UK fraud agency under inspection
* Inspection to focus on how cases selected and pursued
* Attorney General's office says not about possible break-up
* Inspection comes after high-profile cases dropped
By Laurence Fletcher
LONDON, Feb 15 (Reuters) - Britain launched an unexpected investigation into its Serious Fraud Office on Wednesday, reviving questions over the future of an agency criticised for dropping several high-profile cases.
The review will focus on how Britain's main agency for hunting down major financial crimes and corruption goes about selecting and pursuing cases, a spokeswoman for the government's legal advisor said.
The spokeswoman for the office of the Attorney General said the inspection was "not in any way, shape or form" about whether the agency should be broken up.
But Britain has been looking into ways to shake up its financial regulatory system in the wake of the credit crisis and British media reported last year that a plan to break up the Serious Fraud Office was shelved at the last minute.
Some staff feared the investigation by the Crown Prosecution Service would discredit the agency and fold its lawyers and investigators into separate state bodies.
"People inside the organisation are not happy about it," said one employee, adding that the investigation undermined assurances that the agency's position was secure.
The SFO made no official comment.
The inspection of an agency once dubbed "The Seriously Flawed Office" by detractors, comes after it dropped a number of high-profile probes into credit crisis collapses, including U.S. fraudster Bernard Madoff's UK operations, hedge fund Weavering Capital and fund manager Dynamic Decisions.
In December, it was forced to concede that there were errors in a search warrant obtained against property tycoon Vincent Tchenguiz.
It is currently investigating a cover-up of investment losses at Japanese camera and medical equipment firm Olympus .
Adding to speculation over the agency's future is the coalition government's decision to scrap the Financial Services Authority industry regulator next year as part of its post credit-crisis shake-up.
Dividing lines between different agencies are not always clear and cases are sometimes passed between bodies.
The spokeswoman for the Attorney General's office said the review of the Serious Fraud Office had not been prompted by specific cases or the criticism of the agency, adding that it had been under discussion for a while.
She said the agency's director, Richard Alderman, had agreed that it made sense two months before he hands over to lawyer David Green. Green said in December "the SFO is here to stay".
The inspectors were due to visit the SFO on Wednesday.
Since 2008-2009 the SFO's annual budget has been cut by 34 percent to 34 million pounds ($22 million), although Alderman has said the agency is nevertheless doing more now than it was a few years ago.
There was surprise in London legal circles in September after the SFO dropped a two-and-a-half year probe into failed hedge fund Weavering Capital just days after a Cayman Islands civil court awarded damages of $111 million against two fund directors and said the manager had committed "fraud".
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