How will the criminal justice system manage cyber fraud?

Statistics for the first quarter of 2017 show a record low in the number facing prosecution but record high in number of convictions. Fraud, which has not previously been counted in the annual crimes recorded figures is now the most commonly experienced crime in England and Wales, with 3.4 million incidents in the year ending March 2017 (for more information see: Police Force Area crime statistics published). Over half of these (57%, 1.9 million incidents) were cyber-related. For more information, see National Audit Office confirm fraud is the most commonly experienced crime in England & Wales.

  • 71 million individuals were dealt with by the Criminal Justice System in the last year.
  • The total number of individuals formally dealt with by the CJS in England and Wales has been declining since 2007 to a record low.
  • 43 million defendants were prosecuted.
  • The conviction ratio was 86% – the overall conviction ratio has increased by 2 percentage points to 86% (the highest in the decade) in latest year, and has fluctuated between 80% and 84% over the earlier years of the decade.
  • The conviction ratio for indictable offences remains broadly stable compared to the previous year (83%).
  • For indictable offences, the custody rate rose to 31% and the average sentence length increased to 19.5 months. The overall custody rate has remained unchanged at 7.2% since the year ending March 2016 while the custody rate for indictable offences has been increasing since the year ending March 2011, from 24% to 31%.
  • For indictable offences, a greater proportion of offenders (31%) received immediate custody than any other type of sentence.
  • First time offenders were more likely to be convicted than cautioned.
  • The most common sentence given for all offence groups is a fine, which accounted for 74% of offenders sentenced in the latest year.
  • The proportion of offenders receiving immediate custody rose by 2 percentage points in the last year, while the proportion of community sentences decreased similarly.

How we prosecute fraud

The CPS records an increase of 31% in fraud and forgery cases since 2011 although, like general crime, only a small proportion of fraud is actually reported. The cost of fraud and money laundering to the UK vastly exceeds the cost of tax evasion which is the focus of the Criminal Finances Act 2017 (see Practice note: Tax offences, failure to prevent tax evasion). In 2016, HMRC estimated that the UK’s tax gap stood at £36 billion, of which tax evasion accounted for £5.2 billion. In May 2016, the Annual Fraud Indicator put the cost of fraud to the UK economy at £193 billion. The cost to the public sector is £37.5 billion with procurement fraud costing £127 billion a year.

The way fraud is committed is changing as a result of evolving technology and is increasingly enabled through the internet and the use of digital devices. It is now often across borders and involves large corporate structures.

The used and unused material in a complex fraud case can reach multiple terabytes or even petabytes and is a major issue for the CPS which has been repeatedly criticised for disclosure failings in HMI reports. For more information, see: HMCPSI and HMIC publishes inspection report on the disclosure of unused material in volume Crown Court cases.

Keeping the scope of the case within reasonable limits to ensure that trials are manageable is a constant challenge. In the HBOS case involving a £245 million loss, there was an excess of 200,000 pages of evidence which was served with over 8,000 items of scheduled unused material. The electronic material contained terabytes of material, including a memory stick containing over 32,000 documents which had to be manually searched.

Alison Saunders, speaking at the John Harris Memorial lecture said in terms:

“Fraud is not limited by international boundaries so it is vital that we have good and effective international relationships with prosecutors and judges overseas. The ability to secure the right evidence from abroad and collaborate effectively – especially where the jurisdiction to prosecute is shared – is central to our work. And so as Britain leaves the EU we will need to ensure we continue to have effective relationships with our European and other counterparts in the international sphere.”

For more information, see Criminal Justice cooperation post Brexit: European Arrest Warrant, European Investigation Order and Mutual recognition.

Alison Saunders cited Operation Greenyards, in which two city traders conspired to defraud a Russian bank of £141million. The proceeds of the fraud were moved around the world including the Caribbean, Switzerland and Eastern Europe in an effort to cover up its origins. The financial analysis allowed the CPS to outline the individual roles which each defendant played, resulting in a successful conviction. The men were sentenced to 12 years’ and 7 years’ imprisonment and this conviction was dependent on evidence and data supplied from abroad.

The CPS has a dedicated, specialist fraud division to ensure the right skills and resources are used to prosecute complex and serious fraud and corruption. Their work ranges from the prosecution of bankers and investment scams to those who seek to defraud the taxpayer of millions of pounds. As fraud continues to evolve and there is an increase in online fraud, the CPS needs to be prepared with the necessary skills and experience to prosecute these cases. The CPS is now working more digitally as it prosecutes digital crime. The criminal justice system cannot claim to have been at the forefront of the technological revolution but progress is being made. The CPS processes far more of its caseload electronically and, generally, serves its cases electronically. Whilst the CPS has not yet used a DPA mechanism as a means of alternative disposal for a company offender, it is a designated prosecutor for those purposes. Nevertheless the SFO has made significant use of them this year. For more information, see Practice note, DPAs: overview.

SFO figures show 13 defendants were convicted in seven cases, giving a conviction rate by defendant of 87% (up from 32% the previous year) and by case of 100%. This conviction rate (although from a much smaller pool) matches the CPS records for fraud convictions.

The history of fraud reform

Successive governments have sought a more effective way to deal with fraud cases which, due to their complexity and in some cases the sheer volume of material, are long and expensive to try. In 1998 the Home Office consultation paper “Juries in Serious Fraud Trials” proposed four options as alternatives to the present form of jury trial. The decision as to whether or not a case should be treated as serious fraud was to be for the trial judge, based on the overriding criterion of the ‘interests of justice’. The judge was required to take into account the following:

  • Does the case require some specialised knowledge?
  • Are the factual issues complex or voluminous?
  • Does the case require prolonged examination of documents or accounts?
  • Will the trial, as a whole, be unduly long or complex?

The four options proposed by the paper were:

  • Special jury – selected from a special screening process
  • Trial by Judge alone
  • Fraud trial tribunal.
  • Trial by a single judge with a jury for key decisions.

The option pursued was trial by judge alone. In 2003, following three long and not entirely successful fraud trials (that of Robert Maxwell, Blue Arrow and Jubilee Line lasting 8, 12 and 21 months respectively) section 43 of the Criminal Justice Act 2003 was given royal assent but never implemented . This provision would allow cases of serious or complex fraud to be tried without a jury if a judge was satisfied that:

“The complexity of the trial or the length of the trial (or both) is likely to make the trial so burdensome to the members of a jury hearing the trial that the interests of justice require that serious consideration should be given to the question of whether the trial should be conducted without a jury.”

However the Attorney GeneralLord Goldsmith, subsequently sought to repeal the section and to replace it with new provisions under the Fraud (Trials Without a Jury) Bill. In 2007 the Fraud (Trials Without a Jury) Bill passed its third reading in the House of Commons though it faced fierce criticism from those asserting that trial by jury is the bedrock of the criminal justice system. The government felt that long and complex trials put too much pressure on jurors. Cases such as the Jubilee line case collapsed under their own weight. The Solicitor General at the time, Mike O’Brien, thought that an application for a bench trial would only be appropriate in about 6 cases per year and that the procedure did not breach any fundamental principles.

At the time, then Shadow Attorney General Dominic Grieve said that the bill sent out “a dreadful message about the way it views participatory democracy in this country.”

In any event the Bill was defeated. Section 43 of the CJA 2003 was repealed by section 113 of the Protection of Freedoms Act 2012 and so preserves the right of defendants accused of serious or complex fraud to be tried by a jury of their peers. Trial by judge alone in cases where there is a danger of jury tampering, provided for by section 44 remains in force. The way that increasingly complex cases are tried continues to be debated.

The future for fraud reform

Alison Levitt QC, speaking at the Cambridge Symposium earlier this month proposed a new legal approach to economic crime: the Combined Fraud Court. This court would combine the civil and criminal systems, making the process quicker, cheaper and, crucially, delivering a better outcome for victims.

The court would work by having a single trial, using aspects of both civil and criminal law, heard by a specially qualified “fraud judge” sitting with a jury. At the end of the trial, the judge would ask the jury whether they are satisfied to the criminal standard that the defendant is guilty.

If the answer was yes, then the judge would deal with aspects which are currently dealt with under separate regimes:

  • Sentencing the defendant.
  • Assessing and awarding compensation to the victim.
  • Confiscating assets which represent the proceeds of the defendant’s crimes.
  • Costs.

Where a jury is not sure of guilt, then the judge discharges the jury and reverts to the civil procedure: having heard all the evidence and decided, on the balance of probabilities, whether to find in favour of the victim. If the answer is yes, the judge assesses the damages payable to the victim and the costs.

The advantages to the victim of such a procedure are that:

  • Witnesses only have to give evidence once.
  • There is one trial rather than two, and so it is both quicker and cheaper.
  • The same judge hears both the civil and the criminal aspects of the case so that there is consistency in assessing culpability in both sentencing and compensation.

The potential difficulties with this approach are that it requires a complete re-write of the rules of evidence, criminal procedure and civil procedure, and arguably undermines the role of the jury should an adverse civil judgement arise after they have deemed someone to be not guilty.

For more information, see: Cambridge Symposium 2017: Alison Levitt QC speech

What is clear is that as the complexity of fraud increases in an increasingly digitised world, the way that fraud is investigated and prosecuted will have to evolve so that evidence may be collected, analysed and presented at trial in a way that is comprehensible and fair. The starkest contrast in cyber fraud commission and cyber fraud prosecution is the speed at which the former is completed. The delay in getting fraud trials to court is a huge problem for victims, witnesses and hampers any realistic prospect of compensation. All these factors mean that this will be a continuing topic for debate and may be one of the reasons that DPAs become the preferred disposal for corporate economic wrongdoing. For more information, see blog post: The Rolls-Royce DPA: an end to corporate prosecution?

There are no immediate and easy solutions to this problem. Perhaps the most important consideration is ensuring that all stakeholders in the criminal justice system have a say on future developments. In recent times, changes to the criminal justice system have been proposed with insufficient consideration of their impact (for more information see: LU, HMCTS pilot operating hours scheme suspended until February 2018). Creating a system that embraces technology and delivers justice, yet ensures adequate safeguards, will require all voices to be heard.

Practical Law Morag Rea

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