Investigations by regulators: What SMEs need to know
From dawn raids to criminal prosecutions, regulatory intervention and exposure can be extremely costly for both companies and individual directors and officers who can be at risk of investigation and ultimately prosecution. In this article we are going to look at some of the twists and turns that can arise as regulatory actions progress.
Investigations
Investigations may be triggered by a self-report by the company when they become aware of a potential problem or could arise out of the blue with a dawn raid following tip-offs to regulators, suspicions arising from returns made to regulators and periods of surveillance.
Who can Prosecute?
Regulatory matters are generally not investigated by the police but there are circumstances where there could be a concurrent police investigation and an investigation by another official body empowered by legislation to bring a prosecution.
For smaller to medium sized companies the expected exposure to investigations at the forefront of the mind of the company tends to be investigations by the health and safety executive. However, there are many other regulatory bodies that could commence both criminal and civil action against the company and/or directors and officers.
Regulators and prosecutors include:
- Crown Prosecution Service
- Serious Fraud Office
- Financial Conduct Authority
- National Crime Agency
- Health and Safety Executive
- HM Revenue & Customs
- The Competition and Markets Authority
- The Environmental Agency
- The Department of Work and Pensions
- The Department for Business Innovation and Skills
- The Insolvency Service
- The Charity Commissions
- The Care Quality Commission
- The Office of Gas and Electricity Markets
- The Water Services Regulatory Body
- The Food Standards Agency
- The Defence Fire Safety Regulator
Many regulatory matters begin with site investigations, police interviews, dawn raids and/or surveillance. If matters progress to a prosecution, then this could be prosecuted by the Crown Prosecution Service (CPS) or as a private prosecution. Most criminal cases in England and Wales are prosecuted by the Crown Prosecution Service. However, it is possible for private prosecution to be commenced which can be commenced by an individual or entity. Private investigations are common in fraud situations.
Smaller sized companies will also find themselves at a larger risk of a private prosecution as some prosecutions may not be pursued by the CPS for reasons such as it not being in the public interest and not appropriate to pursue using the public purse.
For the remainder of this article, we are going to look at the additional hurdles that can arise when a regulator is exploring an action involving alleged fraud and dishonesty.
Being subject to investigation and awaiting decision’s regarding whether prosecutions will be commenced can take a substantial amount of time. Whilst this is ongoing there is a real risk that those involved can be subject to restraint orders and freezing orders which attempt to prevent alleged wrongdoers from disposing of their assets for significant periods of time or until the underlying proceedings are resolved, unless a successful application is made to discharge the orders.
Freezing Orders
If we look at freezing orders, these applications will be considered necessary to ensure that assets obtained by allegedly fraudulent acts are not dissipated. Freezing orders, attempt to prevent disposal and dealing with assets. A freezing order acts as an instruction to third parties by placing restrictions on banks in relation to allowing movement of assets. Therefore, as part of a freezing application procedure process the alleged wrongdoing is obliged to give disclosure of assets so that the institutions that hold the assets can be informed of the order to ensure that they do not allow the assets to be moved. This order can freeze, but does not give security to the claimant. Therefore, the order does not determine who will get the assets when the underlying proceedings are resolved. Depending on the circumstance the assets of third parties could also be frozen. To obtain an order there needs to be a case of fraud, there needs to be identifiable assets and there needs to be a real risk that the defendant will attempt to dissipate the assets. To avoid the risk of the defendant disposing of the assets an application like this is usually made ex parte without the defendant being informed.
Additionally, the Police have wide investigation powers and with the CPS they can freeze assets and get disclosure from banks. Regulators can also make use of:
- Compensation and confiscation orders
- Search and seizure orders
- Norwich Pharmacal applications, when further information is needed in order to bring a claim
- Bankers trust applications, which require a third party to give information of the actions of alleged wrongdoers.
In complex matters the length of the claim can exceed six years with the investigation stage being lengthened with the threat of a prosecution hanging over a company and directors for years and with hard fought applications having to be made in the meantime. It is worthwhile to note that the Limitation Act 1980 will only apply to civil actions and section 32 of the Limitation At 1980 provides that the limitation period shall not run until discovery of fraud. The effect of the legal doctrine of Laches would also need to be considered. Whilst a discussion on Laches is beyond the scope of this article, Laches is a doctrine or equitable remedy that allows a claim to be time barred if there is delay that prejudices those facing claims. However, there is no statutory time limit on the commencement of criminal proceedings in the UK except for summary offences which are tried in the Magistrates Court.
Bringing Charges
After being subject to a potentially long running investigation, defending possible multiple applications and the prospect of criminal prosecution with no timeframe in which a prosecution must be commenced, a decision will be made regarding whether charges will brought or not. If a prosecution is commenced then there will be the court timetable to follow, defence costs to pay and ultimately a decision will be made with a finding of guilty or not guilty.
However, there is always the possibility that a criminal prosecution will not follow. Initially this appears to be a positive outcome and there may be a feeling that the matter is at an end. However, whilst this will come as a relief there remains the prospect that matters can advance down a different avenue. For example, civil actions such as forfeiture proceedings could be pursued as an alternative course of action.
Forfeiture proceedings
Forfeiture proceedings arise when assets have been frozen. Following on from assets being frozen, the prosecuting body can then take a civil action to seek forfeiture of frozen accounts. This type of action is a civil remedy, but the proceedings are dealt with in the criminal courts. If a finding is made against the parties/entities that have had their assets frozen, then the property or assets that have allegedly been obtained unlawfully will be forfeited upon a forfeiture order being granted.
The long running nature of these actions can see a costs exposure in the millions of pounds and can involve not only the costs of solicitors and barristers, but also forensic experts / accountants with potentially thousands, or even millions, of documents being subject to scrutiny.
Costs Exposure
We have experience of the actions described above continuing for periods of over seven years and with limits of indemnity being exhausted before a final outcome is even achieved. In these cases, we have seen limits of indemnity of £2m being paid in respect of costs, with Insured’s then having to meet further additional costs beyond their policy limits in addition to the risk of personal and company assets.
In one case a company and directors were investigated and charged by the Royal Mail for statutory conspiracy to commit fraud in relation to under-reporting of postage and conspiracy to commit the offence of falsification of documents for an accounting purpose. The Insured’s policy responded up to the £2m policy limit but the case was not concluded before the policy limits of indemnity were exhausted.
In another ongoing case, we have seen costs already exceed £1m in respect of actions being pursued by HMRC. Following on from a criminal investigation the HMRC has pursued forfeiture orders, restraint orders / freezing orders on the basis that assets were allegedly obtained through or intended for use in ‘unlawful conduct’ as a result of alleged conspiracy by individuals to commit tax fraud.
Exposures in the current climate
In the current climate we must mention the additional risk companies and the board of directors are exposed to in relation to furlough schemes and the risk of investigations by the HMRC into possible furlough fraud . HMRC have specific online portals that allow reports to be in relation to suspected tax fraud, customs, VAT or exercise fraud as well as covid-19 relief fraud. Companies can, of course, also alert regulators to their own errors by making a self-report.
Whistle-blower legislation and employee disputes
A company can be exposed to further risk if they believe that an employee is a whistle-blower and they treat their employee adversely as a result; this could result in an employment dispute also arising based on breaches of whistle-blowing legislation. Whistle-blower legislation protects a worker who makes a disclosure which concerns relevant failings or withholding of information. The relevant legislation that provides protection to whistle-blowers in the UK is the Public Interest Disclosure Act 1998. For there to be a relevant disclosure one to the following relevant features must apply:
- A criminal offence.
- A breach of any legal obligation.
- A miscarriage of justice.
- Danger to the health and safety of any individual.
- Damage to the environment.
- The deliberate concealing of information about any of the above.
In view of the above, it is easy to see situations arising that result in both regulatory involvement and an employment claim connected to whistle-blowing. In view of the risks both companies and directors are exposed to from both a criminal and civil perspective, it is vital that any actions pursued by regulators are dealt with carefully from the very outset in order to manage any investigations or claims pursued and attempt to minimise the risk of greater exposure as matters develop over time.
This article provides some insight into how an investigation into company affairs and management can have more far-reaching consequences than may first be considered and demonstrates how one set of investigations can lead to multiple legal actions that are interlinked.
The Zurich Executive Risk Solutions policy can provide Directors and Officers’ Liability and Corporate Liability cover with indemnity for defence costs incurred as part of an investigation and prosecution. If an employment claim also arises from an alleged whistleblowing situation, then policies can also be purchased to include Employment Practices Liability cover, which would respond to defence costs, settlements and awards in respect of employment tribunal claims. We have access to specialist panel firms of solicitors to defend, under our direction, companies and directors and officers against these often complicated claims. In all cases a dedicated Zurich claims handler will be appointed to each case to ensure that our Insured’s always have a direct point of contact with their Insurer to guide them through the coverage provided by their policy, which will be assessed to take into account the unique nature of each individual claim.
