Written evidence submitted by the Financial Conduct Authority (FRA0029)

How the Justice System conducts fraud investigations and prosecutions

The FCA is the conduct regulator for around 51,000 financial services firms and financial markets in the UK. We aim to make markets work well for individuals, for businesses and for the economy as a whole.  Not all fraud is within our jurisdiction, we therefore focus our work on the areas where our powers and remit mean we can have the most impact (as explored further below).

The terms of reference are framed around investigating and prosecuting fraud.  The Financial Services & Markets Act 2000 (FSMA), which sets out the FCA’s powers and remit, does not provide us with an express power to prosecute fraud but we can prosecute fraud if it furthers our statutory objective. In particular, if we obtain evidence of fraud during an investigation into misconduct under FSMA, the Money Laundering Regulations (MLRs) or the Financial Services Act 2012 (FSA), that evidence can be used in an FCA prosecution for fraud alone or in conjunction with offences under those Acts.  If a firm provides regulated products or services without the correct authorisation (unless exempt), they may be carrying on unauthorised business. This is a breach of the “general prohibition” and a criminal offence. Much of the Enforcement Division’s fraud pursuit work relates to fraudsters conducting improperly unauthorised business and we have prosecuted several large-scale frauds involving multiple defendants and losses of several million pounds arising out of unauthorised business investigations. Our powers to gather evidence from unauthorised firms where there are no suspected FSMA breaches are more limited.

The FCA works closely with other law enforcement partners and regulators to tackle fraud.  We are a foundation member of the National Economic Crime Centre (NECC), which brought together the FCA, NCA, SFO, CoLP, HMRC and CPS, government departments, regulatory bodies, and the private sector with a shared objective of driving down serious organised economic crime in the UK. We actively support the NECC with four seconded staff and the work to counter the threat from investment fraud continues.

Alongside engagement with the NECC and the SFO, we refer fraud to the police. The Justice Committee has identified that only 1% of police resources are dedicated to fraud.  We are often told that police forces are unable to accept referrals because of resource constraints. 

For prosecutions within our remit, the FCA has a Criminal Prosecution Team (“CPT”) led by Chief Criminal Counsel (an experienced criminal QC) consisting of 11 lawyers experienced in prosecuting financial crime.  They advise investigators from the outset of a criminal investigation and on all aspects of the prosecution process.  The CPT lawyer applies the Code for Crown Prosecutors when advising on evidential sufficiency to charge and whether a prosecution meets the public interest test. Five proceeds of crime lawyers advise upon all aspects of asset forfeiture from pre-charge restraint through to compensation for victims post-conviction.  The scale and complexity of FCA prosecutions is such that external prosecution counsel are instructed before a charging decision.     

For example, in July 2021, the FCA prosecuted Ian Hudson for offences of fraud and breaching the general prohibition.  Mr Hudson falsely claimed to be a financial adviser and accepted approximately £2m in deposits from clients which he dishonestly misused.[1]  Following a guilty plea, Mr Hudson was sentenced to 4 years’ imprisonment.  Confiscation proceedings to recover compensation for his victims are ongoing.   

The roles of the Crown Prosecution Service and the Serious Fraud Office in the prosecution of fraud

The FCA and SFO liaise at the pre-referral stage of any investigation that may have fraudulent elements to help inform decision making regarding who may be the most appropriate organisation to take particular elements of cases forward. Liaison with the SFO will occur during an open investigation if potentially fraudulent elements emerge that may be of interest to the other organisation. Such discussions ensure that investigations opened by one organisation are not prejudiced by the enquiries of the other. Senior individuals in Enforcement at both the FCA and SFO attend quarterly calls to discuss the progress of investigations that may be of mutual interest.

The experience of the impact and prosecution of fraud among those working in the legal system and victims of fraud

The FCA regularly carries out a nationally representative survey of UK consumers, the Financial Lives survey. Our most recently published survey showed that unsolicited approaches have increased during the pandemic, increasing the risk of fraud and scams. In the 12 months to February 2020, 18% of adults (9.3m) received at least one unsolicited approach involving investments, pensions and retirement planning – that might be a scam. Over a fifth (22%) say they definitely received more unsolicited approaches since the end of February than they did before Covid-19; a further 22% think this may be the case.

1.4 million adults say they paid out money as a result of a Covid-19 possible scam. People with characteristics of vulnerability are more susceptible to these approaches: 12% paid out money, compared with 1% of those without such characteristics. Younger adults are also more susceptible: 16% of 18-24 year olds paid out money, compared with 1% of those aged 55+.

The impact of fraud upon its victims is not measured solely in economic terms. Fraud can cause severe psychological distress, which in turn can lead to physical health problems and prevent victims from going about their everyday lives.  Victims have described destroying evidence to hide financial loss from their family, or how they are nervous to answer the telephone or sign their own name.  A victim of a UK-based money launderer to a trans-national organised crime group who laundered £2.5 million, the proceeds of, at least, 7 professionally run overseas investment frauds [2], described the fraud’s impact upon her to the FCA’s CEO Nikhil Rathi.  The crime left her “feeling absolutely broken and suicidal”.  She wrote, “scams like this one do groom people. Looking back I feel ashamed to have been taken in, I feel guilty (probably more than the scammers do) because that money was to prevent me being a burden to my family later, which is why suicide seemed to loom as such an attractive option.” Many victims express the sentiment that the loss of self-respect, confidence and hope is as ruinous as the loss of the money.  

Gaining a victim’s confidence and trust is essential to investigating and prosecuting fraud.  For certain offences, trained specialist officers are deployed to assist the victims and their families. Such support is not available to victims of fraud.  The task of providing support to multiple victims over a protracted period falls to investigators, who alongside their job of investigating complex financial matters and preparing evidence for trial, must make themselves available to witnesses who may be suffering from significant guilt and shame and are trying to pick up the pieces from a scam that will affect most of them for the rest of their lives.  In her letter to Nikhil Rathi, the victim described the FCA investigator as a “rock” who had saved her life.

The counter is also true when victims are frustrated with what they perceive to be a lack of progress with the investigation.  Investigators have to remain professional when dealing with abuse and formal complaints.  The complexity of fraud investigations together with an overburdened court system contributes to cases being delayed as they progress through the judicial system. Victims may therefore have to wait several years from the date they have reported the matter to the conclusion of a trial and possible compensation following confiscation proceedings.  

Plans to tackle rising instances of fraud, particularly the rise of fraud facilitated online

The FCA prosecutes fraud within our remit, but prevention is vital to tackle fraud effectively and prevent consumer loss. We have powers that go beyond pursuit and prosecution, so we act where we can have the most impact. Our consumer investments strategy includes actions to tackle scams and frauds, and we set out our approach to combatting fraud in our 2021/22 Business Plan. Our objectives include: keeping fraudsters out of financial services at the gateway; stopping the firms we regulate from facilitating fraud; detecting and pursuing fraudsters who are FCA-supervised; detecting and pursuing improperly unauthorised/unapproved fraudsters and informing & empowering the public to protect themselves.

In the financial year 2020/21, we pursued approximately 50 Enforcement investigations against unauthorised business with approximately £21.7m compensated to victims for unauthorised investment businesses and nearly £7m being frozen on behalf of investors under civil and Proceeds of Crime Act restraining orders.

The FCA considers that prevention is a vital strategy because fraud is often discovered well after it has been committed, when victims realise that what they thought was a safe investment is no such thing. This latency between commission and discovery of fraud is one of the significant investigative challenges. Other inherent challenges are establishing the relevant offence to the criminal standard, and the low likelihood that victims will receive appropriate redress or compensation from perpetrators.

A cornerstone of our prevention work is our investment in the ScamSmart media advertising campaign. We have run 9 campaigns over the last 5 years, providing consumers with advice and information on how to spot and avoid scams, as well as specific information about types of scams, such as advance loan fee fraud. Increased numbers have visited the FCA’s ScamSmart website: in 2021 there were 478,096 unique visits, compared to over 182,000 visits in 2020.

The FCA also provides a warning list for consumers, banks and other financial services firms which lists firms that may be engaging in regulated activities without authorisation or running scams. The FCA conducts proactive monitoring to capture suspicious advertising and our warning list is updated daily. We issued over 1410 consumer alerts in 2021 (over 1200 were issued in 2020 up from 573 in 2019). We are aiming to achieve a substantial reduction in scam/fraudulent advertising through our work with social media firms.

Tackling online fraud, the biggest driver of financial harm, will enable us to take a solid step forward in protecting consumers. We therefore welcomed the Government’s confirmation that the draft Online Safety Bill is intended to include measures to address certain types of user-generated fraud, such as fake investment opportunities promoted on social media.

To help achieve the Government’s stated aim of ensuring the UK is the safest place in the world to be online, we have proposed that the Bill be amended further to:

• designate content relating to fraud offences as priority illegal content
• extend the duties in the Bill to cover fraudulent content contained within paid-for advertising

We have engaged extensively with colleagues in the Department for Digital, Culture, Media and Sport, HM Treasury, the Home Office and Ofcom on these matters, on the draft Bill more generally, and on what it will mean for our ongoing joint work. We will continue to work with officials and partner regulators to support the drafting and roll-out of the Bill.

Given the FCA’s remit, to continue to tackle the rising levels of fraud in the UK, it is paramount that we continue the coordinated approach involving the NECC to pursue offenders identifiable by online platforms and protect consumers. 

We welcome the Government’s investment to tackle economic crime, including fraud. We suggest that consideration could also be given to improving the pipeline through the courts, for example, the early provision of allocated Judges and court time for priority fraud cases.

Problems with evidence and disclosure in the prosecution of fraud cases;

The evidence in fraud cases is voluminous; typically consisting of multiple financial records, tracing of front companies registered in multiple jurisdictions, statements from victims, and documents extracted from digital devices seized from the suspects.  Securing and producing digital and foreign evidence can sometimes be very challenging. High-harm fraud networks almost invariably use technology to mask identities and deploy an international footprint either through enablers or financial flows.  Cyber forensic specialists will repeatedly try to decrypt digital devices, which if accessed are likely to contain vast amounts of data which falls to be reviewed by investigators either as evidence or relevant unused material.  The volume of digital data we handle has grown significantly in recent years. Between 2010 – 2017, during the course of investigations we gathered a total of 230 terabytes (tb). From 2017 to end 2021, this data had grown to 790 tb. This adds complexity and time to the investigation process.  Consequently, suspects may be “released under investigation” pending a charging decision for a considerable period of time. 

The FCA prosecutor considers how best to present complex evidence clearly and efficiently to the jury; a group with different degrees of understanding about financial crime.  We present much of our evidence graphically, with key documents displayed on iPads provided to each juror. Effective use is made of video-link facilities to minimise travelling for witnesses.  We anticipate this practice will become common-place following COVID-19 and the justice system’s familiarity with virtual hearings.   

Regarding disclosure, the identification and review of most relevant unused material takes place before a charging decision.  The complexities of accessing and reviewing large volumes of digital data present an on-going and increasing challenge which is exacerbated by lack of defence engagement. Data analytics reduces the pool of potentially relevant material (e.g. through smart searches) but technology assisted review could be more efficient. 

Prosecutors are unlikely to deploy technology assisted review unless they know that the parties and judiciary have confidence in it.  Pre-charge there is no mechanism for judicial approval of the use of such technology. A first phase schedule of relevant unused material, accompanied by a Disclosure Management Document setting out the Prosecution's approach, will be served on the defence prior to the first hearing in the Crown Court.  Absent pre-charge engagement by the suspects, it is necessary for the Disclosure Officer and prosecutor to spend considerable time collating and reviewing material which ultimately is not relevant to the issues at trial.  Pre-charge engagement is encouraged in the Attorney General's Guidelines but in our experience the involvement of the defence in identifying what is in issue is rarely forthcoming. At the first appearance in the Crown Court we would welcome the allocation of a trial Judge who has sufficient time to effectively manage disclosure and ensure that all parties are complying with their statutory obligations.  For the defence this would mean identification of the matters in issue to assist the prosecution to identify relevant material. Disclosure is an essential component of a fair trial and we do not suggest that an obligation on the defence to co-operate would absolve the prosecution of its responsibilities, but delays can be caused by refusing to provide passcodes, or a failure to agree realistic search terms for legally privileged material or for digital devices.  In practice, the current regime obliges the prosecution to schedule material that has no relevance to the actual issues in the case, mandating the early identification of the issues would reduce this unnecessary burden. A corollary of the late crystallisation of issues in the case is that late defence applications for disclosure can be made which can at best be difficult to manage in terms of time and resource and at worst can have a detrimental effect on the trial.

What can be done to make it easier to investigate frauds conducted on the UK public from abroad

International co-operation is often key to a thorough investigation; from the collection of intelligence and the subsequent production of material in an evidential format to support a successful prosecution. 

International co-operation in criminal matters is voluntary and competing priorities for the other State may impact upon the level of co-operation achieved.  Co-operation benefits from a developed network of contacts who can influence and progress requests in other jurisdictions. The FCA’s positive international relationships through organisations such as IOSCO mean that some foreign regulators are willing to obtain evidence without the need for a formal International Letter of Request (“ILOR”).  Engagement with foreign regulators, Eurojust and the CPS liaison network can cut through the often slow and sometimes unpredictable process of formal ILORs in criminal matters by identifying whether the other State is willing and able to assist and targeting the request accordingly.  

Use of the Egmont Group (a united body of 152 Financial Intelligence Units (“FIUs”) providing a platform for the secure exchange of expertise and financial intelligence to combat money laundering and terrorist financing) via the UKFIU (the designated single point of contact for UK law enforcement agencies, including the FCA, with overseas FIUs) has proved an excellent method of gathering intelligence for use in proceeds of crime investigations, including into money laundering offences. Responses cannot be used evidentially but the intelligence obtained from overseas FIUs can be vital in formulating an ILOR for formal evidence from those jurisdictions.

The NCA international Liaison Officer network is a key tool but there is scope for a coordinated effort to engage with and on many occasions support those jurisdictions who can provide intelligence and evidence. We have a dedicated function which engages and collaborates with both domestic and international law enforcement and intelligence partners.

Government proposals for more stringent identification verification requirements by Companies House may assist to identify any actors located abroad or their UK-based agents. 

We welcome the innovative Crime (Overseas Production Orders) Act 2019, which provides for overseas production orders to require a person based overseas to produce stored electronic data or give access to electronic data.  The Treaty between the UK & NI governments and the US was signed in October 2019.  We understand that provisions are not yet in force and await the finalisation of terms between the UK & US.   

Progress in relation to the Government’s Fraud Strategy and the Crown Prosecution Service’s Economic Crime Strategy.

Government’s Fraud Strategy/Home Office’s Fraud Action Plan

We are fully supportive of the Home Office led 3-year Fraud Action Plan (2022-2025). We support the actions set out under the 5 pillars of the Fraud Action Plan and are committed to working alongside our public-private counterparts to counter the fraud threat. We continue to be active partners, feeding into some of the work that is planned or underway to tackle fraud, which has included:

-          Contributing, alongside OPBAS, to the development of two of the three fraud sector charters that were launched last October, namely the retail banking and accountancy sector charters. Our Executive Director of Enforcement and Market Oversight, Mark Steward, is a member of the Joint Fraud Taskforce that has been set up to oversee the delivery of the charters and hold the sectors to account for the actions contained within;

-          As set out above, we have worked closely with Government and partners on the Online Safety Bill, and have proposed that fraudulent paid-for advertising be included; and

-          We have been working alongside the PSR who are currently consulting on measures that could improve customer outcomes in relation to authorised push-payment fraud.

January 2022