For more than a decade, lawyers, academics and business representatives have been discussing the need for a new approach to corporate criminal liability for economic crime. With significant expansion of the tried and tested failure to prevent (FTP) structure now imminent, and further debate on the Economic Crime and Corporate Transparency Bill scheduled for late March, there are questions still to be answered.
As economic growth, globalisation, automation and technological development have marched inexorably onwards, the challenge of prosecuting companies by way of the 100-year-old common law ‘identification doctrine’ has become more difficult. This approach to corporate liability requires it to be proven that a company’s ‘directing mind and will’ participated in a crime in order to attribute liability to the company itself. When the Bribery Act 2010 (the BA) came into force in 2011, introducing a new criminal offence of failure to prevent bribery by an associated person (often referred to as “the section 7 offence”), this represented a significant change in the way in which UK-connected companies could be held to account for the untoward acts of their employees, agents and other individuals, anywhere in the world.
By some measures, the BA has been a success: it has facilitated successful prosecutions and deferred prosecution agreements (DPAs) in relation to a number of companies, some of them very well-known. There have been a number of consultations, calls for evidence, reports, debates and attempts to further amend the criminal law since 2015 (explored in more detail in a previous article by these authors), with an emerging trend – albeit slow and somewhat erratic – towards further use of the FTP model. The introduction of the Criminal Finances Act 2017 added two further FTP criminal offences, and a significant majority of respondents to the government’s 2017 Call for Evidence on options for reform of corporate liability for economic crime agreed that expansion of FTP would result in improved corporate conduct, despite the additional compliance burden.
As one of our Criminal Litigation partners, Alun Milford, commented recently (in a Kingsley Napley-sponsored special report on fraud and financial crime for The Times / Raconteur), “Firms that operate ethically, understand where their risks lie and take proportionate steps to address these through appropriate compliance procedures should have nothing to fear.”
Considering the options
However, the Law Commission’s Options Paper, published in June 2022, rejected the idea of a general failure to prevent economic crime offence, on the basis that this could be too broad (leading to a disproportionate compliance burden) and would overlap with existing bribery and facilitation of tax evasion offences. Instead, a more limited offence of failure to prevent fraud by an associated person was proposed.
The Options Paper included four key principles which the Law Commission considered to be appropriate for future FTP offences: companies should only be liable where the relevant conduct was undertaken by an individual with a view to benefitting the organisation, but not if the intention was to harm the organisation itself; a defence of reasonable prevention procedures (similar to that found in the CFA) should apply; the government should be required to publish guidance on such prevention procedures; and there should not be a presumption that the FTP offence would extend to conduct carried out by employees or agents overseas.
There was also discussion in the Options Paper as to the impact of any new offences in terms of compliance costs and, as a connected question, whether new offences should apply to all companies or only those above a specified size or turnover threshold. This was not explored in great depth, and the Law Commission did not reach its own conclusion on the point. However, the most recent developments with the Economic Crime and Corporate Transparency Bill (the Bill) indicate that the government considers this point to be a significant one.
Recent progress
The Bill has been seized on as the ideal opportunity to introduce reforms on corporate criminal liability. On 25th January 2023, the Bill was debated in a House of Commons Committee, and draft amendments were put forward which would have introduced new criminal offences of failure to prevent fraud, false accounting and money laundering. The draft clauses, which were widely backed at a cross-party level and based on amendments proposed in November 2022 by Margaret Hodge MP, were broadly in line with the first two of the Law Commission’s principles (and it seems likely that the third would follow naturally).
During the debate, Minister of State for Security Thomas Tugendhat confirmed – briefly and obliquely, but unmistakably – that the government supported the inclusion of new corporate criminal offences, based on the FTP model, in the Bill. Tugendhat agreed that reform of the law was required and said that the government intended to address the need for new FTP offences during scrutiny of the Bill in the House of Lords.
Then, during the first session of substantive debate of the Bill in the House of Lords, which took place on 8th February, Conservative peer Lord Sharpe confirmed unequivocally that the government intended to bring forward amendments on corporate criminal liability at House of Lords Committee stage, and said details would be shared as soon as possible. He commented, “It is vital to get this right so that these reforms can be utilised by law enforcement, do not duplicate what already exists and avoid placing unnecessary burdens on legitimate businesses. We are working in collaboration with prosecutors and other stakeholders to prepare these measures”.
Another strand to the debate in this area over the years has been whether the identification doctrine itself could and should be reformed. However, Lord Sharpe stated that broader reforms of this nature were out of scope of the Bill (although the Government is exploring “other avenues for introducing appropriate and effective legislation on the identification doctrine”).
The House of Lords debate revealed general cross-party support for the Bill, although a number of members made points around the need for proper funding and resourcing of agencies, including the Serious Fraud Office, to allow effective enforcement of any new criminal offences.
Interestingly, former Solicitor General Lord Garnier KC went far beyond the previously proposed amendments to the Bill, and made bold calls for the Bill to “expand the failure to prevent regime to cover at least some of the 50 or so financial or economic crimes that are available to be dealt with by deferred prosecution agreements”.
The most recent media reports, based on comments from unnamed sources, have indicated that the government intends to take a relatively narrow approach, and will bring in only one new offence, of failure to prevent fraud. There are also indications that this will apply only to companies above a certain size, thus excluding smaller businesses from the scope of the law.
It is now clear that at least one new FTP offence will become part of UK law this year, although this may not take effect for at least another few months, as even after the Bill receives Royal Assent, statutory guidance will need to be drafted, finalised and published.
The impact of the new law
New criminal offences of this nature will undoubtedly strengthen prosecutors’ hands, in the same way as the advent of the Bribery Act allowed for significantly easier prosecution of companies and led to a number of high-profile criminal settlements with significant financial penalties attached. In terms of compliance, companies will be able to draw from their experience in implementing ‘adequate’ anti-bribery and ‘reasonable’ anti-facilitation of tax evasion procedures. Nevertheless, they will also, inevitably, bring an increased compliance burden; in particular, new risk assessments, policies and training will need to be developed by most companies who are within scope of the law.
As well as the final details of the new FTP fraud offence, a number of questions remain open, including which agency or agencies will take responsibility for enforcement of the law, and how effective they will be; whether guidance on reasonable prevention procedures will be sufficiently detailed, and issued in a timely manner; and – significantly – exactly what threshold will apply to the scope of the offence.
The answer to the latter point will be a significant one, as it will determine which companies will need to invest valuable time and resources into further financial crime compliance measures. There have already been complaints from some quarters that the nature of the failure to prevent approach to corporate liability makes it more difficult for smaller organisations to implement compliance systems that would constitute “adequate procedures”, and easier for law enforcement to prosecute them under the “directing mind and will” test in any event. Small companies often have no dedicated in-house compliance resource, and generally a more limited budget to take external advice and therefore, it is argued, are disproportionately affected by this kind of legislation. Indeed, the first successful contested prosecution under section 7 of the Bribery Act was of a small company with only 30 employees. Perhaps this is why the government appears to have made the decision to exclude these kinds of companies from the scope of the new anti-fraud offence.
On the other hand, the six principles set out in the Ministry of Justice Guidance for the Bribery Act, and likely to be adopted in a similar form for any new FTP legislation, include that procedures should be proportionate to the risk measured through risk assessments: so it is not the size of the entity but the nature and extent of its exposure to potential external and internal risks that is key. It is also clear from many of the deferred prosecution agreements which the SFO has secured over the past decade that big-name, multinational corporations are vulnerable to the consequences of FTP, as the legislation intended.
Committee-level scrutiny of the Bill in the House of Lords has been scheduled for 27 March 2023. We can only hope that some of the above questions will be answered at that stage, allowing companies and their management as much time as possible to come to terms with, and plan for, the imminent new law.
