability and compliance in financial legal response 373
institutions
UK Computer Misuse Act (1990) 645
compliance officer issues in financial sector
see also cybercrime; internet; technology
279–87
anti-corruption measures 284 confidence building see financial system,
Basel Committee on Banking Supervision engendering confidence
279 confidentiality rights 509, 532–4
complexity issues of products and services confiscation
282–3 Hong Kong, anti-money laundering regime
cyber security and cyber crime 284 120–21
early red flag indicators, importance of orders, UK, Proceeds of Crime Act 325–6,
285–6 327, 450
ethical conduct and Integrated Risk post-conviction laws 535
Management Committees 286 priorities, UK, Proceeds of Crime Act
financial crisis effects 280–81, 282 448–9
international developments and trends 285 rates of proceeds of crime 746
market misconduct and crime prevention value of property as 455
283–4 see also civil asset recovery
money laundering and terrorist financing confiscation and forfeiture, UK 462–72
measures 283 CARIN (Camden Assets Recovery
monitoring international developments and Interagency Network) 472
trends 285 civil claim, injury suffered by state
product development cycle involvement, enforceable as 464–5, 468–9
need for 282–3 Community Cashback Schemes 470
regulation, current 280–81 confiscation mechanism and Proceeds of
risk management 281–2, 283, 285 Crime Act (2002) 464–5, 469, 470
Securities Industry Financial Markets confiscation rates 746
Association’s White Paper 279–80 criminal lifestyle assumption 464, 466–8
Shariah compliance risk, need for criminal lifestyle assumption, variations in
understanding of 283 calculation 465–6
specialised training 284–5 distinction between (conviction versus
team working, need for 285 non-conviction base) 462–3
see also control liability and compliance in European Convention on Human Rights,
financial institutions; enforcement confiscation as penalty 465, 469, 471
computer related fraud 366–77 fiscal benefits of allowing direct
advance-fee frauds 368–9 incentivisation 471–2
advertising and click-frauds 369 forfeiture without conviction is not
botnets and spam generation 371–2, 642 substitute for conviction 470–71
chip and PIN technology effects 372 forfeiture without conviction and no
credit card skimming and ‘carding’ 371 feasible option to prosecute 471
cybercrimes and computer misuse funding and incentivisation 469–70
provisions 373–4 international consensus on core principles,
fraudulent sales 368 need for 470–72
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Subject index 769
international impetus for consensus and regulatory risk considerations 627–8,

cooperation 463–4 632–4, 635
non-conviction based asset forfeiture, statement of expectation 633–6
justification for 468–9 suspicious activity reporting 629, 636
prosecution process underpins use of civil see also compliance officer issues in
standard of proof 471 financial sector; enforcement
Scottish asset forfeiture agency 465–6, 471 control measures for bribery and corruption
standard of proof implications 463–4, 465 see bribery and corruption, legal
conflicts of interest mechanisms to control
and corporate executives see fiduciary duty conviction rate concerns 736–7
of loyalty, corporate executives and see also sentencing
cooperation see international cooperation
conflicts of interest
CoP see crimes of the powerful (CoP) and
hedge fund regulation development 147
legitimisation
conspiracy, antitrust 132, 133–9 corporate control liability, strategic tools and
conspiracy to defraud 26, 321, 323–4, 478, future development 743–4
555 corporate criminal liability introduction, UK
consumer welfare 384–5
accountability and responsibility in corporate criminal responsibility, South Africa
financial sector 248 see South Africa, corporate criminal
citizen empowerment 36–7, 743–5 responsibility
commercial and consumer fraud distinction corporate criminals 12
29–30 corporate executives see executives
indifference of some traders to well-being corporate form, misuse and abuse 103–12
of clients 39, 40 affirmative asset partitioning 103–4
individual members of public as victims 10 company as asset protection device,
and unfair competition 131 vulnerability of 105–6
see also ethical conduct corporate financial assistance rule, Australia
control liability and compliance in financial 108
institutions, UK 625–37 corporate veil piercing 104–6
company’s audit responsibilities 635 disguised returns of capital 107–8
compliance officers’ role 632 insolvent trading and shareholder interests
control liability concept 626–8 109–10
‘control person’ definition 627 proper purpose rule for directors 106–7,
‘control person’ risk 632–3, 634 108
disclosure of control liabilities 630 property characteristic of company,
enforcement practice 630–31 misusing 106–7
evasion 631 real estate investment trusts (REITs),
Financial Conduct Authority (FCA) 628 corporate form 103
financial crime definition 628 share interest disclosure 106
Financial Services (Banking Reform) Act takeovers and shareholder interests 110–11
(2013) 634 corporate governance
Financial Services and Markets Act 628 directors and senior managers, risk
governance and risk management systems management and governance
and controls 635 improvements 240–41, 243, 244–6,
individual accountability, culture and ethics 247–9
633–5 Indonesia see Indonesia, corporate
insider trading 629 governance and social responsibility in
institutional risk and costs 629–31 banking institutions
‘partnered approach’ recommendation management disqualification see
635–6 management disqualification in
Proceeds of Crime Act (2002) 628, 629 companies and financial institutions,
regulatory governance 628–33 UK
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OECD Principles of Corporate Governance embezzlement by political leaders 447–8

172–3 EU Convention on the Fight against
requirements, UK, Financial Conduct Corruption 386
Authority (FCA) 295–6 EU Criminal Law Convention on
whistleblower protection 589, 601 Corruption 60
see also auditors and fraud detection; and Financial Action Task Force 661, 667
businesses; directors; executives; as non-cooperation reason 666–7
management “old” and “new” distinction 8, 11
corporate governance and responsibility strategic tools and future development see
155–65 strategic tools and future development,
and agency theory 160, 164 corruption
company law re-examination
and terrorism see terrorism and economic
recommendation 159
crime, corruption
corporate governance and corporate (social)
responsibility as separate subjects corruption and international development
160–61, 162 assistance 405–18
drivers of corporate governance debate ‘common language’ assessment 410–11
156–8 corruption causes and effects 406–7
economic success as driver 156–7 corruption definitions 405–6
executive compensation 160, 229, 232, 236, corruption measurement 406
237, 286 Corruption Perception Index (CPI) concerns
financial crises effects 157–8, 162–3, 406
166–7, 173–4 economic development and corruption
future research 164 proceeds 407–8
global considerations and legal implications enforcement issues 410
163–5 funding issues 410, 412–13, 415, 416
incentive mechanisms and shareholder international legal efforts 409–12
alignment 157 monitoring issues 410
institutional perspective 164–5 sovereignty perception challenges 409–10
paradigm shift 161–3 state practices, effects on 411
shareholder primacy and shareholder value United Nations Convention against
maximisation 155–6, 157–8, 159–60, Corruption (UNCAC), compliance
164, 165 measures 411–12
shareholder vote legislation 158 corruption and international development
short-termism problems 157, 160 assistance, UK, Department for
Standing Commission on Responsible International Development (DFID)
Capitalism suggestion 162–3 412–16
voluntary nature 161–2, 163, 164 asset recovery involvement 415, 416
see also accountability and responsibility in corruption level and poverty impact, limited
financial sector 414–15
corporate veil piercing 104–6 country strategy reports 413–14
Corporations Act and family interests, China criminal justice approach, activities to
730 strengthen 416
Corporations Law, Australia 589 direct budget support and technical
corruption assistance balance 414
bribery and corruption see bribery and International Centre for Asset Recovery,
corruption, legal mechanisms to control support for 415
China see China, anti-corruption measures technical assistance and capacity building
compliance officer issues and programmes 414
anti-corruption measures 284 transparency and accountability 413–14,
crime and criminals, characteristics 7–8 415
crimes of the powerful (CoP), Russia 55, corruption, new strategies 394–404
60–61 collective action principles 400
Barry Rider - 9781783475780

Subject index 771
corruption as both economic and political creditors’ rights, fraud against (Paulian
problem 398 action), France 338, 339, 342–4, 346
corruption definitions 394–6 crime control definition xxx
future research 403–4 crime disruption and use of intelligence
ICT-based tools 400 638–46
implementation role and distortion 402–4 bot networks 642
institutionalist approach 400–402 conventional wisdom 639–40
nature and cause of corruption, lack of crime controller categories and effectiveness
agreement on 399–400 640, 641
neoclassical to new institutional economics cybercrime as FBI priority 642–3, 644
change 398–9, 401 cybercrime targeting, US/UK comparison
643
past strategies 396–9, 401
cyberspace effects 638–9, 641–6
principal–agent theory 398, 400
environmental crime theory 639–40, 642
public choice theory as past strategy 396–7, EU Convention on Cybercrime 377, 644–5
398–9, 401 hacking 370–71, 642, 644
public policy design distortion 402–3 intellectual property crime 23, 642
see also strategic tools and future intelligence collection 640, 641, 642–3
development international collaboration, need for 644–6
Corruption Perception Index (CPI) concerns Mutual Legal Assistance Treaties (MLATs),
406 effectiveness concerns 635, 643–4
corruption and public policy in post-conflict phishing website detection 642
states 435–43 Problem Oriented Policing (POP) model
Afghanistan 437–8, 439, 442 639–40, 644
anti-corruption programmes, need for spam 642
development of 442 crime seriousness measurement, insider
authoritarian rule 438–9 trading crimes 253–4
charismatic leadership influences 436–7 crimes of the powerful (CoP) and
ethnic affiliation influences 436–7, 439 legitimisation 51–62
group protection needs 437–8 “big business” presence 52
International Security Assistance Force global financial and economic architecture
(ISAF) involvement 439, 440 effects 53
Iraqi politics and corruption 438, 440–42 inconsistency claims 52
Iraqi politics and corruption, military and offender and offence types 52–3
security needs 441–2 theoretical controversies and categorisation
Iraqi politics and corruption, security 51–3
personnel salaries 441 crimes of the powerful (CoP) and
liberal democratic states, practice legitimisation, Russia 53–62
differences influencing intervention anti-corruption drive 55, 60–61
436 armed forces and corruption-related
licensing foreign security companies 438 offences 60–61
military and aid priorities, competing capitalism and democracy 53–4
439–40 collective offences 58
military and security needs 437 corporate fraud as threat to Russian
patronage and bribery 437–8, 439, 440–41, companies 58–9
442 economic crime statistics 56–7
public salaries, withholding 439 embezzlement 59–60
Western involvement, criticism of 439 fraud offences 57–60
cost factors see funding issues hostile takeovers 61–2
counterfeiting and forgery 9–10, 18, 24, 34, insider information, illegal use of 61
59, 78–9, 373 international conventions against corruption,
credit card skimming and ‘carding’ 371 party to 60
see also computer related fraud legal persons free from criminal liability 58
Barry Rider - 9781783475780

market manipulation 61 trial before a judge alone or with

money laundering laws, re-examination of professional assessors, call for 561–2
57 witness testimony 559–60
privatisation, illegitimate and damaging see also criminal penalties; judicial
character 54 approaches; sanctions; sentencing
real standard of living reduction 54 criminal law
regulatory and legal system shortcomings EU Criminal Law Convention on
54–6 Corruption (2009) 60
sanctions for participating in corporate fraud see fraud in criminal law
fraud 58 fraud concept, English law history 25–7
criminal burden of proof, and unfair money laundering, serious crime and human
rights balance 534–8
competition 131
criminal liability
criminal case prosecuted elsewhere,
China, insider trading regulation 267,
non-conviction based forfeiture 502 274–5, 276
see also civil asset recovery, US, corporate criminal liability introduction
non-conviction based forfeiture 384–5
criminal characteristics see economic crime fraud and subjective dishonesty 328
and criminals, characteristics criminal lifestyle determination 450, 452–5,
criminal culpability, strategic tools and future 464, 466–8
development 745–6 criminal penalties
criminal fraud see fraud in criminal law death penalties, China 425, 426, 433
criminal intelligence use, organised economic insolvency-related crime 207, 208, 210,
crime 70–72, 74 211, 213, 215
criminal justice approach to corruption, unfair competition and crime 141
activities to strengthen 416 see also criminal justice system; judicial
criminal justice system and UK common law approaches; sanctions; sentencing
553–62 criminal procedural norms, judicial resistance
activities to strengthen 416 to 719
banking crisis prosecutions, lack of 558 criminal property pursuit and asset recovery,
Bribery Act amendment suggestion, UK 447–61
inclusion of company employees civil recovery 457–61
560–61 civil recovery, US contrast 457–9
civil recovery and Proceeds of Crime Act corruption and embezzlement by political
(2002) 561 leaders 447–8
Criminal Justice and Public Order Act criminal property definition 448
(1994) 555, 557–8 drug trafficking effects 447
Deferred Prosecution Agreement tool, use ‘innocent owners’ provision 459–61
of 561 prison sentences as deterrent 447, 448
disclosure obligations 556–8 victims of theft, protection of 459
electronic surveillance use 560 criminal property pursuit and asset recovery,
failed prosecutions and US RICO UK, Proceeds of Crime Act 448–57
legislation comparison 558–9 assets held abroad 454
Fraud Act (2006) 558 benefit to defendant, determination of 450,
fraud as deception 553–4 451–2, 453–4
fraud trial process problems and judicial business profits derived from criminal
decisions 556–7 activity , (undocumented workers)
future direction 558–62 450–51
history 554–5 compensation award to alleged offender
interview information as evidence 557 after case dismissal 456–7
legal aid 555 confiscation order hearing 450
right to silence 557 confiscation priorities 448–9
sentencing regime 560 criminal conviction dependency 449
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Subject index 773
criminal lifestyle, determination of 450, compliance 288

452–5 ‘control person’ 627
foreign nationals who commit crimes corruption 394–6, 405–6
abroad 449 crime control xxx
hearing requirements 450, 451–2 criminal property 448
income creation through bribery 451 economic crime 3–4
money laundering offences, restrictions on extradition process 647
454–5 financial crime xxviii-xxxii, xxix, xxxi-xxxii
proceeds of overseas crimes 449, 451–2, 33–4, 628
454–5 fraud concept 15–16
repeat offenders 453–4 hedge fund 145
value of property as confiscation 455 inside information 269–72
victims of crime and compensation 455–6 offshore 679–80
criminalisation of bribery, and legal reform organised economic crime 66–7, 68–9
382–5 tax fraud xxix
crowd mobilisation and social networking whistleblower 586–7
45–6 derivatives market 232–3, 237
cultural differences, and transparency and see also hedge fund regulation development
disclosure 729–31 detection
cybercrime and auditors see auditors and fraud
compliance officer issues 284 detection
costs xxxiii-xxxiv phishing website 642
crime and criminals, characteristics 9, strategic tools and future development
13–14 733–5
crime types 641–2 whistleblower protection, early detection
cyber attacks and hacking 45 and forewarning of malpractice 598
and cybersecurity 311 deterrence
encoded digital media, dealing with 567 civil asset recovery as 497
EU Convention on Cybercrime 377, 644–5 practicalities see financial crime deterrence
as FBI priority 642–3, 644 practicalities
intelligence use and cyberspace effects ‘visible deterrence’ policy implementation
638–9, 641–6 225
ownership problems 68, 73, 74 developing countries 660, 666, 742–3
targeting, US/UK comparison 643 see also individual countries
terrorism and cyber technologies 547–8 development assistance see corruption and
see also computer related fraud; internet; international development assistance
technology diamond smuggling report, Financial Action
Task Force (FATF) 283
data dictum meum pactum (my word is my bond)
‘data retention’ legislation 585 approach 37
‘dirtier data-processing’ involvement 622, see also historical perspective of financial
623 crime
De Larosière Report, EU 243–4 directors
death of defendant, civil asset recovery 500 accountability and responsibility 240–41,
death penalties, China 425, 426, 433 243, 244–6, 247–9
debt see insolvency civil liability, insolvency-related crime,
defendant benefit, determination of, UK, China 214
Proceeds of Crime Act 450, 451–2, corporate governance see corporate
453–4 governance
Deferred Prosecution Agreements 227, 561, duty of care 721
571, 700–701 proper purpose rule 106–7, 108
definitions shadow directors 207, 208, 212
company 716 see also corporate governance; executives
Barry Rider - 9781783475780

‘dirtier data-processing’ involvement 622, 623 duty to report offences, Hong Kong,
see also auditors and fraud detection anti-money laundering regime 116–17
discharge applications, civil asset recovery
707 economic crime and criminals, characteristics
disclosure 3–14
asset disclosure order 709 corporate criminals 12
control liabilities 630 corruption 7–8, 11
and cultural differences 729–31 counterfeit products 9–10
decisions, white-collar crimes 575–6 cybercrime 9, 13–14
failure, and fraud and restitution 328, 329 economic crime definitions 3–4
fraud cases regime, UK 567–8 employers as victims 10–11
full and frank, civil asset recovery 706–7 and financial crisis see financial crisis,
full and frank disclosure by applicant, civil
economic crime and development links
asset recovery 706–7
fraud 6–7, 13
information sharing decisions 564
insider trading regulation, China 269–70, individual members of public as victims 10
272, 273 market as victim 11, 13, 14
insolvency-related crime, US 210 money laundering 8, 12, 13
leaking and disclosure, difference between organised crime groups 13–14
585 politically exposed persons (PEPs) as
obligations, criminal justice system, UK criminals 7, 13
common law 556–8 rogue insiders as criminals 13
Public Information Disclosures Act, smuggling 6
Australia 587–8, 592, 594, 595, 598 state as victim 11
Public Interest Disclosure Act, Australia victim categorisation 10–11
586–7 white-collar and blue-collar crime, first use
public sector disclosures, importance of of terms 4–5
589–90 see also financial crime headings
share interest 106 economic democracy principle, Indonesia 168
third party 273–4, 704 economic effects
see also non-disclosure China, anti-corruption measures 420–21,
dishonesty 425–6, 431
objective, and criminal liability 328 economic development and corruption
test, and criminal fraud 323 proceeds 407–8
dissipation of assets risk 706, 707 economic success as driver of corporate
dol (deceit) and fraud, interchangeable use, governance 156–7
France 339, 341 financial crisis see financial crisis
double jeopardy rule 578, 648–9 terrorism and corruption 93
double-criminality requirements, offshore electronic surveillance use 560
jurisdictions 686–7 see also monitoring
“dressed-up” fraud, France 348–9 embezzlement 59–60, 447–8
drug trafficking 46–7, 48, 302, 447, 672, employees
676–7 UK Bribery Act amendment suggestion,
dual criminality problems, money laundering inclusion of company employees
offences 478, 479, 484 560–61
due diligence UK Employment Rights Act 609
bank’s undertakings’ failure 515 undocumented workers 450–51
financial crime deterrence practicalities 300, employers as victims 10–11
306–7, 310 enforcement
due process concerns, civil asset recovery agencies and budget cuts 736
502–5 challenges, and terrorism 95
duty of care, directors 721 financial crisis effects 237
duty of loyalty see fiduciary duty of loyalty international cooperation 660, 661–5
Barry Rider - 9781783475780

Subject index 775
issues, corruption and international Convention on the Fight against Corruption

development assistance 410 386
legal mechanisms in bribery and corruption corruption concept 7, 11
387–93 Criminal Law Convention on Corruption 60
practice 237, 410, 630–31, 717 De Larosière Report 243–4
programme assessment, China, insider European Commission Green Paper on
trading regulation 275–7 auditors 617
US Fraud Enforcement Recovery Act 600 Extradition Act (2003) 647–51
see also civil enforcement; compliance hedge fund regulation development 152–4
officer issues in financial sector; Regulatory Impact Assessments xxxiii
control liability and compliance in European Convention on Human Rights 465,
469, 471, 651
financial institutions; sanctions
Everbright Securities abnormal trading 277
England and Wales see UK
evidence gathering
environmental crime theory 639–40, 642 corporate hierarchies, South Africa 201
see also crime disruption and use of evidence characterisation, unfair
intelligence competition and crime 136–7
equity, fraud in 22–3, 28, 31 extradition process, evidence amounting to
espionage prima facie case 651
commercial espionage and recruitment fraud cases 564, 565–7
policy checks 303 and international cooperation 661–3, 667
see also financial crime deterrence interview information as evidence 557
practicalities management disqualification in companies
estoppel doctrine 25 and financial institutions 717
see also fraud concept, English law history offshore issues in policing financial crime
ethical conduct 681–3, 685, 686
control liability and compliance in financial white-collar crimes, defence strategies 577
institutions, UK, individual witness testimony 559–60
accountability, culture and ethics 633–5 exclusionary approach, Financial Action Task
fraud and morality 16–18 Force (FATF) 526–7, 529–30
and future development 733 executives
Indonesia 168, 169, 174 compensation 160, 229, 232, 236, 237, 286
and Integrated Risk Management and conflicts of interest see fiduciary duty
Committees 286 of loyalty, corporate executives and
and whistleblowers 599–600, 610 conflicts of interest
see also consumer welfare see also corporate governance; directors
ethnic affiliation influences and corruption external orders, fraud in criminal law 327
436–7, 439, 591 extra-territorial civil asset recovery see civil
see also corruption and public policy in asset recovery, tracing and freezing, UK,
post-conflict states overseas cases
EU extra-territorial jurisdiction
Alternative Investment Fund Managers UK Bribery Act 431–2
Directive 152–3, 153–4 US Foreign Corrupt Practices Act 431, 432,
Anti-Money Laundering Directive xxxi 473, 433
479, 486, 488–90 extradition
banking governance and financial risk international cooperation 663–5, 667
management 244–5, 246–7 treaty issues, China 432–3
bonuses cap 286 extradition process, UK 647–57
Capital Requirements Directive (CRD IV) absence of prosecution decision as bar 649
244, 246–7 criminal and civil conduct, R v O’Brien
Capital Requirements Regulations 295 case study 653–7
Contract Law, and third party rights 341 definition 647
Convention on Cybercrime 377, 644–5 double jeopardy as bar 648–9
Barry Rider - 9781783475780

EU Extradition Act (2003), and bars to fiduciary duty of loyalty, corporate executives
extradition 647–51 and conflicts of interest 184–90
European Convention on Human Rights approval grounds of interested transaction
(ECHR) and proportionality 651 186–9
evidence amounting to prima facie case 651 board ratification 188–9
extradition reasons 648 fair price analysis 188
forum bar 650 fair transaction factors 187–8
hostage taking considerations 650 friendliness allegations 186
human rights considerations 651, 652–3 “material interest” factor 186
legal framework 647–8 shareholder ratification 189
passage of time as bar 649–50 transactions lacking good faith 189–90
person’s age as bar 650 valid approval exception 185
persons who can be extradited 648 Financial Action Task Force (FATF)
physical or mental condition considerations on corruption 661, 667
651 diamond smuggling report 283
Proceeds of Crime Act (2002) Restraint money laundering and terrorist financing
Order, breach of 653–7 measures see money laundering, and
racial/sexual/political considerations 649 terrorist financing measures, Financial
refusal, reasons for 648 Action Task Force (FATF)
right to a fair trial 653 non-conviction based confiscation 535
right to liberty and security 653 Recommendations, money laundering
specialty arrangements 650, 653–7 offences 473–7, 479–80, 481, 483–4,
torture or inhuman treatment prohibition 486–8, 494
652 suspicious activity reporting 486–8, 494
financial control and facilitator liability 748–9
facilitator liability and financial control 748–9 financial crime
fair trial right 577–8, 653, 719 definitions xxviii-xxxii 628
Fair Work Act, Australia 592 see also banking; economic crime and
fairness principle, Indonesia 172 criminals, characteristics
false representation 6, 24, 27, 316, 322, 328, financial crime deterrence practicalities
330 300–312
FATF see Financial Action Task Force (FATF) business continuity planning 301, 305,
fiduciary duties 311–12
accountability breaches 741–2 client identification and due diligence 300,
bank’s due diligence undertakings’ failure 306–7, 310
515 commercial espionage and recruitment
breach, and reparation for loss 331–2 policy checks 303
China, Companies Statute and fiduciary cybercrime and cybersecurity 311
accountability 741 deterrence model 300, 305–6, 308–9
financial crisis effects 219–20, 223–5, 226, drug trafficking routes and threat analysis
228–9 302
management disqualification in companies due diligence 300, 306–7, 310
and financial institutions 720–21 Indonesia 173–7
third parties dishonestly assisting in breach money laundering suspicion and reporting
333–4 307
fiduciary duty of loyalty 178–90 organisation types and vulnerability analysis
agency law 181–2 302, 303
Ancient Roman inheritance law 179–80 product delivery services and remoteness
business judgment rule 178 from customers 303
extension to partnerships 182–3 record keeping 301, 303, 305, 308–9
inheritance taxes 180–81 reporting 300–301, 307–8
law of trusts history 179–83 risk management 300, 301–2, 303–4, 305
profit restrictions 182 and social media 301, 310–11, 312
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Subject index 777
training 301, 306, 309–11 international regulatory coordination

vulnerability analysis 300, 302–3 shortcomings 227–8
whistleblowing system 308 privatisation policy effects 221–4, 226–7
financial crime history see history of financial public scandals and public sensitivity to
crime confidence 223–4
financial crisis regulation by exception 222–3
banking crisis prosecutions, lack of 558 ‘visible deterrence’ policy implementation
compliance officer issues 280–81, 282 225
corporate governance and responsibility voluntary regulation 222
effects 157–8, 162–3, 166–7, 173–4 firms see businesses
trust, effects on 219–20, 223–5, 226, 228–9 foreign exchange controls 235, 431
foreign nationals who commit crimes abroad
financial crisis, economic crime and
449
development links 229–38
forfeiture see civil asset recovery
derivatives market see derivatives market forgery and counterfeiting 9–10, 18, 24, 34,
economic protection, need for 229–30, 231, 59, 78–9, 373
236 forum bar, extradition process 650
enforcement decisions and sanctions 237 France
financial crash, true causes 231–6 anti-money laundering regulation 534
funding of rescue of money-center banks foreign nationals who commit crimes
235 abroad 449
future development protection 237–8 freezing orders 711–12
greed and excessive compensation packages insolvency-related crime 212
229, 232, 236, 237 France, fraud theory 338–55
international law and Financial Stability autonomous corrective principle 353
Board 237 certain and due debt owed to the creditor
international monitoring 235 343
Millennium Development Goals, effects on contractual provisions, fraud against 345–6
236 creditors’ rights, fraud against (Paulian
“Money Center” financial actors, failure to action) 338, 339, 342–4, 346
regulate 231–4 debtor’s insolvency 343
ring-fencing of bank funds 237 “dressed-up” fraud 348–9
risk factors, unrecognised 232–3, 234–5 efficient means to defraud a party 351–2
technological innovation 236, 238 existence of a fraud, proven 343–4
traditional economic crime and criminal fraud and abuse of rights, difference
liability 230–31 between 339
US housing market crash 232, 236 fraud against third party rights 341–6
financial intelligence units (FIUs) 49–50 fraud and bad faith, differences between
financial markets see markets 339–40
Financial Stability Board (FSB) 237, 239–40 fraud and dol (deceit), interchangeable use
financial statements, credibility of 617 339, 341
see also auditors and fraud detection fraudulent evasion of the law 346–50
financial system, engendering confidence fraudulent intention 350–51
219–28 fraus omnia corrumpit as general principle
capitalist system, inherent instability of of law 340, 352–4
225–7 good faith principle 353
coercive regulation, effects of shift to 227 hereditary reserve principle 348
cost effectiveness considerations 223 and intention of the parties 348–9
Deferred Prosecution Agreements 227 malicious intention 344
financial crisis effects on trust 219–20, marriages, evasive 346–7
223–5, 226, 228–9 naked fraud 347–8
financial market regulation 220–25 private international law 348
independent scrutiny of regulators 221 tax avoidance 347
Barry Rider - 9781783475780

theory of mistake (erreur) 339 Serious Fraud Office (SFO) powers 563,
traditional dualist classification 341–9 570–71
transfer of immovable rights, and fraudulent telecoms or internet providers, acquiring
collusion 344–5 records from 567
unitary notion of fraud 349–54 third party, evidence requisitioned from 566
fraud fraud in civil law, UK 316–21
as abuse of position 6, 27 asset recovery 317
computer related see computer related fraud civil recovery under Proceeds of Crime Act
crime and criminals, characteristics 6–7, 13 (2002) 320–21
crimes of the powerful (CoP), Russia 57–60 deceit 316–17
as deception 553–4 dishonest assistance and liability to account
for breach of trust 319
detection see auditors and fraud detection
freezing orders 321
evidence of, civil asset recovery 704, 707
knowing receipt and liability to account for
fraudulent bankruptcy 211 breach of trust 318–19
fraudulent trading, and insolvency 207–8 liability in constructive trust 318–20
hedge fund regulation development 147 liability in constructive trust, tracing
and Islamic law see Islamic law and 319–20
concept of fraud liability to account for breach of trust
theory see France, fraud theory 318–19
trial process problems and judicial decisions misrepresentation 316, 317
556–7 non-disclosure 316
triangle model, auditors and fraud detection fraud concept 15–31
617–18 commercial and consumer fraud distinction
UK Fraud Act (2006) 26–7, 208, 322–3, 29–30
558, 745 debt and insolvency 28
whistleblower protection and disclosure definition problems 15–16
types 590 early history 20–22
fraud cases, management of complex, UK in Islam 19–20
563–72 Jewish and Roman concept comparison
alternative case resolution 571 21–2
asset recovery and Proceeds of Crime Act in Judeo-Christian religion 18–19
(2002) 569–70 money laundering 28
case management strategy 564–5 and morality 16–18
Crown Prosecution Service (CPS) 563, Roman law and common law fraud and
570–71 actio doli 27–8
Deferred Prosecution Agreements (DPAs) social security fraud and human rights 28–9
571 and technology 31
disclosure regime 567–8 fraud concept, English law history 22–7
encoded digital media, dealing with 567 action in deceit 24, 25
evidence assessment and management 564, breach of warranty 24
565–7 civil law 27
health issue considerations 564 common law 22, 24–5, 27–8
information sharing decisions 564 constructive taking doctrine 26
interviewing techniques, importance of Criminal Justice Act (1987) 26
skilled 568–9 criminal law 25–7
judicial management 572 Criminal Law Act (1977) 26
privileged material identification 567 dishonesty as concept 26, 27
probative material sources 564 in equity 22–3, 28, 31
prosecution decisions 570–71 estoppel doctrine 25
Restraint Orders 569–70 exercise of discretion 24–5
Roskill report 563 false pretences, obtaining by 26
search warrant applications 565–6 Fraud Act (2006) 26–7
Barry Rider - 9781783475780

Subject index 779
intellectual property cases 23 receipt of secret commission or bribe 336

Larceny Act (1916) and Theft Act (1968) traced property ownership 336–7
26 fraus omnia corrumpit (fraud vitiates
Misrepresentation Act (1967) 28 everything) see under France, fraud
fraud in criminal law, UK 321–7 theory
abuse of position 322–3 freezing orders 321, 330
confiscation orders and Proceeds of Crime civil asset recovery see civil asset recovery,
Act (2002) 325–6, 327 tracing and freezing, UK
conspiracy to defraud 323–4 United Nations Security Council Resolution
dishonesty test 323 1373 and freezing of funds 547
external orders 327 fugitive wrongdoer 501
false accounting 324 see also civil asset recovery, US,
false representation 322 non-conviction based forfeiture
Fraud Act (2006) 322–3 funding issues
fraudulent trading 324–5 anti-money laundering measures
misrepresentation and financial markets 325 implementation 528–9
mutual legal assistance and Proceeds of confidence building and cost effectiveness
Crime Act (2002) 327 considerations 223
non-disclosure 322 confiscation and forfeiture 469–70
private prosecutions 321–2 corruption and international development
restraint orders and Proceeds of Crime Act assistance 410, 412–13, 415, 416
(2002) 326 developing countries 742–3
sentencing 323, 324–5 rescue of money-center banks 235
victim compensation and Proceeds of Crime future developments
Act (2002) 326–7 China, anti-corruption measures 431–4
fraud and restitution 328–37 criminal justice system and UK common
civil liability and objective dishonesty 328 law 558–62
criminal liability and subjective dishonesty information management 518
328 international cooperation 227–8, 667, 734–5
false representation 328, 330 International Criminal Court inclusions
financial position abuse 328–9 671–4
freezing order 330 protection, and financial crisis 237–8
information disclosure failure 328, 329 and strategic tools see strategic tools and
liability range 329–40 future development
limitation defences 337 future research 164, 403–4, 601
see also assets and asset recovery
fraud and restitution, personal monetary gagging orders 713
remedy 329, 330–35 see also civil asset recovery, tracing and
fiduciary duty breach and reparation for freezing, UK, overseas cases
loss 331–2 Germany
fraudulent gains 330 “company burials” and share sales 211
stewardship duties in respect of property, freezing orders 711–12
fraudulent 331 insolvency-related crime 210–11
substitutive performance claims 331–2 Global Corruption Barometer 414, 440
third parties dishonestly assisting in breach see also Transparency International (TI)
of trust or fiduciary duty 333–4 Global Organization of Parliamentarians
unjust enrichment of third parties who against Corruption 673
received property subject to a trust 335 good faith
fraud and restitution, proprietary remedy principle, France 353
329–30, 335–7 transactions lacking, and fiduciary duty of
direct substitutions, no need for 336 loyalty 189–90
need for proprietary or fiduciary base to
justify proprietary remedy 335–6 hacking 370–71, 642, 644
Barry Rider - 9781783475780

see also computer related fraud; cybercrime just price doctrine 34

health considerations law of trusts 179–83
in extradition process 651 market theories and regulation of securities
fraud cases, management of complex 564 35–6, 37
and trafficking crimes 76–7, 83–5 mis-selling scandals 32–3
hedge fund regulation development 144–54 operational culture of financial industry,
Amaranth Advisors collapse 149–50 understanding 39–40
back-up emergency lines of credit 150 public protests 36–7
commodities trading risks 149–50 Railway Mania scandal, UK 38
conflicts of interest 147 regulatory compliance, understanding
dangers to investors and financial markets 39–41
146–8, 150–51 restrictive trade practices 36
EU regulation development 152–4 self-regulatory traditions 36, 37–9
hedge fund definition 145 social ostracism for financial crimes, effects
hedge fund strategies 145–6 of threat of 37
Hong Kong Dollar market attack by hedge South Sea Bubble scandal, UK 26, 38
funds, effects of 149 transaction recording 38–9
KBC Alternative Investment Management trust relationships and commercial
bond arbitrage strategy failure 149 exchange 37–8
leverage effects 146, 148, 150, 151, 153 Hong Kong
LTCM collapse effects 148–9, 150 Bribery Ordinance and unexplained wealth
market neutrality concerns 147–8 identification 751
organised criminals or terrorists, possible Dollar market attack by hedge funds, effects
vehicle for 148 of 149
risks to investors and financial markets Independent Commission Against
146–8 Corruption (ICAC) 738, 739
and shadow banking system 145 mutual legal assistance 662–3
short-notice withdrawal restrictions 150 trial with judge alone 561
small investors and “funds of hedge funds” Hong Kong, anti-money laundering regime
147 113–24
systemic risk to financial system 148–51 Anti-Money Laundering and
transparency in valuation of holdings, lack Counter-Terrorist Financing Ordinance
of 147 120
US, recent regulatory development 151–3 “benefit” to defendant, establishing
see also accountability and responsibility in 117–21
financial sector; derivatives market duty to report offences 116–17
hereditary reserve principle, France 348 legislative confiscation regime 120–21
history of financial crime 32–41 Long Title reference and confiscation
China, anti-corruption measures 419–21 legislation 117
China, insider trading regulation 262–7 Organized and Serious Crimes
criminal justice system and UK common Ordinance (OSCO) 114, 115, 116, 117,
law 554–5 120
definition problems 33–4 “proceeds of an indictable offence” and
dictum meum pactum (my word is my two-stage test 115–16
bond) approach 37 right of silence 121–3
English common law, emergence of 35–6 scope and scale of money laundering
forgery and counterfeiting in Roman times 113–14
34 sentencing 124
fraud concept, early history 20–22 hostage taking considerations, extradition
fraud concept, English law history see fraud process 650
concept, English law history hostile takeovers, Russia 61–2
indifference of some traders to well-being see also crimes of the powerful (CoP) and
of clients 39, 40 legitimisation, Russia
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Subject index 781
human rights public sector involvement, need for 175

and anti-money laundering regulation see quality improvement 172
money laundering, serious crime and regulatory position 168–70, 176
human rights balance responsibility principle 171
civil liberties concerns see civil asset sustainable economic development 168, 171
recovery, US, civil liberties and due transparency principle 171
process concerns informal economic activity as risk factor
European Convention on Human Rights 525–6
465, 469, 471, 651 information disclosure see disclosure
and extradition process 651, 652–3 information management in suspected money
fraud and abuse of rights, difference laundering cases, UK position 512–18
between 339
bank’s fiduciary duty breach 515
and social security fraud 28–9
civil litigation risks to banks and financial
Iceland, self-laundering 483 institutions 514–17
identity crime 369–71, 374–6 de-risking practice 517–18, 519
see also computer related fraud Financial Intelligence Unit consent regime
incentive mechanisms 157, 243, 469–70, concerns 514, 515–16
471–2 money laundering offences 513, 514
Indonesia, corporate governance and social Money Laundering Reporting Officers
responsibility in banking institutions (MLROs) 508, 514, 515, 516–17
166–77 Proceeds of Crime Act (2002) 513–15
accountability principle 171 regulatory framework 513–14
Bank Indonesia Regulation 170 sentencing 513
banking assets 166 “suspicious activity report” (SAR)
Board structure 172 requirements 513–15, 516
business community as market participants Terrorism Act (2000) 513, 514
170 “tipping off” provisions 514–15, 516
Code of Good Corporate Governance information management in suspected money
169–70 laundering cases, US and international
company view of corporate social position 508–12
responsibility 167 Bank Secrecy Act, safe harbour provision
economic democracy principle 168 509–10
ethics-based approach 168, 169, 174 confidentiality restrictions 509
fairness principle 172 Financial Crimes Enforcement Network
financial crime prevention 173–7 (FinCEN) 510–11
financial crises effects 166–7, 173–4 Foreign Account Tax Compliance Act
functions of corporate social responsibility (FATCA) and expanded reach over
174–5 foreign accounts 511–12
implementation weaknesses 175–6 future objectives 518
independence principle 172 PATRIOT Act and terrorist financing 509,
limited liability companies 168 510–11
Model Code of Corporate Governance 176 regulatory framework 509–11
monitoring improvements, need for 176 “suspicious activity report” (SAR)
National Committee on Governance (NCG) requirements 509–10
167, 169, 176 tax evasion issues 512
OECD Principles of Corporate Governance, information technology and social media use
awareness of 172–3 585, 600–601
performance indicators 171 see also internet; technology
principles of good corporate governance ‘information-connection’ test, China 268
171–3 inheritance law, Ancient Roman 179–80
Prohibition on Unfair Business Competition inheritance taxes 180–81
Law 171 innocent owner defence 459–61, 503
Barry Rider - 9781783475780

see also civil asset recovery; criminal US 209–10

property pursuit and asset recovery institutional perspective 164–5, 400–402,
insider trading 514–17, 629–31
China see China, insider trading regulation intellectual property crime 23, 642
control liability and compliance 629 intelligence use
illegal use of insider information, Russia 61 and crime disruption see crime disruption
Islamic law 364–5 and use of intelligence
and morality 733 cyberspace effects 638–9, 641–6
rogue insiders as criminals 13 organised crime 70–72, 74
tipping off 695–6 strategic tools and future development 737,
insider trading crimes, sentencing 250–61 747
civil disgorgement remedy 251
International Association of Anti-Corruption
UK Court of Appeal Fraud Guideline 251–2
Authorities (IAACA) 411, 666
UK, English Sentencing Council guideline
259, 260–61 International Association of Prosecutors and
insider trading crimes, sentencing, US law codes of best practice 660
252–61 International Centre for Asset Recovery 415
‘abuse of position of trust’ adjustment 255 International Co-operation Review Group
crime seriousness measurement 253–4 (ICRG) 523
culpability factor 259, 260 International Compliance Association 284–5,
and Dodd-Frank Act 250, 253, 254, 255, 288
258 international cooperation 658–67
Federal Sentencing Guidelines 252–5 benefits 659–61
gain calculation 253–4, 255–9, 260 bribery and corruption, legal mechanisms to
harm assessment 259, 260 control 385–7
judicial approaches 255–61 China, anti-corruption measures 431–2, 433
market absorption approach 256, 257–8, computer related fraud 376–7
260 confiscation and forfeiture 463–4, 470–72
minimum offence level 254 crime disruption and use of intelligence
mitigating factors 259–60 644–6
organised insider trading scheme 254 cybercrime see cybercrime
relevant conduct rules 254 deposition obtained abroad 662
sentencing factors 259–61 developing states’ involvement 660, 666
Sentencing Reform Act 252, 253 evidence gathering 661–3, 667
insolvency extradition legislation and surrender of
debtor’s insolvency, France 343 fugitive offenders 663–5, 667
fraud concept 28 Financial Action Task Force and corruption
management disqualification and personal 661, 667
insolvency regime 716 forfeiture without conviction 463–4, 470–72
trading, and shareholder interests 109–10 future direction 227–8, 667, 734–5
UK Insolvency Act 325, 342 globalisation effects 658–9
insolvency-related crime 206–16 informal cooperation 660
China 214 International Association of Prosecutors and
France 212 codes of best practice 660
fraudulent trading 207–8 law enforcement 660, 661–5
Germany 210–11 letters of request for evidence 662
Italy 211–12 mutual legal assistance 327, 635, 643–4,
restriction on re-use of company names 686, 688–9
(Phoenix Companies) 208 non-cooperation reasons 665–7
Russia 213 ownership concerns 67–8
Singapore 215 restrictions and refusals 664–5
Taiwan 214–15 shortcomings 227–8
UK 206–9 sovereignty concerns 665
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Subject index 783
strategic tools and future development Ireland, Criminal Assets Bureau (CAB) and
752–3 conviction based confiscation 468–9
UN Convention against Transnational Islamic law and concept of fraud 19–20,
Organized Crime, participating states’ 356–65
role 659–60 burden of proof 360–61
International Criminal Court 668–78 condemnation of fraud 362–3
aiding and abetting as criminal financial crimes, prohibition of 364–5
responsibility mode 675–6 fiqh (jurisprudence) 357–8
bribery and corruption as possible future insider trading 364–5
inclusion 672–3 Islamic law sources 356–9
budget and caseload concerns 673 misrepresentation 360
crimes occurring in the territory of a State money laundering 365
Party 676 non-disclosure of material price-sensitive
financial aspects of underlying offences information 364–5
674–8 public interest 358
forfeiture and reparations scheme 677–8 Qur’an 357, 359, 362–3, 364, 365
future inclusion possibilities 671–4, 676–7 rescinding a contract 360–61
gravity of crime issue 673 rule of law validity 359
liability mode, determining relevant 675 Shari’ah law 283, 356, 359
mens rea test 675 Sunnah 357, 359, 362–3, 364, 365
origins 668–9 Italy
pillage as possible underlying crime 676–7 insolvency-related crime 211–12
Rome Statute exclusion 668–71 organised crime groups 13
terrorism and drug trafficking, resistance to
inclusion 669–71 Jamaica
international development assistance see crime and tourism links 98
corruption and international development money laundering 87, 89–91
assistance Proceeds of Crime Act 89–91, 95
International Organization of Securities reporting of corrupt activity 95
Commissions (IOSCO) 239–40, 285 tax evasion 97
International Security Assistance Force (ISAF) Terrorism Prevention Act (TPA) 98
439, 440 Japan
International Standards on Auditing (ISAs) FATF Mutual Evaluation Report 476–7
615–16 money laundering 481, 483
internet Punishment of Organized Crimes and
development effects 44 Control of Crime Proceeds Act 478,
online reporting, China 429–30 482
providers, acquiring records from 567 Jewish fraud concept 18–19, 21–2
see also computer related fraud; judicial approaches
cybercrime; technology criminal procedural norms, judicial
interviewing techniques, importance of skilled resistance to 719
568–9 fraud cases, management of complex, UK
investigation efficacy and secrecy, strategic 572
tools and future development 752–4 fraud trial process problems and judicial
investigative agencies, pressure to get results decisions 556–7
736–8 insider trading crimes, sentencing, US
investment schemes 368 255–61
EU Alternative Investment Fund Managers trial before a judge alone or with
Directive 152–3, 153–4 professional assessors, call for 561–2
see also computer related fraud see also criminal justice system; criminal
investors, hedge fund risks 146–8 penalties; sentencing
Iraq, corruption and public policy 438, just price doctrine 34
440–42 see also history of financial crime
Barry Rider - 9781783475780

legal aid 555 Market Abuse Directive (2007), China, insider

legal mechanisms to control bribery and trading regulation 267
corruption see bribery and corruption, markets
legal mechanisms to control ’ban of market entry’, China 274
legal profession and clients, relationship compliance officer issues and market
between 533–4 misconduct 283–4
legitimisation, crimes of the powerful (CoP) crimes of the powerful (CoP) and market
see crimes of the powerful (CoP) and manipulation 61
legitimisation financial market regulation 220–25
leverage effects, hedge fund regulation hedge funds and investor risks 146–8
development 146, 148, 150, 151, 153 insider trading, market absorption approach
Libor scandal 32–3 256, 257–8, 260
limited liability companies 168, 718 market abuse code, UK 290–91
loyalty as fiduciary duty see fiduciary duty of market theories and regulation of securities
loyalty 35–6, 37
LTCM collapse 148–9, 150 market as victim 11, 13, 14
see also hedge fund regulation development and misrepresentation 325
and trafficking see trafficking crimes
Malaysia, Islamic insurance benefits 359 unfair business practices and market
malware 370–71 distortion 88, 98
see also computer related fraud marriages, evasive 346–7
management media disclosure effects and whistleblower
personnel management processes and protection 584, 585
succession plans 241–2, 247 mens rea test 193–4, 199, 477–8, 534–5, 675
senior management ‘tone’ effects 296 misappropriation of assets 58, 59, 91, 97,
see also businesses; corporate governance 210–11, 216, 252, 269, 395, 704–5
management disqualification in companies misrepresentation 28, 316, 317, 325, 360
and financial institutions, UK 714–25 mitigating factors, insider trading crimes
company, meaning of 716 259–60
court powers 715–16 “Money Center” financial actors, failure to
criminal procedural norms, judicial regulate 231–4
resistance to 719 see also financial crisis
defined past misconduct 716 money laundering
disqualification as civil sanction 718–19 consent regime see UK, money laundering
disqualification duration 722 and consent regime
disqualification orders and undertakings crime and criminals, characteristics 8, 12,
722–3 13
disqualification scope and duration 716–17 and crimes of the powerful (CoP), Russia
evidence gathering and enforcement 717 57
fair trial guarantee considerations 719 EU Anti-Money Laundering Directive xxxi
fiduciary duties and duties of care 473, 479, 486, 488–90
consideration 720–21 fraud concept 28
jurisdictions with similar regimes 714–15 information management see information
legal consequences 723, 724 management in suspected money
limited liability abuse 718 laundering cases
permission to act notwithstanding International Criminal Court inclusions 672,
disqualification 724–5 676–7
personal insolvency regime 716 securities and banking industries see
standard of probity and competence 719–20 securities and banking industries, civil
‘unfit conduct’ trigger 719–22 enforcement, US, anti-money
see also accountability and responsibility in laundering laws
financial sector strategic tools and future development 737,
‘Mareva by letter’ as stopgap 709 741–2, 746, 753
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Subject index 785
suspicion and reporting 307 effectiveness assessment methodology

technology and internationalisation of crime 523–4, 528–9
43, 46–9 effectiveness assessment methodology,
see also individual countries technical compliance standards 523
money laundering offences 473–84 evaluation programme 522
criminality type 479–80 exclusionary approach 526–7, 529–30
domestic and regional law 473, 477–9 ‘financial systems and the broader
dual criminality problems 478, 479, 484 economy’ protection 524–6
Financial Action Task Force (FATF) informal economic activity as risk factor
Recommendations 473–7, 479–80, 481, 525–6
483–4, 486–8, 494 International Co-operation Review Group
(ICRG) framework 523
Financial Action Task Force (FATF)
international implementation of
Recommendations, predicate offences
Recommendations 522, 523
475–6, 479–80, 483–4 new entrant cost barriers 529
inter-governmental bodies 473–4 Non-Cooperative Countries and Territories
international law 474 (NCCT) programme 522–3
mens rea test 477–8 quantification of proceeds of crime 527–8
proof requirements 480–81 regional FATF-style bodies and global
restrictions on 454–5 coverage of standards 522
self-laundering 483–4 risk-based approach 525–6, 529–30
sentencing powers and separate offences safety and security contribution 526–8
478–9 suspicious transaction reporting,
tax offences 476, 481–2 over-compliance concerns 529
tipping-off breaches by financial institutions unintended consequences 528–30
476–7 see also terrorism and economic crime,
UN Vienna Convention 473, 474, 475 money laundering
money laundering, serious crime and human money-transfers, and offshore issues 680–81
rights balance 532–41 monitoring
‘associational’ liability 539 accountability and responsibility in
civil forfeiture restrictions 537 financial sector 241, 243–4, 248–9
criminal legal rights 534–8 China, Committees for Discipline
legal profession and clients, relationship Inspection (CDIs) 421, 422, 424–5,
between 533–4 428–30
legal regime scope differences 537–8 electronic surveillance use 560
mens rea test, distortion of conventional importance of 297
element 534–5 improvements, need for, Indonesia 176
non-conviction based models of forfeiture international developments and trends,
535–7 compliance officer issues 285
post-conviction laws and confiscation 535 issues, corruption and international
privacy or confidentiality rights 532–4 development assistance 410
‘proceeds of crime’, understanding of record keeping and financial crime
537–8 deterrence 301, 303, 305, 308–9
property rights 538 stewardship duties in respect of property,
risk-based appraisal concerns 540 fraudulent 331
‘success’, problem with 540–41 moral issues see ethical conduct
terrorism context 538–40 mutual legal assistance 327, 635, 643–4, 686,
United Nations Security Council (UNSC) 688–9
intervention 538–9
money laundering, and terrorist financing naked fraud, France 347–8
measures, Financial Action Task Force ‘naked officials’, China 430–31, 432–3
(FATF) xxx 8, 49, 283, 520–31 Netherlands, freezing orders 711–12
deterrence measures 527 New Zealand, cartels 125–9
Barry Rider - 9781783475780

Nigeria cybercrime and ownership problems 68, 73,

Economic and Financial Crimes 74
Commission xxviii definitions 66–7, 68–9
Ibori money laundering case 449, 451–2, efficiency focus problems 72–3
454–5 financial expertise to deal with, lack of
non-conviction based forfeiture 70–71
justification for 468–9 growth trend 65–6
serious crime and human rights balance hedge funds as possible financing vehicle
535–7 148
UK 462–3 Hong Kong, Organized and Serious Crimes
see also civil asset recovery Ordinance (OSCO) 114, 115, 116, 117,
Non-Cooperative Countries and Territories 120
(NCCT) programme 522–3 insider trading schemes 254
non-disclosure 316, 322, 364–5 international cooperation and ownership
see also disclosure considerations 67–8
Japan, Punishment of Organized Crimes
OECD Convention on Combating Bribery of and Control of Crime Proceeds Act,
Foreign Public Officials 60, 386 Japan 478, 482
OECD Principles of Corporate Governance lack of understanding of 68–9
172–3 perception of 69–70
offshore havens 47, 48–9, 680–82 regulation 67, 70
offshore issues in policing financial crime silo-centric approach 68, 73, 74
679–90 skills shortages for dealing with 68
Cayman Islands, Criminal Procedure Code South Africa, Prevention of Organized
and confiscation of funds 681–2 Crime Act 535
criminal proceeds, hiding of beneficial success measurement challenges 72–3
ownership 681 organs for transplantation 76
evidence, identifying and marshalling see also trafficking crimes
681–3, 685, 686
money-transfers, explanation of 680–81 ‘partnered approach’ recommendation 635–6
offshore definition 679–80 see also control liability and compliance in
prosecution focus 683–4 financial institutions
restraint of criminal property 683, 685 partnerships, fiduciary duty of loyalty
safe haven myth 680–82 extension to 182–3
wire transfers, understanding of 680, 682 passport order 710
offshore issues in policing financial crime, see also civil asset recovery, tracing and
offshore jurisdictions 684–7 freezing
domestic financial crime 684–6 Paulian action, creditors’ rights, France 338,
double-criminality requirements 686–7 339, 342–4, 346
international financial crime 686–7 penalties see criminal penalties
mutual legal assistance and sharing ‘person-connection’ test, China 266
information 686, 688–9 personal monetary remedy see fraud and
resourcing concerns 687–8 restitution, personal monetary remedy
security and safety 689–90 personnel management processes and
training and human resources 689 succession plans 241–2, 247
Onion Router (TOR) 9 pesticides, counterfeit 82–3
online reporting, China 429–30 see also trafficking crimes
see also internet pharmaceuticals, counterfeit 83–5
organisations see businesses see also trafficking crimes
organised crime 13–14, 65–74 Philippines
characteristics 42–3 Corporations Code 741
criminal intelligence use and analysis corruption justification 733
70–72, 74 phishing 43, 370, 371, 642
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Subject index 787
see also computer related fraud civil asset recovery, presumption of

Phoenix companies 208 innocence and burden of proof 503
pillage as possible underlying crime 676–7 confiscation and forfeiture, standard of
plea bargaining, strategic tools and future proof implications 463–4, 465
development 750 criminal burden of proof, and unfair
political considerations, extradition process, competition 131
UK 649 Islamic law, burden of proof 360–61
political power involvement, China 422–3, money laundering offences 480–81
427, 433–4 prosecution process underpins use of civil
politically exposed persons (PEPs) as standard of proof 471
criminals 7, 13 proper purpose rule for directors 106–7, 108
post-conflict states see corruption and public
see also directors
policy in post-conflict states
property
post-conviction laws and confiscation 535
poverty impact of corruption 414–15 criminal property pursuit see criminal
powerful, crimes committed by property pursuit and asset recovery
corruption and embezzlement by political forfeited, property that can be 499
leaders 447–8 intellectual property crime 23, 642
and legitimisation see crimes of the misusing property characteristic of
powerful (CoP) and legitimisation company 106–7
strategic tools and future development preservation order 710
735–6 rights, money laundering, serious crime and
presumption of innocence 201, 503 human rights balance 538
price fixing see unfair competition and crime stewardship duties, fraudulent 331
privacy or confidentiality rights 509, 532–4, third party ownership, civil asset recovery
594–5 500–501
private litigation, insider trading, China 275 traced property ownership 336–7
private prosecutions 321–2, 348 transfer of immovable rights, and fraudulent
privatisation policy effects 54, 221–4, 226–7 collusion 344–5
privileged material identification 567 value of property as confiscation 455
Problem Oriented Policing (POP) model proprietary remedy see fraud and restitution,
639–40, 644 proprietary remedy
see also crime disruption and use of prosecution decisions, fraud cases,
intelligence management of complex 570–71
Proceeds of Crime Act prosecutorial independence, and future
Jamaica 89–91, 95 development 738–9
UK see UK Acts, Proceeds of Crime Act prosecutorial and investigative agencies,
(2002) pressure to get results 736–8
‘proceeds of crime’, understanding of 537–8 public choice theory as past corruption
product delivery services and remoteness from strategy 396–7, 398–9, 401
customers 303 public funds, embezzlement of 59–60
product development cycle involvement, need public interest
for 282–3 Australia Public Service Act 1999 (PS Act)
see also compliance officer issues in 587, 593, 594
financial sector individual members of public as victims 10
professional scepticism 616, 620–22 and Islamic law 358
see also auditors and fraud detection public confidence, restoring 616–17
profits public scandals and public sensitivity to
business profits derived from undocumented confidence 223–4
workers 450–51 UK Public Interest Disclosure Act 596
restrictions, fiduciary duty of loyalty 182 public policy
secret profits rule 731, 741 design distortion and corruption, new
proof requirements strategies 402–3
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in post-conflict states see corruption and regulatory compliance, understanding

public policy in post-conflict states 39–41
public protests 36–7, 743–5 regulatory requirement, UK, money
public sector disclosures, importance of laundering and consent regime 490–93
589–90 securities 35–6, 37, 691–2
‘publishable information’ test, China 269–70 self-regulatory traditions 36, 37–9
punishment shortcomings, crimes of the powerful
China see under China, anti-corruption (CoP), Russia 54–6
measures reparation see compensation
civil asset recovery as form of 497 repeat offenders 453–4
see also sanctions; sentencing restitution
civil restitution as remedy 740–42
and fraud see fraud and restitution
quantification of proceeds of crime 527–8
and processes, US 497–8
restraint orders 326, 569–70, 683, 685
racial/sexual/political considerations,
right to a fair trial 577–8, 653, 719
extradition process, UK 649 right to liberty and security 653
real estate investment trusts (REITs) 103 right to silence 121–3, 557, 581–2
record keeping and financial crime deterrence risk
301, 303, 305, 308–9 appraisal concerns, serious crime and
see also monitoring human rights balance 540
recruitment policy checks banking governance and financial risk
and commercial espionage 303 management 244–5, 246–7
see also financial crime deterrence civil litigation risks to banks and financial
practicalities institutions 514–17
red flag indicators, importance of early 285–6 compliance issues 289–90, 297, 298–9,
see also compliance officer issues in 627–8, 632–4, 635
financial sector ‘control person’ risk 632–3, 634
regulation dissipation of assets, civil asset recovery
anti-corruption measures, China see under 706, 707
China, anti-corruption measures financial crime deterrence practicalities 300,
by exception 222–3 301–2, 303–4, 305
compliance officer issues in financial sector financial crisis and unrecognised factors
280–81 232–3, 234–5
control liability and compliance in financial focus, China, anti-corruption measures
institutions 628–33 430–31
cost factors see funding hedge fund regulation development 146–51
EU Regulatory Impact Assessments xxxiii information management and de-risking
financial market regulation 220–25 practice 517–18, 519
hedge fund see hedge fund regulation management, compliance officer issues
development 281–2, 283, 285
Indonesia, corporate governance in banking management and corporate governance
institutions 168–70, 176 240–41, 243, 244–6, 247–9
and information management see ‘naked officials’, China 430–31, 432–3
information management in suspected and terrorist financing 525–6, 529–30
money laundering cases rogue traders see insider trading
insider trading, China see China, insider Russia
trading regulation crimes of the powerful (CoP) see crimes of
international regulatory coordination the powerful (CoP) and legitimisation,
shortcomings 227–8 Russia
organised crime 67, 70 insolvency-related crime 213
regulatory agencies in bribery and
corruption 387–9 safe haven myth 47, 48–9, 680–82
Barry Rider - 9781783475780

Subject index 789
see also offshore issues in policing financial see also corruption and public policy in
crime post-conflict states
sanctions self-incrimination 504–5
bribery and corruption 390–93 see also civil asset recovery, US
corporate fraud participation, Russia 58 self-laundering 483–4
and financial crisis 237 see also money laundering
insider trading regulation, China 274–5, 277 self-regulatory traditions 36, 37–9
insolvency-related crime, China 214 sentencing
management disqualification as civil bribery and corruption 389–90
sanction 718–19 conviction rate concerns 736–7
see also criminal justice system; criminal criminal fraud 323, 324–5
penalties; enforcement; punishment; criminal justice system, UK 560
sentencing insider trading crimes see insider trading
Scottish asset forfeiture agency 465–6, 471 crimes, sentencing
search warrant applications 565–6 money laundering cases 124, 478–9, 513
secret profits rule 731, 741 prison sentences as deterrent 447, 448
see also profits US Sentencing Reform Act 252, 253
securities see also criminal justice system; criminal
‘effect on the price’ approach, China 271 penalties; judicial approaches;
regulation 35–6, 37 punishment; sanctions
Securities Industry Financial Markets shadow banking system 145
Association’s White Paper 279–80 see also hedge fund regulation development
Securities Law, China 267 shadow directors 207, 208, 212
securities and banking industries, civil see also directors
enforcement, US 691–702 shareholders
Exchange Act (1934) 691–2, 694, 696 “company burials” and share sales,
Federal Reserve System 693 Germany 211
Financial Crimes Enforcement Network insolvency and takeover cases 110–11
(FinCEN) 693, 701 ratification, corporate executives and
Financial Industry Regulatory Authority conflicts of interest 189
(FINRA) 691, 692–4, 697–8 responsibilities 243
Foreign Corrupt Practices Act (FCPA) 696 share interest disclosure 106
insider trading and tipping 695–6 shareholder primacy and shareholder value
Office of the Comptroller of the Currency maximisation 155–6, 157–8, 159–60,
(OCC) 693, 701 164, 165
private individuals 693–4 Shari’ah law 283, 356, 359
Securities Act (1933) 691 see also Islamic law and concept of fraud
Securities and Exchange Commission short-termism problems, and corporate
(SEC) 606–8, 691, 692, 694–6, 715, governance 157, 160
739–40 silence, right to 121–3, 557, 581–2
securities fraud 694–5 Singapore
securities regulation 691–2 corporate financial assistance rule 108
unregistered broker-dealers 694 disguised forms of capital return 107
securities and banking industries, civil insolvency-related crime 109, 215
enforcement, US, anti-money laundering real estate investment trusts (REITs) 103
laws 698–701 social costs, anti-money laundering and
Bank Secrecy Act (1970) 699 terrorist financing measures 529–30
criminal and civil enforcement 699 social fabric, corruption effects 93–4
Deferred Prosecution Agreement 700–701 social media 45–6, 301, 310–11, 312
Financial Industry Regulatory Authority social security fraud and human rights 28–9
(FINRA) Rule 3310 699, 701 South Africa
PATRIOT Act 699 civil forfeiture restrictions 537
security companies, licensing foreign 438 Prevention of Organized Crime Act 535
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South Africa, corporate criminal responsibility information sharing 743

191–205 insider trading and morality 733
agency relationship 195, 196 intelligence role 737, 747
common law doctrine of vicarious liability international cooperation 752–3
194–203 investigation costs and bounty hunting
common law doctrine of vicarious liability, 742–3
limitations 196–7 investigation efficacy and secrecy 752–4
corporate criminal liability concept 193, plea bargaining 750
202 powerful, crimes and influence of 735–6
corporate hierarchies and evidence prosecutorial independence 738–9
collection problems 201 secret profits rule 731, 741
corporation constitution and articles of tax evasion 753
association 193 transparency and disclosure, and cultural
criminal activity increase 192 differences 729–31
imputation of liability via the director or unexplained wealth 751–2
servant 199–204 whistleblowing 749–50
mens rea association to persons identified see also corruption, new strategies; future
with the corporation 193–4, 199 developments
presumption of innocence 201 strategic tools and future development,
third party compensation 198 corruption
South Korea, corruption and economic growth as crime against the state 732
407–8 detection levels 733–5
sovereignty concerns 409–10, 665 and fiduciary accountability breaches 741–2
Spain, Criminal Code and money laundering as international crime, and collaboration
477 734–5
spam 371–2, 642 money laundering 737, 741–2, 746, 753
see also computer related fraud moral and ethical aspects 733
specialist investigative needs 738 reasons for, and temptation susceptibility
specialty arrangements, extradition process 732–4
650, 653–7 understanding of 728
Sri Lanka, Finance Business Act 286 substitutive performance claims 331–2
state as victim 11 see also fraud and restitution
sterile investments 87–8 surveillance see monitoring
strategic tools and future development 726–54 suspicious activity reports
citizen empowerment 743–5 control liability and compliance 629, 636
civil enforcement 739–40 Financial Action Task Force (FATF) 486–8,
civil restitution as remedy 740–42 494, 529
confiscation rates of proceeds of crime 746 information management in suspected
conflicts of interest and accountability money laundering cases 509–10,
732–4, 740–41, 744 513–15, 516
conviction rate concerns 736–7 money laundering and consent regime
corporate control liability 743–4 488–9, 490–91, 492
criminal culpability 745–6 over-compliance concerns 529
developing countries and investigative costs Sweden, Economic Crime Authority 3, 10
742–3 Switzerland
elite prosecutorial and investigative criminal standard of proof in all forfeiture
agencies, pressure to get results 736–8 cases 463
enforcement agencies, effectiveness and foreign financial institutions (FFIs) direct
budget cuts 736 reporting 512
financial control and facilitator liability tax fraud definition xxix
748–9
good governance structures and procedures, Taiwan, insolvency-related crime 214–15
need for 731 takeovers and shareholder interests 110–11
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Subject index 791
taxation UK Terrorism Act (2000) 290, 513, 514

money laundering offences 476, 481–2 terrorism and economic crime 86–99
tax avoidance, France 347 civil liability 89–90, 91, 96–7, 542–7
tax evasion 97, 512, 753 funding terrorism 97–8
tax fraud definition xxix regulation costs 98
tobacco products and trafficking crimes 81 tax evasion 97
US Foreign Account Tax Compliance Act terrorism and economic crime, corruption
(FATCA) 281, 511–12 92–7
technology bribery 92
anti-money laundering and terrorist economic effects 93
financing, technical compliance factors facilitating 93
standards 523 law enforcement challenges 95
chip and PIN technology effects 372 offences 95–6
corruption, new strategies, and ICT-based reduction strategies 95
tools 400 social fabric effects 93–4
electronic surveillance use 560 terrorism and economic crime, money
and fraud concept 31 laundering 86–92, 94
innovation 236, 238 anti-money laundering framework 89–92
internet providers, acquiring records from cash intensive businesses, purchase of 87
567 financial sector infiltration effects 88–9
social media, financial crime deterrence intermeddler liability 91
practicalities 301, 310–11, 312 regulated sector obligations 90
social media, and whistleblower protection sterile investments 87–8
585, 600–601 tax evasion 97
technical assistance and international unfair business practices and market
development assistance 414 distortion 88, 98
see also computer related fraud; see also money laundering, and terrorist
cybercrime; internet financing measures, Financial Action
technology and internationalisation of crime Task Force (FATF)
42–50 terrorism, regulation of financing, US
cyber attacks and hacking 45 542–50
money laundering 43, 46–9 cyber technologies 547–8
national financial intelligence units (FIUs) forfeiture from interbank accounts held by
49–50 foreign banks 545–7
organised crime characteristics 42–3 forfeiture/confiscation of suspected funds
phishing 43 542–4
social networking and crowd mobilisation PATRIOT Act 544–7, 548–9, 550
45–6 United Nations Security Council Resolution
telemarketing fraud 43 1373 and freezing of funds 547
terrorist group involvement 43, 49 third parties
virtual currencies 44–5 civil asset recovery effects 708–9
terrorism compensation, South Africa 198
and anti-money laundering regulation see disclosure see disclosure
money laundering, serious crime and dishonestly assisting in breach of fiduciary
human rights balance, terrorism context duty 333–4
and drug trafficking 669–71 EU Contract Law, and third party rights 341
hedge funds as possible financing vehicle evidence requisitioned from 566
148 fraud against third party rights, France
strategic tools and future development 753 341–6
and technology 43, 49 property belonging to, civil asset recovery
Terrorism Prevention Act (TPA), Jamaica 500–501
98 unjust enrichment, receiving property
trafficking crimes 82, 669–71 subject to a trust 335
Barry Rider - 9781783475780

timing bribery and corruption see bribery and

importance of, civil asset recovery 705, 713 corruption, legal mechanisms to control
passage of time as bar to extradition Cadbury Report 245
649–50 civil asset recovery see civil asset recovery,
tipping off tracing and freezing
insider trading 695–6 common law see common law
money laundering cases 476–7, 488, 489, Company Law Review 159
491, 493, 494–5, 514–15, 516 ‘comply or explain’ system of corporate
tobacco products 81–2 governance 246–7
see also trafficking crimes confiscation and forfeiture see confiscation
torture or inhuman treatment prohibition 652 and forfeiture
see also extradition control liability and compliance see control
tracing, civil asset recovery see civil asset liability and compliance in financial
recovery, tracing and freezing institutions
trading, insider see insider trading corporate criminal responsibility doctrine
trafficking crimes 75–85 202–3
arbitrage of borders 77 corporate financial assistance rule 108
art crime 79–81 Corporate Governance Code 245–6
coercive crimes comparison 75 corporate Takeover Codes 110–11
counterfeit and pirated products, estimated Court of Appeal Fraud Guideline 251–2
value 9–10, 78–9 criminal justice system see criminal justice
denied demand 76–7 system and UK common law
health care requirements 76–7 criminal property pursuit and asset recovery
organs for transplantation 76 see criminal property pursuit and asset
pesticides, counterfeit 82–3 recovery
pharmaceuticals, counterfeit 83–5 Crown Prosecution Service (CPS) 563,
predatory crimes comparison 75 570–71
taxation effects, tobacco products 81 Cyber Crime Strategy 643
terrorism financing 82 ‘data retention’ legislation 585
tobacco products 81–2 Deferred Prosecution Agreement tool 561
training Department for International Development
auditors and fraud detection 621 (DFID) see corruption and
financial crime deterrence practicalities 301, international development assistance,
306, 309–11 UK, Department for International
offshore issues and human resources 689 Development (DFID)
skills shortages for dealing with organised disguised forms of capital return 107–8
crime 68 economic crime definition 3–4
specialised, compliance officer issues 284–5 English Sentencing Council guideline 259,
specialist investigative needs 738 260–61
transparency see accountability EU Alternative Investment Fund Managers
Transparency International (TI) 93, 94, 302, Directive implementation 152, 153–4
405, 406, 419 extradition process see extradition process
Global Corruption Barometer 414, 440 fiduciary duty of loyalty 180–82, 185, 187,
trust 189
fiduciary duties see fiduciary duties financial control and facilitator liability
liability in constructive 318–20 748–9
Turkey, money laundering deterrence financial crisis and economic crime see
deficiencies 301–2 financial crisis, economic crime and
development links
Uganda, corruption rating 414 Financial Intelligence Unit consent regime
UK concerns 514, 515–16
Association of Chartered Certified financial market systemic failure,
Accountants (ACCA) 159 recognition of risk of 234–5
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Subject index 793
Financial Services Authority (FSA) 222–5, right of silence 122

298, 387–8, 390–93 Roskill report 563
financial system confidence see financial Scottish asset forfeiture agency 465–6, 471
system, engendering confidence self-laundering 483
fraud cases, management of complex see Serious Fraud Office (SFO) 6, 7, 387, 389,
fraud cases, management of complex 563, 570–71, 738–9, 740, 750
fraud in civil law see fraud in civil law Small Business, Enterprise and
fraud concept see fraud concept, English Employment Bill 609
law history South Sea Bubble scandal 26, 38
fraud in criminal law see fraud in criminal Stewardship Code 157, 159
law tax evasion and money laundering 481–2
fraud and restitution see fraud and unexplained wealth identification 751
restitution whistleblower protection see whistleblower
fraus omnia corrumpit recognition 354 protection, UK legislation
insider trading, maximum sentence 253 whistleblowing rewards see whistleblowing
insolvency-related crime 109–10, 206–9, rewards
342 white collar crimes see white-collar crimes,
Institute of Chartered Accountants, defence strategies
Dialogue in Corporate Governance UK Acts
159–60, 162 Anti-terrorism, Crime and Security Act
Law Commission Report on bribery reform (2001) 386
386–7 Bribery Act 281, 290, 292–3, 382, 387,
legislative confiscation regime 120 560–61, 744, 745, 747, 749
London Conference on Cyberspace (2011) Bribery Act, extra-territorial jurisdiction
645 431–2
management disqualification see Companies Act 106, 107–8, 159, 162, 178,
management disqualification in 189, 203, 207
companies and financial institutions Company Directors Disqualification Act
marriages, evasive 346, 347 (CDDA) see management
“missing trader” fraud 118 disqualification in companies and
money laundering and information financial institutions
management see information Computer Misuse Act (1990) 645
management in suspected money Coroners and Justice Act 251
laundering cases, UK position Criminal Justice Act (1987) 26
money laundering legislation xxxiii 118–20, Criminal Justice and Public Order Act
124, 290, 291–2, 298, 480–81 (1994) 555, 557–8
money laundering regulation and Criminal Law Act (1977) 26
non-conviction based confiscation 537 Employment Rights Act 609
money-center banks, funding of rescue 235 Financial Services (Banking Reform) Act
National Crime Agency (NCA), perceived (2013) 634
economic crime threats 66–7, 71 Financial Services and Markets Act (2000)
National Intelligence Model (NIM) 71, 639 see below
organised crime, First National Strategic Fraud Act (2006) 26–7, 208, 322–3, 558,
Assessment 71 745
Parliamentary Commission on Banking Insolvency Act 325, 342
Standards, ‘special measures’ tool Larceny Act (1916) 26
248–9 Leeman’s Act (1867) 38–9
plea bargaining 750 Misrepresentation Act (1967) 28, 317
Prudential Regulation Authority (PRA) 225, Powers of Criminal Courts (Sentencing) Act
247, 249, 293, 295, 610, 611 326–7
Railway Mania scandal 38 Proceeds of Crime Act (2002) see below
real estate investment trusts (REITs) 103 Public Interest Disclosure Act 596
Regulatory Impact Assessments xxxiii Terrorism Act (2000) 290, 513, 514
Barry Rider - 9781783475780

Theft Act (1968) 26 UK, countering financial crime, Financial

UK Acts, Financial Services and Markets Act Services and Markets Act 2000 (FSMA)
(2000) 225, 248, 249, 325, 327 defence of behaviour based on ‘reasonable
bribery and corruption, legal mechanisms to grounds’ 290–91
control 387–8, 390, 391 failure to implement relevant procedural
control liability and compliance in financial and organisational requirements 298
institutions 628 market abuse statement of penalty 291
countering financial crime see UK, procedural compliance defence 291
countering financial crime, Financial Threshold Conditions and authorisation
Services and Markets Act (2000) 293–4, 295
UK Acts, Proceeds of Crime Act (2002) 447, UK, Financial Conduct Authority (FCA) 225,
464–5, 469, 470, 479, 480–81 247–8, 249
and civil recovery 320–21, 561 bribery, compliance procedures aimed at
confiscation mechanism 464–5, 469, 470 388–9, 390, 391–3, 749
confiscation orders 325–6, 327 control liability and compliance in financial
control liability and compliance in financial institutions 628
institutions 628, 629 corporate governance requirements 295–6
countering financial crime 290, 292 countering financial crime see UK,
and criminal property pursuit see criminal countering financial crime, Financial
property pursuit and asset recovery, Conduct Authority (FCA)
UK, Proceeds of Crime Act Decision Notice to Standard Bank 298
extradition process, and Restraint Order disciplinary action against Besso Limited
breach 653–7 298–9
fraud cases, management of complex financial crime definition 33–4
569–70 Financial Crime Guide 296, 297
information management in suspected high levels Principles for Business 295
money laundering cases 513–15 market abuse code 290–91
money laundering and consent regime on organisational structure 296
490–91 risk management supervision 247–8, 249
mutual legal assistance 327 risk-based supervision of authorised firms
restraint orders 326, 653–7 289–90, 293–4
victim compensation 326–7 on senior management ‘tone’ 296
UK, countering financial crime 288–99 whistleblowing rewards 610, 611
authorisation and systems of control 293–4 UK, money laundering and consent regime
Bribery Act 290, 292–3 485–95
compliance definition 288 consent application process and time
compliance and internal systems of business periods 491–2, 493–4
controls 290–93, 298–9 and EU Anti-Money Laundering Directive
EU Capital Requirements Regulations 295 486, 488–90
Financial Services Authority (FSA), Final Proceeds of Crime Act (2002) 490–91
Notice to Coutts & Co 298 regulated sector cooperation requirements
governance and control of financial crime 489–90
risk 294–6 regulatory requirement 490–93
Money Laundering Regulations 290, 291–2, suspicious activity report 486–9, 490–91,
298 492, 494
monitoring and surveillance, importance of tipping off offence 488, 489, 491, 493,
297 494–5
Proceeds of Crime Act 290, 292 transactional delays, explaining 491, 493
Prudential Regulation Authority (PRA), UN Convention against Corruption xxix 60,
authorisation procedures 293, 295 386, 395, 411–12, 463, 672–3, 740, 742,
risk and risk management 289–90, 297 751
terrorist financing and Terrorism Act 290 China as signatory 432
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Subject index 795
UN Convention against Transnational Deferred Prosecution Agreements (DPAs)

Organized Crime 377, 659–60 571, 631
UN Crime Congress xxviii-xxix Dodd-Frank Act 151–2, 153, 237, 250, 253,
UN International Convention for the 254, 255, 258, 281, 605–6, 607
Suppression of the Financing of economic crime definition 3, 4
Terrorism 98 electronic surveillance use 560
UN Millennium Development Goals 236 Exchange Act (1934) 691–2, 694, 696
UN Office on Drugs and Crime 415 False Claims Act 600, 605, 745
UN Security Council 539–40, 547 Federal Reserve System 693
UN Vienna Convention 473, 474, 475 Federal Sentencing Guidelines 252–5
undocumented workers 450–51 fiduciary duty of loyalty 178, 182, 183,
unexplained wealth 751–2
184–5, 186, 187–90
see also strategic tools and future
financial control and facilitator liability 748
development
unfair competition and crime 125–43 financial crimes definitions xxix, xxxi-xxxii
cartel conduct as criminal offence 125–32, Financial Crimes Enforcement Network
143 (FinCEN) 510–11, 693, 701
cartel conduct as criminal offence, role of financial crisis and economic crime see
intent, establishing 127, 132, 138–43 financial crisis, economic crime and
competition condition 130 development links
consumer welfare protection 131 Financial Industry Regulatory Authority
criminal burden of proof 131 (FINRA) 691, 692–4, 697–8, 699, 701
criminal penalties 141 financial market systemic failure risk,
element of intention 129–32 recognition of 234
purpose/effect condition 130, 131 Foreign Account Tax Compliance Act
unfair competition and crime, US v Apple and (FATCA) 281, 511–12
price fixing 127, 131, 133–41 Foreign Corrupt Practices Act 696, 739
analysis 137–41 Foreign Corrupt Practices Act, as
civil proceedings, possible reasons for 137 extra-territorial jurisdiction 431, 432,
evidence characterisation 136–7 433
legitimate business justification for conduct Fraud Enforcement Recovery Act 600
134–6, 139–40 fraud trials and witness testimony 559, 560
and rule of reason 133, 138–9 freezing injunctions, lack of 711
‘unfit conduct’ trigger 719–22 Government Accountability Project 608
see also management disqualification in hacking reports 370
companies and financial institutions hedge funds, recent regulatory development
UNIDROIT Principles of International 151–3
Commercial Contracts 341 housing market crash 232, 236
United Arab Emirates, money laundering 479, insider trading 634, 695–6
481, 482, 483 insider trading crimes, sentencing see
unknown wrongdoer 500 insider trading crimes, sentencing, US
see also civil asset recovery, US, law
non-conviction based forfeiture insolvency-related crime 209–10
unregistered broker-dealers 694 International Strategy for Cyberspace 645
US JOBS Act 151
Bank Secrecy Act (1970) 509–10, 699 Libor scandal 32–3
civil asset recovery see civil asset recovery, money laundering, information management
US see information management in
Commodities Exchange Act 605–6 suspected money laundering cases, US
compliance officers’ role 632 and international position
confiscation rates of proceeds of crime 746 money laundering legislation xxxiii 479–80,
corporate takeovers 111 482, 753
cybercrime as FBI priority 642–3, 644 money laundering regulation 533, 536–7
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money-center banks, funding of rescue of ethnicity and whistleblowing perceptions

235 591
Office of the Comptroller of the Currency fraud disclosure types 590
(OCC) 693, 701 future research 601
Operation Choke Point 530 information technology and social media
PATRIOT Act 509, 510–11, 544–7, 548–9, use 585, 600–601
550, 699 investigative responsibilities 599
‘performance bonds’ suggestion 286 leaking and disclosure, difference between
plea bargaining 750 585
prosecutorial independence 738 legislative protection 589
RICO (Racketeer Influenced Corrupt media disclosure effects 584, 585
Organisations) legislation 468, 558–9 monetary rewards for disclosures 600
Sarbanes-Oxley Act 281, 589, 616–17 moral issues 599–600
Securities Act (1933) 691 negative attitudes towards whistleblowers
securities and banking industries see 584–5
securities and banking industries, civil nuisance, distinguishing from 601
enforcement, US organisational loyalty issues 584–5,
Securities Exchange Act 252 599–600
Securities and Exchange Commission public sector disclosures, importance of
(SEC) 606–8, 691, 692, 694–6, 715, 589–90
739–40 research into whistleblowing 591–2
securitisation reform 281 whistleblower definition 586–7
self-laundering 483 whistleblower origins 583
Sentencing Reform Act 252, 253 whistleblowing, reasons for need for
Sherman Act 125, 131, 132, 133, 136, 137, 588–90
138–9 whistleblower protection, Australian
tax evasion 482 legislation 583–4, 586–9, 592–5, 601
terrorism, regulation of financing see civil remedies and compensation in
terrorism, regulation of financing, US response to reprisal 593–4
unfair competition 125, 127, 130–31, 132, confidentiality, anonymity and disclosure of
133, 133–41 identity of disclosers 594–5
Volcker Rule 237 disclosable conduct types 588
whistleblower definition 586 Fair Work Act 592
whistleblower protection 749 immunity from liability 593, 598
whistleblowing rewards see whistleblowing notification to discloser of action being
rewards, US taken 595
Ombudsman role 595
victim categorisation 10–11 Privacy Act 594–5
victim compensation 326–7, 455–6 Public Information Disclosures Act 587–8,
virtual currencies 9, 44–5 592, 594, 595, 598
voluntary regulation 161–2, 163, 164, 222, Public Service Act 1999 (PS Act) 587, 593,
607 594
vulnerability analysis 300, 302–3 whistleblower protection, UK legislation
596–8
Western involvement in post-conflict states, anonymity and confidentiality 598
criticism of 439 disclosure recipients 597–8
see also corruption and public policy in early detection and forewarning of
post-conflict states malpractice 598
whistleblower protection 583–601, 749, 750 public disclosure types 596–7
China, anti-corruption measures 423–4 reprisals and Employment Tribunal
corporate governance and anti-corruption protection 598
strategies 589, 601 whistleblowing
‘data retention’ legislation 585 financial crime deterrence practicalities 308
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Subject index 797
strategic tools and future development reward restrictions 606

749–50 Securities and Exchange Commission
whistleblowing rewards 602–11 (SEC), Adoption Release 606–8
disclosure and national security issues 602 voluntariness analysis 607
integrity of financial markets, concerns over white-collar and blue-collar crime, first use of
603 terms 4–5
private sector disclosure 603 white-collar crimes, defence strategies, UK
whistleblowing rewards, UK 609–11 573–82
British Bankers’ Association views 610–11 abuse of process 577–8
effectiveness of the existing rules, concerns closing speeches 582
over 609
defendant’s character, portrayal by defence
Employment Rights Act and statutory
team 580–81
protections 609
Financial Conduct Authority (FCA) views disclosure decisions 575–6
610, 611 double jeopardy rule 578
financial incentives and profit motive evidence admissibility 577
concerns 610 fair trial right 577–8
moral hazard concerns 610 ‘gift’ to defence, prosecution giving 579
Parliamentary Commission on Banking legal arguments 576–7
Standards report 609–10 Plea and Case Management Hearing 575
Prudential Regulation Authority (PRA) preliminary hearings’ strategy 574–5
views 610, 611 right to silence at trial 581–2
Small Business, Enterprise and stay of proceedings 578
Employment Bill 609 trial process and jury observation 578–9
‘whistleblowers’ champion’ suggestion 611 witness treatment 574
whistleblowing rewards, US 600, 604–9 wire transfers, understanding of 680, 682
award level assessment 608–9 see also offshore issues in policing financial
Commodities Exchange Act 605–6 crime
Dodd-Frank Act 605–6, 607 witness testimony 559–60
False Claims Act 605 see also evidence gathering
Government Accountability Project 608 World Bank
information relating to a violation of Anti-Corruption Strategy 401
securities laws 606 Corporate Scorecard and poverty reduction
legal duty to report information, and 666
ineligibility for reward 607 Stolen Asset Recovery Initiative (StAR)
participation in internal compliance systems 415, 742
incentives 606–7 World Economic Forum (WEF) 77–8, 83
Barry Rider - 9781783475780

Barry Rider - 9781783475780


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JOBNAME: Rider PAGE: 1 SESS: 5 OUTPUT: Wed Oct 14 15:09:05 2015

RESEARCH HANDBOOK ON INTERNATIONAL

Barry Rider - 9781783475780

RESEARCH HANDBOOKS IN FINANCIAL LAW

Research Handbook on International Insurance Law and Regulation

Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Research Handbook on Secured Financing in Commercial Transactions

Research Handbook on Crisis Management in the Banking Sector

Barry Rider - 9781783475780

Research Handbook on International

RESEARCH HANDBOOKS IN FINANCIAL LAW

Cheltenham, UK + Northampton, MA, USA

Barry Rider - 9781783475780

© The Editor and Contributors Severally 2015

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2015940692

This book is available electronically in the

ISBN 978 1 78347 578 0 (cased)

Typeset by Columns Design XML Ltd, Reading

Barry Rider - 9781783475780

PART I THE NATURE AND CHARACTERISTICS OF ECONOMIC

1 The characteristics of economic crime and criminals 3

PART II THE ENTERPRISE OF CRIME

6 Organized economic crime 65

PART III BUSINESS CRIME

9 The misuse and abuse of the corporate form 103

vi Research handbook on international financial crime

13 Corporate governance and responsibility 155

PART IV THE FINANCIAL SECTOR AT RISK

18 Engendering confidence in the financial system – challenges and

26 Fraud in civil and criminal law 315

Barry Rider - 9781783475780

31 The legal mechanisms to control bribery and corruption 381

PART VII THE PROCEEDS OF FINANCIAL AND ECONOMIC CRIME

36 The pursuit of criminal property 447

PART VIII ENFORCEMENT AND CONTROL

45 The traditional criminal justice system: its efficacy in dealing with

Barry Rider - 9781783475780

viii Research handbook on international financial crime

47 Defending individuals charged with white collar crimes – challenges

Name index 755

Barry Rider - 9781783475780

Dr Richard Alexander, MA (Cantab); PhD (Lond); Barrister (England and Wales).

x Research handbook on international financial crime

Ms Laura Atherton, MA (Cantab); Solicitor-Advocate (England and Wales). Laura is

Barry Rider - 9781783475780

Professor Caroline Bradley, MA, LLM (Cantab). Caroline is a Professor of Law at

Mr Jeffrey Bryant, LLB (Birmingham); Barrister (England and Wales). Jeffrey is a

Mr Stefan D. Cassella, JD (Georgetown); BS (Cornell); AUSA (District of Maryland);

Barry Rider - 9781783475780

xii Research handbook on international financial crime

Ms Kathryn Arnot Drummond, MA (Edinburgh); Barrister (England and Wales).

Barry Rider - 9781783475780

Professor Leonid Fituni, MA (Moscow State University); PhD (Institute of African

Mr David Fitzpatrick, MA (Cantab); Barrister (England and Wales) (Hong Kong).

Barry Rider - 9781783475780

xiv Research handbook on international financial crime

enforcement agencies as an alternative to the investigation and prosecution of different

Professor Ronald D. Francis, MA (NZ); PhD (Melb), DipCrim (Cambridge). Ronald

Professor M. Michelle Gallant, BA (Hons) (UPEI); LLB (Hons) (UNB); LLM

Dr Peter M. German OOM, BA (Hons) (Mt Allison); MA (Simon Fraser); LLB

Dr George Gilligan, MPhil, PhD (Cantab); MA (La Trobe). George is a Senior