After several years of discussion and consultation, the UK Government now appears to be close to reforming the law on corporate criminal liability via the Economic Crime and Corporate Transparency Bill. These changes, if enacted, should make it much easier to prosecute corporates for various financial crimes.
These changes are being introduced via the Economic Crime and Corporate Transparency Bill (the "Bill"), which is currently approaching the end of its journey through Parliament on its way to becoming law. It has recently returned to the House of Commons, where amendments made in the House of Lords are to be considered.
The Bill contains two key legislative changes intended to expand corporate criminal liability in the UK:
- The expansion of the identification principle
- The introduction of an offence of failure to prevent fraud and money laundering
This focus on fraud reflects the UK Government's concern that fraud accounted for just under half of all crime experienced in the UK as at September 2022 (though a significant number of frauds are perpetrated by organised criminal groups based overseas). This focus on fraud was a key part of the Government's second Economic Crime Plan, which was published earlier this year.
Expansion of the Identification Principle
Corporate criminal liability has been of concern in the UK for some time, because prosecutors have struggled to apply the narrow "identification principle" to successfully hold corporates to account for financial crimes.
As it currently stands, the identification principle requires that a corporate can only be held criminally liable if the commission of an offence can be attributed to a natural person who holds such a position within the corporate that this person can be said to represent the corporate’s “directing mind and will” at the time the offence was committed.
In practice, this represents a very narrow group of individuals and is a high threshold to attain. It is particularly problematic in the context of large corporates with diffuse governance structures.
The Bill expands the identification principle by replacing the "directing mind and will" test with a "senior managers" test, which provides more clarity and expands the concept to a wider group of individuals, which should make it easier for prosecutors to successfully pursue corporates.
The Bill allows for the attribution of criminal liability to a "body corporate" or partnership if its "senior manager", acting in actual or apparent scope of authority, commits a "relevant offence":
- A "relevant offence" includes substantive money laundering offences, and the ancillary money laundering-related offences of "failing to disclose" and "tipping off". It also includes a wide range of offences, including fraud, false accounting, tax evasion, bribery and breaches of sanctions regulations.
- A "body corporate" can be incorporated outside the UK.
- A "senior manager" is an individual who plays a significant role in either managing a corporate's activities or making decisions about how these are to be managed.
The expansion of the identification principle is an attempt to address the difficulties of applying it to large corporates. The difficulties of prosecuting corporates with complex and diffuse management structures using the identification principle have been raised by senior prosecutors, including the outgoing Director of the Serious Fraud Office ("SFO"), Lisa Osofsky.
The SFO will soon have a new Director, Nick Ephgrave QPM. He has previously held senior positions within the Metropolitan Police Service and Surrey Police. With fraud at endemic levels in the UK, and a priority for the UK Government, it will be interesting to see whether the SFO begins to focus more on fraud cases and less on overseas bribery cases.
Failure to Prevent Fraud and Money Laundering
When the UK law on bribery was reformed via the UK Bribery Act 2010, a failure to prevent bribery offence was introduced, which applied exclusively to corporate bodies. The failure to prevent bribery offence entered into force in July 2011. Its model was followed when the UK Criminal Finances Act 2017 created two offences relating to the facilitation of tax evasion, both of which entered into force in September 2017.
These offences were intended to make it easier to prosecute corporates in the UK for the specified conduct. Each is subject to a compliance defence, which would apply if the entity had in place "adequate procedures" to prevent bribery, or "reasonable prevention procedures" to prevent the facilitation of tax evasion (interestingly, "adequate procedures" is intended to be a higher bar than "reasonable prevention procedures"). The UK Government issued guidance on these defences and took a principles-based approach.
Contested proceedings for the failure to prevent bribery offence are rare and the defence has yet to be properly tested in court (and as such there is no appellate case law). There has yet to be a prosecution of a failure to prevent facilitation of tax evasion offence.
A potential, broader "failure to prevent economic crime" offence has been discussed for years. The Law Commission consulted on how to expand corporate criminal liability in 2021, and considered different ways of doing this. Last year, it outlined various options for strengthening corporate liability, which, notably, included the expansion of the failure to prevent model to fraud.
The Bill was introduced on 22 September 2022. When it got to the House of Lords, it was amended to include the offence of failure to prevent fraud. This offence was initially limited to large organisations (i.e. those with two or more of: an annual turnover of more than £36 million; a balance sheet total of more than £18 million; and a work force of more than 250 employees). The scope of the failure to prevent fraud offence was expanded by the House of Lords in June 2023 to include various money laundering offences. This has proved controversial, as the Government had purposefully excluded this from the original drafting on the basis that it would be duplicative of obligations that are already imposed on the regulated sector. The size limitation was also removed so that the offence would apply to all corporates. It remains to be seen whether the added failure to prevent money laundering component survives and becomes law, but it seems clear the failure to prevent fraud offence will.
The new failure to prevent offence will once again be subject to a compliance defence of having "reasonable prevention procedures" to prevent the corporate from committing fraud or money laundering offences. The UK Bribery Act 2010 has clearly been the model for these new offences. Although no draft guidance has been issued yet by the UK Government in relation to the new offence, it is anticipated that a similar principles-based approach will be taken, as it was in the Government guidance regarding the previous failure to prevent offences. Corporates will need to upgrade their compliance programmes to address the risks arising from the new offence, but will be able to leverage their existing compliance frameworks.
- "Fraud" is broadly defined and includes offences such as tax evasion, fraud, fraudulent trading and false accounting.
- "Money laundering" is not yet defined in the Bill, but the Secretary of State is empowered to specify the offences.
- The Bill makes a "relevant body" criminally liable for fraud or money laundering committed by its "associate". The fraud or money laundering must be intended to benefit the "relevant body" or anyone to whom the associate provides services. The relevant body is not guilty of an offence if the conduct underlying that offence was intended to harm it. So, if the corporate itself was the victim of a fraud by an employee, the corporate could not face liability for that fraud.
- An "associate" is an employee, agent or subsidiary of the body, or a person who otherwise performs services for or on behalf of the body.
- It is immaterial if the conduct of the body, or the conduct constituting the fraud or money laundering, took place outside the UK. A "relevant body" is a body incorporated in the UK and carrying on business in the UK or elsewhere, or a body incorporated outside the UK but carrying on business, or a part of a business, in the UK. Partnerships are also included in the definition.
- The Bill allows for the addition of the failure to prevent fraud offence to the list of those offences into which a Deferred Prosecution Agreement ("DPA") may be entered.
The new failure to prevent offences, and expansion of the identification principle, are likely to mean there will be an increase in corporate investigations, DPAs and prosecutions, though budgetary constraints will inform the degree to which that occurs. Corporates will want to bolster their compliance programmes to address the new failure to prevent offence, and also the expansion of the identification principle, though they should wait until the statutory guidance is released regarding the new failure to prevent offence.
Corporates seeking to acquire a target may want to broaden the financial crime due diligence exercise they are conducting to review economic crime more broadly and include a review of fraud and money laundering policies and procedures.
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