corporate crime and the criminal justice system

Last week we looked at the rapist as a powerful offender. We looked specifically at the interaction of three variables:

Now we move on to another type of powerful offender: the powerful businessman or company executive. Here the issues are

the status of the offender: just as the rape accused will assert that he was, he thought, behaving quite normally and assumed that consent to sex was given, the business offender accused of, say fraudulent trading, or false accounting, will assert that he was, he thought, behaving quite normally and assumed that he was helping to bring prosperity and employment to the country and, if any law has been violated in the process, this must have been an oversight. Just as with sexual history evidence, there may well be a tendency to believe the accused. Indeed the major effect of the status of the offender may well be the difficulty of getting the offence in court at all.

the complexity of the offence: the court trial may well be a complex and long drawn out affair and focus on whether something actually happened (complex readings of balance sheets and accounts may be presented to the jury in a corporate fraud case) or that if something happened (e.g. unsafe products were marketed or a process failed e.g. in a rail crash ) then this was indeed a case of negligence for which someone can be held responsible and if so who actually is it. Often it is very difficult in a large organisation to determine the notion of an individual having committed a crime. English criminal law is particularly insistant on this

the political context of the offence. If the offence occurred in the course of, and as part of a desire to pursue, what are regarded as positive goals (business success, exports, bringing jobs to Britain etc.) then there may well be a feeling that in reality a prosecution is not the best way to have proceeded and a quite chat or an apology or a settlement out of court may be the best way to proceeed.

So we also add to our list of 'powerful offenders' capable of putting up considerable obstacles to the criminal justice system, the commercial enterprise, in particular large enterprises with a global reach and who play a key part in the national economy.

First, we need to familiarise ourselves with the main features of what is known as corporate crime. The study of corporate or business crime is a fairly specialised area of criminology because it may require familiarity with aspects of economics and finance, business law and accountancy. Follow this link for a brief introduction to corporate crime

1. the high status corporate offender: Enron 2001

Enron was the epitome of US business success. For five years running it had been dubbed the 'most innovative company' by Business Week

It was the world's largest energy trading company (and the seventh largest US corporation) (Energy trading = buying and selling gas and elecricity rather than producing it)

Enron had close relations with the Bush administration. Bush had allegedly received donations to his political funds of around $572,000, Enron executives played a leading role in advising Bush on his energy policy It was Enron CEO Kenneth Lay, who recommended the person that President Bush appointed the head of the Federal Energy Regulatory Commission, the principal regulatory agency for gas and electricity

In 2001 - 2 it all began to unravel. Suddenly Enron announced a $600m loss

Rumours began circulating that turned out to be true that company executives had created secret partnerships (i.e. separate companies) and over 2,800 phony subsidiaries in off-shore locations. These were called 'special purpose entities' and amazingly they didn't have to feature in the accounts of the parent company. So basically they had been making a loss and were shunting it off into this maze of smaller companies so the shareholders and investors didn't know about it.

The loss which suddenly appeared was due to one of these 'partnerships' coming unstuck and $35m of losses being revealed
Investors massively sold shares, the price collapsed, and within weeks, $60 billion dollars of Enron share values had gone up in smoke

What was really vicious was that executives, while they had been manovering to keep share prices up before the crash, had been massively selling their own shares while encouraging employees to buy more shares (so as to keep the price up) and had blocked employees selling their own shares in their pension fund even when the share price started falling rapidly

Lay and other senior executives were allegedly secretly selling their own shares, knowing that the true state of the company finances would sooner of later become known. Senior executives of the company Kenneth Lay CEO and Jeffrey Skilling were convicted for securities fraud. Lay faced a total of 46 years in prison but died in July 2006

The US courts are pretty strict now on corporate offenders and its getting better here. The recent (2009-10) banking scandal and the issue of bankers bonuses has probably contributed to a public atmosphere in which a tougher stance on corporate offending, particularly in the financial sector would have large scale public support.

But one of the most important cases over the last twenty five years has some indications that the status of the offender could be seen, mistakenly of course, to influence the court.

The high status corporate offender: The Maxwell pension funds scandal

The scandal began with the media magnate Robert Maxwell allegedly committing suicide by jumping off his yacht in November 1991. His

business empire collapsed shortly afterwards as it emerged that its debts vastly outweighed its assets. But what also emerged was that over £400m was missing from the company pension funds at one of his biggest holdings Daily Mirror newspapers. Maxwell has stolen it.

The essence of Maxwell's crime was this. He presided over an empire of some 400 companies where he owned 50-70 per cent of the capital and whose shares were publicly quoted on the stock exchange; the employees of these companies subscribed to a company pension fund. But he also had private companies and frequently channelled money between companies. What he had been allegedly doing was siphoning off cash and assets from the public companies and from their pension funds into the private ones.

When companies run into trouble their employee pension funds are a tempting source of funds to bale out the company. After the Maxwell scam the law was tightened up to make pension fund administration more independent of the company itself and beyond the reach of its directors.

His sons Kevin and Ian and another city financier were prosecuted by the Serious Fraud Office but at the first trial in 1996 all were acquitted. The SFO (the special prosecutor for complex frauds set up in 1987) was widely criticised for incompetence and wasting time and public money.

But what is interesting is that after the first trial, a second one was planned. It was so complex that the SFO had quite rightly split it into two trials. The second trial never took place. The following article from the Independent newspaper throws and interesting light on this. It effectively suggests that the judge was allegedly influenced by the personal intervention of a member of the defendants family - Kevin Maxwell's wife

Pandora Maxwell, a resolute and determined woman who impressed a High Court judge with her account of living under the shadow of lengthy criminal trials, yesterday emerged as one of the chief reasons why charges against her husband Kevin were dropped.

She had told Mr Justice Buckley in private pre-trial hearings how her family had been affected by the scandal of the collapse of the pounds 2bn Maxwell empire, the subsequent trial of her husband and the threat of a second trial, which was finally lifted yesterday.

The judge said: "Mrs Maxwell's bewilderment and anger at the decision to proceed to another trial were not feigned. I cannot be over-influenced by such matters but no one could have been unmoved by her evidence."

He added: "Her obvious distress was, I am convinced, entirely genuine. She described the agony of the trial and the days waiting for the verdict with the prospect of significant prison sentence in the balance.

I have reached a very clear view that these proceedings serve no further public interest. To pursue them in the face of the jury's unanimous verdict in the first trial would test both the public's confidence and the integrity of the system."

Independent 20 September 1996

2. the complex offence: the problem of finding a controlling or directing mind

Some of the worst deaths both of employees, customers and indeed on occasion the surrounding population have been the result of criminal negligence by companies. Various train crashes in which it transpired that inspection regimes were lax

In the notorious case of the Herald of Free Enterprise ferry disaster 193 passengers and crew were killed when the ship overturned in Zeebrugge harbour in 1987. The company alleged it was an accident but the coroners jury returned a verdict of unlawful killing: the ship left the port with the bow doors open and while no one individual was to blame, the speed of the turnaround at Zeebrugge and the lack of checking procedures amounted, in the opinion of the jury, to criminal negligence.

The criminal law and the courts deal overwhelmingly with individuals and their responsibilities. Where a crime has been committed arising from the activities of an organisation then the English legal tradition always looks for a 'controlling mind' : some key individual whose decisions can be construed as having led the crime. The coroners jury returned a verdict of unlawful killing (i.e. it wasn't an 'accident') but criminal prosecution of P&O Ferries - the ferry company, failed because the DPP failed to nail any one particular individual for recklessness. This led to debate about the law on corporate manslaughter which despite a new offence of 'corporate killing' hasn't actually been resolved to the satisfaction of all parties. Similar problems of finding individuals to blame - when an event is the outcome of the functioning of the organisation rather than actions by a few individuals, occur in rail disasters.

The outcome was the enactment of the Corporate Manslaughter and Corporate Homicide Act 2007 For many this is a landmark in British law. For the first time, companies and organisations can be found guilty of corporate manslaughter as a result of serious management failures resulting in a gross breach of a duty of care. Basically, the court no longer has to find a single 'controlling mind' and it is sufficient to show that senior management should have been aware of the dangers such as health and safety issues.

The complex offence: the role of the jury in fraud trials

Another aspect of the complex nature of many business crimes is the issue of whether the jury should be removed from complex and lengthy fraud trials. The arguments are simple: those in favour say the issues at stake in such trials are just too complex for 'ordinary' people on a jury to understand. Masses of data from company accounts and balance sheets will be presented in court by both defence and prosecution to try and prove or disprove the charges. In order to make the issues more simple trails a complex fraud case is often broken down into two or more separate trials. This increases the length and the cost of such trials. Therefore the jury should be replaced by 'experts' trained in accountancy, finance and commercial law because only such individuals will really be able to understand what is going on and to make a reasoned judgement as to guilt 'beyond reasonable doubt'.

Those in favour of the retention of the jury in complex fraud trials generally produce two arguments. Firstly, that what is at stake in even the most complex of fraud cases is basically that someone is accused of stealing something. However complex the matters of banking and finance involved, unless the prosecution can prove to a jury of ordinary sensible people that this has happened then they have not proved their case beyond reasonable doubt. Secondly, the abolition of the jury in fraud trials will set a dangerous precendent. The jury is one of the most cherished institutions of our criminal justice system and regarded as the most valuable check on the arrogance of the state. Governments often attempt to restrict it and in recent years have had some success.

The debate on this issue in the UK has been a long one. In 1985 the judge, Lord Roskill chaired the Fraud Trials Committee to deal with what were seen as shortcomings in the investigation, prosecution and trial of serious and complex fraud. One result was the establishment, in 1987, of the Serious Fraud Office to investigate and prosecute serious financial fraud. In it's majority report the committee did advocate the abolition of the jury in serious fraud trials largely on the grounds that such trials were becoming too complex for 'ordinary' jurors to understand. However one member of the Committee, Walter Merricks argued that

“To entrust this judgment to experts I find dangerous. There is the problem that currently, as a matter of law, the standards to be applied in assessing honesty are those of ordinary people. Experts are by definition not ordinary people and they may find it difficult, not to say impossible, to envisage that the standards by which they must judge the accused are not those they would normally apply to themselves or their colleagues”

The argument continued for many years and another major report on the English criminal justice system by Lord Justice Auld, many of whose recommendations were enacted in the Criminal Justice Act of 2003, repeated the complexity argument:

‘for replacing trial by judge and jury with some other form of tribunal in serious and complex fraud cases are the more persuasive. Indeed, they have become more pressing since the Committee reported, given the ever lengthening and complexity of fraud trials and their increasingly specialised nature and international ramifications.' (read my lecture on the criminal trial process which discusses the jury and has a link to the Auld Report)

The Criminal Justice Act 2003 does in fact allow for trial without jury in cases where there is a substantial risk of jury tampering - i.e. intimidation or bribery of jurors usually by organised crime - and in fraud cases that are extremely technical and complex. The provisions concerning jury tampering came into force in 2007, and were used for the first time in 2009 (see the lecture on organised crime in this series).

However the enacting of the sections of the Act dealing with fraud cases required a separate vote in both houses of parliament, which the government lost in 2005. In the same year a major fraud trial collapsed. The trial concerned allegations of fraud in the construction of the Jubilee line extension to the London Underground. Six individuals were accused of allegedly passing inside information to help companies to secure lucrative construction contracts. No money was lost. All 6 were cleared. By the time of the collapse the trial had run for two years and among the recriminations were that the trial had gone on so long because of the necessity to explain everything to the jury which had become confused and disoriented. But defenders of the jury responded that this was just an excuse for the fact that the prosecution had completely botched the case and had not prepared it properly.

The government response was to introduce the Fraud (Trials without Jury) Bill in 2006, but this was also defeated in parliament. There the matter has rested. The intentions of the Coalition government elected in May 2010 towards these issues is not yet clear. I will re-write this section when the position becomes clearer

3. The political context of the offence: the BAE bribery saga

Bribery of (or paying of 'commissions' to) customers by a company in order to secure the sale of its products has, since 2001 been a criminal offence in British criminal law. The example we shall focus on is the alleged paying of bribes to Saudi Arabian officials by a major British armaments company, British Aerospace Systems (BAE Systems) to secure a contract for aircraft sales and the circumstances in which the government allegedly pressured a criminal investigation to stop because it was contrary to the interests of national security. The main reading for this is Tim Webb's pamplet 'Bribing for Britain' Before going any further it should be made absolutely clear that British Aerospace systems has from the outset denied any wrongdoing in the matter. BAE is, incidently, the fourth largest arms producer in the world and Britain's only arms manufacturer.

The issue we are concerned with here is not the issue of bribery per se, but the fact that the British government officials allegedly pressured the SFO to abandon investigation and prosecution because BAE and the Saudi Arabian connection were so vital to British interests.

the pressure to sell

Some types of businesses are more exposed to the temptation to pay bribes than others. Where the marketing of a product depends upon government approval and licensing, as with medical drugs then there may be some unscrupulous companies which may attempt to bribe government scientists to falsify or ignore negative results in the testing laboritories. John Braithwaite in his, still famous, study Corporate Crime in the Pharmaceutic Industry, found many examples regarding the drug Thalidomide which was eventually marketed with such disastrous results

There are other industries where the nature of the produce or service being sold dictates that either a large number of products will be sold or none at all. The aircraft industry is one such example. No airline wants a fleet of about six or seven different types of aircraft - a few Boeing 747s here, a few Airbuses there etc. Spares would have to be kept for different aircraft, separate training for mechanics and pilots working with the different aircraft would have to be maintained. All this would increase costs. Far better to decide between the competing aircraft manufacturers and equip your whole fleet with one type. Then you are carrying one system of spares, maintenance, pilot and mechanic training. So from the standpoint of the competiting aircraft manufacturers, keeping customers 'sweet' so that when the time to renew their fleet of aircraft comes, they buy a fleet of yours and not those of you competitors.

Not surprising therefore that we find some examples of bribing customers in this area. From a strictly economic standpoint the paying of a bribe simply lowers the price at which the product is sold. But the bribe is more than a price reduction, it is more like a personal payment to members of the purchasing company. It may take the form of products for their personal use - a paid holiday for example. In the commercial aircraft industry one of the most famous bribe scandals goes back to the period 1970-75 when allegedly the Lockheed Aircraft Corporation. paid $22 million to foreign governments, officials and political parties to secure sales contracts. Among those allegedly on the payroll were the then Japanese prime minister, the Dutch Royal Family and various Italian politicians. Further revelations in 1976 showed that many of Lockheeds competitors had been doing the same thing.

In the field of military equipment, including aircraft, similar considerations apply. No government wants its armed forces to have a variety of different tanks, aircraft, missiles, rifles etc. each with their own specific munitions, training and maintenance requirements. Governments will normally decide between the competition and then go for one, or at least a very few, suppliers for specific types of armament.

The next interesting thing that Tim Webb shows is that from the mid 1960s onwards British governments accepted the normality of bribing customers as part of the arms export drive. Webb quotes an internal document from 1999 from the British government's Defence Export Services Organisation (DESO) . The document said "In certain parts of the world it has become commonplace for special commissions to be paid. This is a matter for DESO, to whom all requests for special commissions should be referred." Special commissions' is of course a polite word for bribes.

It is crucial to understand that at this time bribery of foreign officials (such as officials in the Defence Ministry of a potential purchaser government) may have been frowned upon but it was not a criminal offence, unlike bribery of domestic government officials, until very recently -2001 to be precise. We are dealing, in other words, with a regulatory offence of the type we have already discussed. In the US and many other countries such bribery is a criminal offence and the US and other countries were putting pressure on the UK government to criminalise such activity. It was brought into UK law as part of anti-terrorist legislation. The 2001 Anti-Terrorism, Crime and Security Act, section 12 extended the traditional crime of bribery of public officials to include individuals where "functions of the person who receives or is offered a reward have no connection with the United Kingdom and are carried out in a country or territory outside the United Kingdom".

BAE systems and the Saudi connection

Meanwhile the Saudi Arabian connection had become very important for the British armaments industry since the 1960s and Tim Webb gives an account of the continually close relations between the ruling Saudi royal family and the British government. Our case study begins in 2005 when the Saudis agreed, for whatever reason, to buy 72 Eurofighter Typhoon aircraft (of which BAE is the British manufacturer) under conditions in which other countries were considering cancelling contracts, usually for the reasons we have mentioned above. BAE would of course be the main typhoon

British beneficiary from this contract. It was conjectured that the paying of commissions may have been important in securing this contract because there was no obvious military reason why the Saudis needed a fleet of these aircraft. (see the article by Campaign Against Arms Trade)

The SFO gets interested

As we have mentioned, the paying of bribes or commissions became a criminal offence in 2001. The Serious Fraud Office (SFO) which we have already mentioned, began to get interested in the BAE-Saudi relationship. There was, by the mid - 2000s allegedly evidence of permanent 'slush fund' from which various payments could be made to Saudi officials. The main ways of transmitting funds, it was alleged, besides direct payment from this fund to the Swiss bank account of a Saudi intermediary also included:

alongside this, there were, it was alleged, all sorts of hospitality arrangements provided in the UK free to Saudi visiting officials, pilots on training courses for the new aircraft etc.

By 2004 the SFO investigation was gathering pace and by 2005 the investigators were making requests to the Swiss banks which allegedly held accounts through which the bribery payments were allegedly passing

A leading Saudi prince (Prince Bandhar) who was concerned with the aircraft contract got wind of what was happening and called in the British Ambassador to request that the investigation be halted. The head of the SFO, Robert Wardle at first resisted pressure from the Prime Minister (Tony Blair), the Attornery General (Lord Goldsmith) and allegedly BAE itself

In September 2006 the SFO obtained the consent of the relevant Swiss banks to view the accounts of the agent of Prince Bandhar

On the 14th December 2006 the inquiry was dropped just as Swiss banks were about to wire the documents to the SFO.

Criminalisation vs national security?

Robert Wardle, the head of the SFO claimed that calling off the investigation was his decision. It was said that he called it off because it wasn't making sufficient progress. But this seems unlikely perhaps in view of the fact that the SFO was about the recieve important documents. Meanwhile both the Prime Minister and the Attorney General made public comments which could be construed as suggesting that they had been instrumental in pressuring Wardle to discontinue the investigation. The Attorney General, Lord Goldsmith said: "It has been necessary to balance the rule of law against the wider public interest." While Tony Blair said "Our relationship with Saudi Arabia is vitally important for our country... that strategic interest comes first"

What was meant by 'the wider public interest' and how could it conceivably clash with the principle of the rule of law which is fundamental to our criminal justice system? Blair referred to 'national security' It was then said that Saudi Arabia was a vital source of information to the British Security Services about terrorist activity directed at the UK and that the Saudis might end this if the SFO investigation continued. There seemed to be a shortage of facts to support this position and one response was that in any case the Saudis were equally dependent on information given to them by the UK government regarding the activities of Saudi dissidents based in the UK.

Meanwhile the US and numerous other countries were furious with the UK decision. The decision did not go unchallenged in the courts. The pressure group Campaign Against Arms Trade took the matter to the High Court which in April 2008 ruled that the Director of the SFO had acted unlawfully in stopping the investigation. The court noted:

"No-one, whether within this country or outside, is entitled to interfere with the course of our justice. It is the failure of Government and the defendant [the Director of the Serious Fraud Office] to bear that essential principle in mind that justifies the intervention of this court."

However in july 2008 this was overturned by the House of Lords (the highest appeal court in the UK) on the grounds that the Director of the SFO had a right to make such a decision

Meanwhile BAE itself had set up a committee in 2007 under former Lord Chief Justice Lord Woolf, to review its ethical business practices. You can read the report here

The key issues in the Saudi case:

The overwhelmingly central issue is the right of the government to stop a major criminal investigation and thereby undermine the rule of law. The doctrine of the rule of law is central to modern conceptions of legality in an open, democratic society. It implies, among other things, that the law will be enforced impartially, against any person or institution that violates it. In the 17th and 18th centuries a key issue was to stop the King intervening in the legal system by stopping the prosecution of people who were his friends or under his patronage. Even the King must be subject to the law. Now in 2008 the issue seems to have reared its head again.

Britain has subsequently been repeatedly condemned for its failure to enforce the international OECD anti-bribery convention, and for the apparent political interference that took place on behalf of BAE.

The SFO gets back on its feet

Nor has the SFO given up. Robert Wardle left the SFO in 2008 and was succeeded by Richard Alderman who, together with the US Department of Justice, was keen to continue to pursue other aspects of BAE

BAE sells arms around the world and a number of SFO investigations with regard to bribery continued. So in fact the SFO continued to close in on BAE. Alderman stepped up investigation of BAEs activity in Tanzania, South Africa, Romania and the Czech Republic

Tanzania: In 2001 This relatively poor African state was persuaded to buy an expensive military air traffic control system (cost £28 million) that they didn't need, given they hardly had an airforce!.

It is alleged that Prime Minister Tony Blair championed the sale against opposition from other Cabinet members such as Clair Short MP.

It seemed that Tony Blair had been a prime mover in this case too, as in the Saudi contracts

Cabinet ministers Claire Short and Robin Cook had apparently tried to stop the sale of the hugely expensive radar to the poverty- stricken Tanzanians. But, as prime minister, he overruled them and insisted that the deal had to go through.

The World Bank and the International Civil Aviation Organisation judged that the 2001 purchase was unnecessary and overpriced.

But then the SFO discovered that around one third of the £28m deal had been diverted into secret offshore bank accounts.

The SFO believed that this money was used to pay bribes to Tanzanian politicians and officials. One of whom was found to have had more than £500,000 in a Jersey bank account he controlled. He denied the money had come from BAE.

South Africa: In December 2008 evidence emerged suggesting that BAE paid £100million to 'financially incentivise' various South African purchasing officials with regard to the purchase of BAE Hawk and Gripen aircraft to the tune of £1.5bn

The plea bargain

Alderman adopted the US style of offering BAE a plea bargain under which the company would admit guilt and pay fine of around £300m. BAE stalled so Alderman very publically threatened a criminal prosecution and stepped up the pressure by in March 2009 having Count Alfons Mensdorff-Pouilly, who acted as an agent for BAE (i.e. he ran various intermediary companies) arrested in Austria in connection with bribery in relation to Hungarian and Czech military aircraft sales. So in February 2010 BAE gave in and paid the fine

No-one went to prison, £300m is small fry for a company the size of BAE

Prosecution of minor offences

Finally, in December 2010 the SFO succeeded in a minor prosecution of a middleman who allegedly had been handling some of the bribery payments in the Tanzania case. The judge declared himself amazed at the suggestion that BAE had not acted corruptly and fined BAE £500,000