NEW CORPORATE OFFENSE OF FAILURE TO PREVENT ECONOMIC CRIME – THE WINDS OF CHANGE?
In May 2012, the Ministry of Justice consultation paper on deferred prosecution agreements (DPAs) identified the difficulties that prosecutors in the UK face with the law of corporate criminal liability and stressed that more needed to be done. Historically, corporate criminal liability in the UK has been difficult to successfully prosecute. The “identification principle” in UK law requires that a corporate can only be held liable for the criminal acts of those who are the “directing mind and will” of the company. Identifying who those individuals are and then satisfying the evidential burden of proof for a criminal prosecution against the company based on the intent and acts of those individuals has often proved quite difficult.
Following the consultation paper and public statements made by many stakeholders, the most vocal of which being David Green, CB, QC and Director of the Serious Fraud Office, there was a considerable pressure for change. Finally, on 2 September 2014, at the 32nd Cambridge International Symposium on Economic Crime, the Attorney General, the Rt. Hon. Jeremey Wright QC MP said, “Government officials are considering proposals for the creation of an offence of a corporate failure to prevent economic crime, modelled on the Bribery Act section 7 offence.” This statement was made as part of the Government’s stated priority to ensure that the UK has the correct laws and structures in place to tackle fraud and corruption, and to improve detection of money laundering. In effect, it appeared that the Government had listened to the prosecutor’s pleas for a change in the law to avoid the “identification principle” difficulties by moving to a strict liability offence.
However, In a complete volte – face on 28 September 2015, Justice Minister Andrew Selous stated that the Ministry of Justice had decided to drop work on creating an offence of ‘failure to prevent economic crime’ such as fraud and money laundering. Mr. Selous said: “Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished.” At the time, some commentators depicted this as a “slap in the face” for David Green who had so fought hard for the change in the law and was no doubt frustrated by this change in position.
But as is often the case, political winds change. On 11 May 2016, in a letter to the Guardian prior to the Anti – Corruption Summit in the UK, David Cameron wrote, “In the UK, in addition to prosecuting companies that fail to prevent bribery and tax evasion, we will consult on extending the criminal offence of “failure to prevent” to other economic crimes such as fraud and money laundering so that firms are properly held to account for criminal activity that takes place within them”. The UK Government then confirmed the proposals in a press release on 12 May 2016 and the Ministry of Justice confirmed that a consultation paper would be published in the summer of 2016. The precise reasons for this return to the September 2014 position will never fully be known but it was clear that many commentators were stating that the UK’s response to economic crime was not good enough and such a proposal one day before such an important summit could only draw fire from such criticisms.
So what will the new offence look like? Many corporates are now more than familiar with the Bribery Act 2010 section 7 offence. The stated intention of the UK Government is that the new offence of failure to prevent economic crime will be modelled on the section 7 offence. “Economic crime” is likely to be broadly defined to include offences such as fraud, theft, false accounting and money laundering plus other market based offences under the Financial Services Act 2012. It is likely that companies will be held liable for the actions of “associated persons” as is the case under section 7 of the Bribery Act. This will include anyone who provides services for or on behalf of the company. The legislation is likely to have extra territorial effect and will apply to crimes committed by a company or associated person anywhere in the world. If the new offence mirrors the section 7 offence, then the only defence for the company will be to show that at the time of the crime, it had in place “adequate procedures” that had been implemented and monitored to prevent such conduct. The new offence will have to be complemented by extensive guidance as to what might constitute “adequate procedures”.
What should corporates do in the face of such changes? Many corporates will already be well versed in the need to act and to do so expeditiously and comprehensively. They will need to undertake detailed risk assessments, create and implement comprehensive policies and procedures and train staff. There will need to be thorough board level involvement and as is always the case, policies and procedures will have to be monitored for compliance to ensure that such policies are honoured in reality as well as being documented. Many corporates will no doubt respond to the consultation and seek to lower any compliance burden but the experience of the Bribery Act 2010 is that any watering down of that burden may well be limited. The other lesson from corporates’ efforts to create and implement anti – bribery procedures is that these processes can take years to properly embed within an organisation’s ethos to ensure that a person applying hindsight to the “adequate procedures” defence is satisfied that the test is met.
Many commentators will ask whether this new offence will achieve its aim of reducing corporate economic crime? There are usually two schools of thought in response. The first praises any efforts to tackle economic crimes that, in the view of many commentators, are rarely prosecuted against corporates. There may well be a general public feeling that there are two systems in play with individuals committing “lesser” crimes feeling the full brunt of the State’s armoury, whereas corporates committing crimes that arguably have a much greater impact on economic well – being are often overlooked with prosecutors citing evidential or resource issues. It could be argued that any attempt to re – address this balance is laudable.
The second school of thought is more cynical and characterises new legislation such as this as a “sticking plaster” on what are more intractable problems with the prosecution of economic crime in the UK. Many people point to a Serious Fraud Office whose budget is repeatedly cut year after year. The SFO’s budget has fallen steadily since the 2008 financial crisis, although it is able to apply to the government for additional ‘blockbuster’ funding to cover the costs of particularly high profile investigations (such as Libor) on a case by case basis. Others point to the SFO’s track record in terms of successful prosecutions and query whether the SFO is up to the job of prosecuting economic crime. What would be the point of creating a new offence if in fact it will rarely be prosecuted? This was obviously the view of the Government in September 2014. The SFO has countered such criticisms with its successful DPA with Standard Chartered Bank and the guilty plea of the Sweett Group to a section 7 Bribery Act offence but the detractors are far from convinced.
The above responses are obviously based on more general grounds. What are likely to be the more detailed issues that could arise with such an offence? The most obvious issue is the breadth of fraud and money laundering and the difficulty in identifying both and preventing them from tainting any business. Many frauds are actually perpetrated against the company itself by either employees or suppliers. Would it make sense in such a situation to prosecute the company for its failure to prevent such crimes? The rational person would most probably say no. In terms of money laundering risks, corporates in the regulated sector (as defined by the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007) are already well versed in compliance with customer due diligence requirements. Will the new offence just duplicate and overlay even more compliance burdens on those already struggling under the weight of such regulatory “red tape” and in terms of those outside the sector, create two systems of regulation confusing and creating unfairness in its application and enforcement? No doubt these issues will form part of lobbying by corporates already struggling with these burdens and it will be interesting to see how the UK Government will deal with the tension of being kinder to businesses in times of austerity and being observed and scrutinised by both national and international pressure groups who regularly criticise the Government’s commitment to tackling economic crime.
The consultation paper may answer some of the above issues and the fact that stakeholders are being consulted can only be a good thing given the wealth of experience of those stakeholders in the application of the section 7 Bribery Act offence. Only time will tell if this new law will again be killed at least in part by pressure from the business sector or whether the pressure from prosecutors and public opinion will suffice to get the proposed law onto the statute books. Many may have doubted the prospect of an offence of failure to prevent tax evasion being enacted but the Panama papers leak made this almost an inevitability. Obviously the recent EU referendum result may put all such proposed legislation on hold given the current crises gripping the country. Given those pressures, those supporting the new economic crime offence may be hoping for a similar scandal to the Panama papers revelation to force the Government’s hand and give a gentle nudge to the winds of change!
Michael specialises in the defence of financial crime, fraud and regulatory investigations and prosecutions. He has acted in numerous high profile investigations and prosecutions brought against individuals by the SFO, FCA, Fraud Prosecution Service, and other regulatory bodies and prosecution agencies. He regularly advises in international cases that involve US and European Prosecutors/Regulators and the overlap between jurisdictions. Michael also advises both companies and professional firms on their anti money laundering compliance. Michael is a Solicitor-Advocate (Higher Courts Criminal and Civil Proceedings).