NatWest three: tip of the iceberg?

Is the case of the NatWest three, extradited to the US to face charges of
‘wire fraud’, an isolated case, or should finance directors be concerned about
the broader implications?

Certainly,
GC100,
the body that represents general counsel in FTSE-100 companies, is sufficiently
concerned that it is in talks with the Home Office about the wider extradition
threat to business people.

Moreover, lawyers say there are around 20 other extradition cases in the
pipeline based on alleged white collar crimes. Not all of these are likely to
bother the corporate world, but the case of Ian Norris, former managing director
of Morgan Crucible Company, could have even wider implications than the NatWest
case. He is wanted in the US on alleged price-fixing charges. But these related
to a cartel, which was dealt with by the European Union in 2003. And, anyway,
the activities the US complained of weren’t illegal in Britain at the time they
were carried out.

If Norris fails to halt his extradition, US authorities could start targeting
a string of new victims. The risk of extradition for business people has
increased exponentially in the past two years as the result of a number of
factors, says Alistair Graham, partner at law firm White & Case, which is
representing Norris.

“First, the US has been becoming visibly more extra-territorial in its
pursuit of perceived white collar crime that appears to affect US citizens.

“Second, the new extradition regime between the UK and the US has removed the
protections previously given to UK citizens, with the most important change
being that a prima facie case no longer needs to be proven against them.

“Third, in an attempt to secure the extradition of UK executives for offences
that were previously not a crime here, US prosecutors are using the tactic of
recharacterising specific US offences that did not exist as crimes in English
law at the time the offences were alleged to have been committed. They are
trying to shoehorn them into broader English law offences, which bear little
resemblance to the original US charges. UK executives are rightly fearful of the
potential consequences.”

CBI warning

The trend is certainly sufficiently worrying to have prompted
CBI
director general Richard Lambert to issue a blunt warning to the government
about the impact of the current extradition arrangements between Britain and the
US. “If the government does nothing to correct the imbalance, it risks damaging
the UK’s position as a leading financial capital market,” he says. “Already UK
firms are examining their US links with a view to minimising their risk
exposure.” Lawyers also report that more companies are scrutinising the small
print in their directors and officers’ insurance to see whether it covers the
cost of defending extradition hearings and, indeed, legal proceedings overseas.

All this is likely to make FDs even more paranoid than they already are when
it comes to investigating potential internal frauds in their companies. “Most
finance directors take a very jaundiced view of involving the police and
starting a criminal prosecution,” says Simon Bevan, head of fraud services at
BDO Stoy Hayward.

“If they are part of a group with US operations, or if the incident involves
an American group, they are even less likely to want to instigate criminal
proceedings if they see it as making even the remotest chance that they, or
someone else from their company, will be extradited to the US.”

Bevan says that research he has undertaken into FDs’ requirements, and
extensive personal experience, is that confidentiality is paramount when a fraud
is discovered. “Their priorities are, first, to identify the fraudsters. Second,
they want to get the money back, which is done through the civil courts. Third,
they then want to improve their systems to prevent it happening again and move
on,” he says.

Prevention is better than cure, and FDs might want to step up their risk
management programme. “Somebody needs to go in and look at what the business is
doing, how it touches upon the US and where that may expose them,” advises
Jeremy Cole, a litigation partner at law firm Lovells. “It’s important to ensure
overall awareness internally of the risk of potential exposure.”

FDs may want to be more rigorous about due diligence to ensure there is no
current breach of US law. Some companies are said to be looking at how they can
restructure to reduce their vulnerability to legal challenges from overseas.
“For instance, if a company has subsidiaries in the US, it may want to think
about the exposure to the parent company and to ensure that the American
enterprises are genuinely discrete corporate entities,” says Cole.

“If the employees have the authority to take their own decisions, you may
reduce the risk to the parent company. You need to look at training arrangements
so that individuals understand the scope and reach of US legislation,” says
Cole.