Financial Crime in the UK

Following record-setting enforcement in 2012, the UK Financial Services Authority’s (FSA) crackdown on insider trading has continued in 2013. The regulator secured a record 10 convictions in 2012 and has five more cases set for this year, having already secured two convictions since January. The new cases will be taken on by the FSA’s successor, the Financial Conduct Authority (FCA).

One of the most notable cases this year involved Richard Joseph, a 43-year old former self-employed futures trader. Joseph, acting on insider tips he received about upcoming mergers, made a profit of approximately $1 million. In March, he was sentenced to four years in prison after being found guilty of six insider trading charges. The FSA also secured the conviction of Paul Milsom, a former senior equities trader at Legal & General, who was jailed for two years for disclosing inside information.

More significantly, the regulator’s “Operation Tabernula” case, its most complex investigation to date, is likely to reach the courts. The FCA has charged five men, including Martyn Dodgson, a former managing director at Deutsche Bank, with various insider-dealing offenses. They are alleged to have made $4.5 million from their trading. A number of other individuals remain under investigation in this wide-ranging insider-dealing probe that began two years ago with coordinated raids on 16 locations across London. The case will be a stern test of the regulator’s criminal powers.

Aside from the continuing investigations, an upwards trend in sentencing for insider trading has developed, as the regulator takes on more serious cases. The highest sentence imposed so far has been four years, with the average jail term coming in at just under 30 months. These figures show that the courts can—and are—taking tough action against financial crime. Expect this trend to continue.

As the FCA caseload in this sphere grows, many experts think that the number of guilty pleas entered by defendants will increase as well. Until 2010 the FSA had secured no guilty pleas. In 2011 there were three, and in 2012 there were four. In 2013 there has been one so far. An increasing realization that conviction remains a possibility when a case reaches the court should see this trend continue.

This year will also see the UK move a step closer to the U.S. model of deferred prosecution agreements, which will allow companies to settle fraud investigations by paying fines. The Serious Fraud Office (SFO) and the Crown Prosecution Service will be allowed to use the tool to encourage firms to “self-cleanse” by reporting issues. The embattled SFO has already tried this approach but ran into judicial difficulties when judges were unhappy at being “presented” with settled cases. This tool, which will be introduced as part of the UK’s Crime and Courts Bill, possibly in 2014, would put the power on a more formal footing. More details of the plan are likely to emerge this summer.