UK: Reporting Client Fraud To The SFO – Issues For Professional Firms To Consider

On 15 December 2008, the Serious Fraud Office (SFO) announced that it had written to senior partners and managing partners of leading UK accountancy and legal firms asking them to report suspected fraud. The SFO has also made a general appeal for shareholders, workers and others connected with the financial services industry to report suspected fraud and illegal practices.

The SFO initiative is linked to expectations that further instances of significant fraud will emerge in the months ahead as a result of current economic pressures.

What is the effect of the SFO's letter and press release?

The SFO's letter and press release do not alter the general law. In particular, they do not alter the fact that there is no general legal obligation on professional advisers and others to report fraud to the SFO or any other authorities. Nor do they alter the fact that professional advisers owe a duty of confidence to their clients.

There will be circumstances where it may be desirable that professionals volunteer information to the SFO. Indeed, where an adviser has sufficient knowledge that a fraud is being conducted, and does not report this to relevant parties, he or she is at risk of facing claims by the victims of a fraud, possible criminal charges as an accessory and potential disciplinary proceedings. Nevertheless, the pervasive nature of the obligations of confidence owed to clients means that advisers must go through some careful steps before taking any decision to make a voluntary disclosure to the SFO.

There are, of course, some limited circumstances where professionals are legally obliged to provide information to the authorities. Examples include reporting obligations under the Proceeds of Crime Act and the Terrorism Act, or if the professional is served with an appropriate warrant or Criminal Justice Act Notice. Obligations of this nature override the duty of confidence.

Nothing in the SFO's letter or press release alters the position as regards these obligations.

Nor does the letter and press release alter the normal steps that, for example, auditors are likely to implement if they become aware of potential fraud or irregularity within a client organisation. In that event, they will wish, so far as practicable, to use normal reporting lines to bring the issue to the attention of appropriate senior management so that the matter can be addressed. Only if the problem was so pervasive that there was nobody with whom the matter could responsibly be raised, or if the management refused to address the matter appropriately, would the option of volunteering information to the SFO need to be considered.

What must a professional adviser consider before volunteering information about suspected fraud to the SFO?

The starting point is the duty of confidence. The duty is overridden if there is a specific disclosure obligation, but there is no legal obligation on an adviser to disclose information to the SFO unless the SFO itself initiates action requiring it.

There are, however, some other limited circumstances in which professionals are released from their duty of confidence. Essentially, these are: (i) where disclosure is in the public interest; and (ii) where disclosure is necessary to protect the professional's own interests. Professional firms are effectively being invited by the SFO to use these exceptions to the duty of confidence to the fullest extent possible.

What, then, are the steps which a professional firm should seek to ensure are followed if individuals become aware of potential fraud or illegality on the part of a client? In principle, they are likely to be as follows:

1. Suspicions should be conveyed to persons holding relevant central management responsibilities within the firm so that they can be considered in a consistent and informed way. Given the overlap with money laundering reporting requirements, use of the firm's money laundering reporting procedures would be an obvious route.
2. The strength of the suspicion or knowledge needs to be assessed along with the potential seriousness of the situation.
3. Whether the firm has a specific obligation to disclose the information to an authority other than the SFO must be separately considered in the normal way.
4. Consideration should be given to whether there is a way in which the issue can be appropriately addressed with senior management of the client. If a firm suspects that its client has been the victim of employee or third party fraud, it will normally be subject to an implied duty to report its suspicions to the client.
5. If 4 is not feasible, consideration should be given to whether it is appropriate in the public interest or the firm's interest for a voluntary report to be made to the SFO. In this context the issues which need to be considered are:

Firms will naturally wish to consider the ethical rules and guidance issued by their regulators (such as the ICAEW's guidance on Professional Conduct and Disclosure in Relation to Defaults and Unlawful Acts). Decisions and actions should be properly documented.

What is the extent of the public interest and self protection exceptions?

The public interest exception applies if the information in question concerns the existence or real likelihood of a crime or serious misdeed of public importance. There is no general definition of "public interest" and hence each case needs to be considered on its own facts. Naturally, the more certain and potentially serious the matter, the more likely the exception is to apply and the more desirable it will be for the professional to volunteer the information. It may also be relevant to consider who is likely to be impacted by the suspected conduct (investors, for example) and whether there is a likelihood of recurrence or of the impact worsening over time. Firms may well wish to take advantage of confidential helplines and other resources offered by their regulator or professional body, and in difficult cases may wish to take legal advice.

The self protection exception applies if disclosure is necessary in order to avoid a serious risk of harm to the professional's own interests. So, for example, disclosure would be justified on this ground if the professional had obtained sufficient knowledge of criminal acts which were in progress to put him or herself at risk of committing an accessory offence. Again, firms will wish to take advantage of available resources, including legal advice, when considering this option.

What are the potential consequences for the adviser if an unjustified disclosure is made to the SFO?

The adviser may be sued. The most likely causes of action would be for breach of confidence or for defamation. The existence of an SFO investigation, if it became public, would almost certainly be detrimental to the client.

Provided that the adviser had an honest belief in any statement made to the SFO, and was not motivated by malice, the adviser should have a valid defence to a defamation claim. However, there would be no obvious defence to liability for breach of confidence if the exceptions discussed above could not be invoked.

It is also conceivable that a professional who made an unjustified disclosure could be subject to disciplinary investigation.

Summary

There will be circumstances in which professionals can and will want to respond to the SFO's invitation to report suspected fraud, but care needs to be exercised in order to avoid the risk of breaching client duties. Firms may conclude that disclosure is only appropriate in plain and obvious cases.

The SFO's campaign is indicative of a likely upsurge in investigatory activity in 2009 and beyond. Firms will wish to be well prepared if they receive specific SFO or other requests for evidence in respect of such investigations. We will be circulating a separate note summarising the matters that commonly need to be addressed in such circumstances.

The SFO's reporting form can be found at http://www.sfo.gov.uk/cases/guidance.asp

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.