SPCS

Stuff News Reports (12/05/13): When the Serious Fraud Office (SFO) finally called an end to its biggest ever investigation last month, it was up to acting chief executive, Simon McArley, to front the announcement.

He described the 32-month probe into Hanover Finance as “by far the most extensive and challenging of the finance company investigations undertaken by SFO”.

It was an investigation that consumed 12,700 man hours, the analysis of 107,000 pages of documents, and 3730 gigabytes of data. Fifty-four interviews were conducted and 30 transactions reconstructed.

After all of that, no charges were laid.

McArley betrays no signs of disappointment at that outcome. It’s now over to the Financial Markets Authority (FMA) to pursue civil action on behalf of investors.

And the one-time chef has other fish to fry.

As the investigation and prosecution of finance companies and their directors winds down, the SFO is aiming to get ahead of any emerging trouble and deliver real deterrence to anyone tempted to take the easy route to riches.

A lawyer by training and practice, with over 18 years as a Kensington Swan partner, McArley effectively dropped out in 2003, heading to AUT to complete a degree in culinary arts.

“The time had come to leave the firm. I didn’t need to do it any more,” he says.

He went on to wield the saucepan in anger at Lorne St, Auckland, restaurant Winos and at the Royal New Zealand Yacht Squadron, between stints at the NZX, where he was acting head of regulation.

The food was good, if he says so himself, but the work was hard.

“It’s very hard work, physically as well as intellectually,” McArley says.

While there may not be complex problem solving involved, McArley says cheffing requires someone who can negotiate “critical paths” to deliver what is ordered at high quality in short timeframes, in an ever-changing environment.

When McArley broke his leg skiing he realised his goose was cooked.

An interest in law enforcement and regulation led to an investigations job at one of the FMA’s predecessor organisations, the Securities Commission, covering a vacancy. McArley set to work on his first finance company investigations and prosecutions, something that has dominated the regulators’ attention ever since.

But the Securities Commission was in Wellington and McArley, while being a Victoria University graduate, lived in Auckland. The travel was taxing.

Back then there was a familiar face heading the SFO in Adam Feeley. McArley had crossed paths with him when Feeley worked at the Companies Office. So when Feeley tapped him to join the Auckland-based SFO in mid-2010, he jumped at the chance. Just over two years later, when Feeley left to head the Queenstown Lakes District Council, McArley stepped up to the acting chief executive role.

The appointment of a permanent chief executive is in the hands of State Services Commission and has not yet been advertised.

“I’m waiting for the advertisement before I make a firm decision on whether I’ll apply,” McArley says.

In the meantime, he’s keen to see the Hanover announcement is taken in context.

The SFO has now finished investigations into 15 failed finance companies, nine of of which led to criminal prosecutions, and seven of those to convictions. In all, 23 people faced charges and a few “outliers” have yet to appear.

“I’m proud of what we have achieved and it’s not all we’ve done in that time,” McArley says.

Fo an office with a relatively small staff, about 50, he was surprised how the SFO managed to keep the momentum of the finance company investigations going.

Commercial prosecutions are difficult, time-consuming and complex, just to unravel the transactions. On top of that, as with other criminal cases, intent has to be proved.

“You have to show what was happening in the heads of the people involved. They rarely write it down.”

Even when you think you have done that, a judge can disagree.

McArley said with steep penalties come high standards of proof. If criminal penalties were all that was available, there would be no remedy for many wronged investors. That’s where civil action comes in.

“You need a full suite and agencies to deliver those in their own ways,” he says.

Civil cases are pending against several finance companies and their directors, including the one filed by the FMA against Hanover directors and promoters Mark Hotchin, Eric Watson, Greg Muir, Sir Tipene O’Regan, Bruce Gordon and Dennis Broit, relating to statements made in company prospectuses and advertising.

McArley’s arrival at the SFO coincided with a change in the way financial and business regulators are dealing with the media. He concedes the Securities Commission, NZX and SFO all had a tradition of silence.

He once tried in vain to get hold of a copy of an NZX regulatory decision.

“It was a very closed thing,” he says.

The problem with that approach is it increases costs, and fails to engender confidence in the market.

“Fifty people in an office can’t capture every crime,” he says. “You need confidence in a market that there is an suitable deterrent there. It all goes to people’s confidence.”

McArley says because organisations can only control the flow of good news, not the bad, a lack of transparency will lead people to assume they are not doing the job. The news will be all bad.

“If you don’t engage with the media you will be known as the organisation that stuffs up all the time,” he says. “You have to build confidence and build a more effective economy by reducing the fear and cost of financial crime.

“That’s really why we engage.”

As a specialist in the worst kinds of financial crime, often complex financial crime, the services of the SFO do not come cheap, but it has 23 years of practices and procedures that it can roll out in its own investigations or, increasingly, to assist other agencies.

Now the office is thinking hard about what comes next and is already moving on.

It is broadcasting loud messages about the potential, and reality, of fraud in the rebuilding of Christchurch. Focus areas for the SFO there are procurement and general fraud, insurance fraud and investment fraud, as well as bribery, corruption and the payment of “backhanders”.

However, the SFO will pursue such cases anywhere and doing that will serve as a deterrent in Christchurch. It’s all about being there early to limit the damage.

“If you are going to intervene, it’s best to do it at the start than when you are finishing,” McArley says. “It’s best to find a $500,000 Ponzi scheme than a $500 million one.

“Early intervention is the key to reducing cost.”

However, it is also very hard to do. Detecting crime early is extremely difficult. If a regulator is transparent, even bullish, it will have a deterrent effect, McArley says.

Strong relations with other agencies are also on the agenda and turf wars a thing of the past, he says. Building such relationships are prominent in the SFO’s new Statement of Intent.

“We will be emphasising the needs to work with other agencies. We have no desire to be the sole prosecutors of financial crime.”

Agencies such as Police, Customs, the FMA, Department of Internal Affairs (DIA), Commerce Commission, the Ministry of Health, ACC and Immigration all have financial crime or fraud interfaces.

The SFO will focus on serious and complex cases, and every so often other agencies will need access to its resources, some “heavy hitting” as McArley describes it.

Cases can be handed over or joint operations can be launched, such as a recent proforma invoicing investigation with the Commerce Commission and other agencies called Operation Edit, and one with DIA, Operation Chestnut, over gaming revenue grants.

In both cases, the primary agencies identified regulatory and criminal matters. Those agencies and the SFO partnered and played to their own strengths.

McArley said the Government has sent strong messages that turf wars will not happen and will not be rewarded. Communications with the FMA, for instance, are “way, way” closer than in the days of the old Securities Commission, McArley says.

That has certainly been the case over investigations into South Canterbury Finance, Rockforte Finance and Belgrave Finance.

“We are working well together,” he says.

Meanwhile, IRD remains an outlier because it is not allowed to share information. SFO will provide information to IRD, but IRD can’t reciprocate.

However, a discussion paper now out could allow changes in that area.

“Our view is, confidentiality and privacy – yes, but not when there is a serious threat to the economy in bribery and corruption. There’s a case to lift some of that secrecy.”

McArley said financial crime and tax fraud “seem to be inexorably linked”. GST issues have been detected in a number of finance company cases, for instance.

But despite having what McArley describes as a “chequered record” on tax cases, the SFO is well placed to spot tax fraud and to share information with IRD – it has several ex IRD staff on its payroll.

Similarly, SFO has one staff member seconded to the New Zealand Police, while there are several police officers stationed in SFO’s offices.

“They’re so big and we’re so small, they are very supportive – as are Customs and IRD,” McArley says.

The SFO will also have to work harder and smarter to detect crime.

McArley has his own view of economic cycles – that there are no cycles of fraud. In his view, fraud is a steady percentage of GDP. What goes up and down is detection. During the global financial crisis, the tide went out and detection became much easier.

“Dirty washing was laundered in the sunlight,” he says.

That sudden transparency produced what looked like a bubble of financial crime.

In the absence of such a shock, detection will rely on whistleblowers and some form of intel analysis. But protection for whistleblowers is “variable”.

“It’s an activity we want to encourage because it is our best defence,” McArley says. “If we want to get on top of financial crime and minimise its impact, we need to encourage whistleblowers. I’m not sure how and it’s not part of SFO’s mandate.”

The SFO gets quite a few whistleblowers but they can end up in court, and that can be an “unpleasant and challenging process”.

As to how he spends his spare time, that’s simple: “What spare time?” he asks.

Source:

Story by Rob O’Neill

Whistleblowers welcome at SFO

http://www.stuff.co.nz/business/8657607/Whistleblowers-welcome-at-SFO

Fairfax NZ News