Directors & Officers beware - the SFO gets serious

Following the collapse of various high profile cases and the subsequent inquiry into its practices, change is clearly rife at the Serious Fraud Office.

Tougher stance on prosecution

Commencing his four year term on 23 April 2012, David Green QC, ex head of HMRC’s prosecution team, has replaced Richard Alderman as Director of the SFO. Whilst a change of management can turn around the most beleaguered of businesses and often has a tangible impact on struggling football clubs (see Chelsea 2012!), the key question is: will the introduction of David Green provide the teeth that the SFO so desperately needs to become more effective?

The initial signs are promising. The opening line of his press release reads like a war cry: "The SFO is here to stay".  In addition, during a recent FT interview, he has promised to investigate "significant strategic targets" suspected of committing the "most complex financial crime and overseas corruption".  David Green clearly delivers on rhetoric, but he faces a huge challenge in trying to overhaul a struggling agency reeling from embarrassing headlines and a diminishing budget.

Richard Alderman's tenure is likely to be remembered for the SFO's willingness to cut deals with high profile companies, such as BAE Systems; however, David Green is overtly critical of a strategy that has led to the perception that the SFO is more willing to compromise than prosecute, stating that he "would like to look to rebalance the relationship between prosecution and civil settlement. We are primarily a crime-fighting agency, and we've got to remember that".

This tougher stance on prosecution contrasts with the coalition's recent proposals to make it easier for prosecutors to cut deals with companies through the use of US-style 'deferred prosecution agreements' (DPAs). It is expected that a consultation paper on DPAs will be released this summer, followed by legislation later in the year. David Green is apparently "100 per cent" in support of DPAs, which at first may appear to conflict with his hard line approach. However, he clearly views DPAs as just one tool in the SFO's arsenal and, despite coming forward, self-reporters run the risk of finding themselves entrapped. For example, David Green has stated that "A corporate might say: if we come and self report we might get prosecuted. Well, they might get prosecuted".

Impact on Ds&Os and their insurers

The SFO's promise to take a tougher stance on prosecution, coupled with the introduction of the Bribery Act 2010 in July 2011, means that potential exposures for directors and officers in the UK are at an all time high, emphasising the benefits for company executives afforded by D&O insurance.

The SFO has said that firms that self-report will face civil rather than criminal proceedings and corporates are advised to approach the SFO when there is a 'real issue' requiring remedial action.  However, this creates obvious dilemmas for firms and their directors and officers: first, a firm or individual are unlikely to recover defence costs under a D&O or PI policy until the SFO initiates proceedings, but failing to self-report leaves open the risk of much costlier subsequent criminal prosecution (which are likely to be covered, at least until an adverse ”final adjudication”).  Secondly, self-reporting in itself might breach policy terms prohibiting the invitation of a claim and may end up proving fruitless if the SFO proceed with a prosecution in any event.

This will inevitably lead to firms and their directors and officers notifying insurers of circumstances in the hope of triggering coverage sooner or, at least, preventing issues arising in the future. Insurers may consider relying on policy terms giving them a discretion to deal with circumstances with a view to preventing or mitigating a future civil liability.  Voluntary or pre-emptive mitigation measures may be covered by specific policy language but how such language will respond as between protecting an insured's brand or regulatory reputation and meeting anticipated or established civil liabilities remains a moot point in insurance law.

What is clear is that D&O and PI insurers are facing increased regulatory exposure, particularly from firms and individuals operating in the financial services sector who are facing: an FSA focussed particularly on senior management, directors and non-executive directors; a manifold increase in the numbers of s.166 skilled person reports leading to more enforcement action; and, with the appointment of a traditional criminal prosecutor in David Green, an SFO that is out to re-establish itself as a serious crime-fighting unit, rather than the impotent agency accused by Lord Justice Thomas of demonstrating "sheer incompetence" in its pursuit of the flamboyant Tchenquiz brothers.