Popular search terms
Click each term for related articles
UK & Europe
Regulatory & Investigations
In the House of Lords last month, the UK Government announced a new “failure to prevent fraud” offence, which will be incorporated to the Economic Crime and Corporate Transparency Bill which is currently progressing through the House of Lords. The bill is currently in its report stage and implementation will proceed following royal assent.
For some time, there have been calls for a ‘failure to prevent’ offence for fraud, which would mirror those for bribery under Section 7 Bribery Act 2010 and for tax evasion under Sections 45 and 46 of the Criminal Finances Act 2017. These provisions are intended to make it easier to prosecute organisations for crimes, as prosecutors only need to prove that the organisation lacked “reasonable” or “adequate” controls to prevent the wrongdoing.
In a speech delivered at the 39th Cambridge International Symposium on Economic Crime in September 2022, Max Hill QC stated that while the Bribery Act is the “gold standard on corporate criminal liability”, there are challenges in enforcing corporate criminal liability in relation to wider economic crime such as fraud. Lisa Osofsky, director of the SFO, went on to add that the new offence has the “potential to transform prosecution” of fraud, and that the similar offence in to combat bribery was a “game-changer”.
Currently for white collar crimes such as fraud, prosecutors need to prove that a “directing mind” at the organisation intended to commit the offence. This is known as the identification principle and it is currently hampering attempts of the prosecutors to hold large companies liable due to the impossibility to prove that anyone in a key decision-making role actually made the decision which led to the criminal conduct.
It has now been confirmed that upon implementation of the bill, companies will be criminally liable where an “associated person” commits a specified fraud offence, with the intention to benefit to organisation or any person who receives services from the company. Its scope will cover both the non-regulated sector as well as regulated firms such as law firms, accountants and other intermediaries that do not have reasonable measures in place to prevent money laundering, fraud and false accounting. However, differing from its predecessors, the failure to prevent fraud offence only applies to “large organisations”, meaning it must have satisfied two of the following criteria in the financial year prior to the year in which the offence took place:
The fraud offences that are captured will include:
a) Fraud by false representation (section 2 Fraud Act 2006);
b) Fraud by failing to disclose information (section 3 Fraud Act 2006);
c) Fraud by abuse of position (section 4 Fraud Act 2006);
d) Obtaining services dishonestly (section 11 Fraud Act 2006);
e) Participation in a fraudulent business (section 9, Fraud Act 2006);
f) False statements by company directors (Section 19, Theft Act 1968);
g) False accounting (section 17 Theft Act 1968);
h) Fraudulent trading (section 993 Companies Act 2006);
i) Cheating the public revenue (common law).
The omission of money laundering in the scope of the offence is due to the fact that the government views the existing money laundering and compliance regulatory regime as sufficient in its application. Despite controversy around this view, the FCA is increasingly taking enforcement action against regulated firms for anti-money laundering systems and controls failures, even in the absence of an act of money laundering.
If passed, the legislation will generate a need for large businesses to reassess their risk and examine the existing processes they have in place against the statutory guidance. It is widely suggested that if the SFO no longer need to attribute the wrongdoing to the ‘directing mind and will’ of the company, market commentary is that it is likely more investigations will be in their scope, and companies’ potential liability will escalate. However, as we set out below, it is questionable whether this is really the case. The Law Commission set out in the July 2022 options that one overriding offence of “failure to prevent fraud” would be very difficult to monitor and prosecute, yet this is the very option that has been adopted.
As discussed, the Act’s scope is now limited to ‘large organisations’. The inclusion of regulated companies in this scope causes an air of confusion. The regulated sector is currently overseen by organisations such as the FCA and SRA, who have power to impose financial penalties and disciplinary action against regulated firms and individuals. Therefore, a corporate criminal offence such as failure to prevent fraud appears to cover situations and scenarios which are already monitored by regulators and the impression, we are left with that the Act will result in significantly enhanced compliance is not necessarily correct.
Firstly, the need to prosecute failure to prevent fraud seems questionable, where the company or its associates have harmed a third-party. In such a case the company would already be exposed to civil lawsuits and private prosecutions. If it was in the regulated sector, the regulator could impose redress. In the legal services sector, new legislation under the Bill proposes to lift the statutory cap on the Solicitors Regulation Authority’s power to issue fines for disciplinary matters relating to breaches of the economic crime regime. A new clause will also allow the SRA to ‘proactively request information’ from solicitors for the purpose of monitoring compliance.
Therefore, it seems counterintuitive to introduce a brand-new offence with entirely overlapping jurisdiction in the regulated sector. Although the government factsheet suggests they have streamlined the offence, it has in fact simply rendered it less applicable, especially where third parties already have significant redress, and the lacunae is barely significant. If the government have accepted that the existing regulatory regime for money laundering offences is adequate, it is questioned why the rest of the regulatory regime is not, and why time and resources are being spent introducing an entirely new regime rather than improving the existing one.
By way of example, it has been questioned whether the Barclay’s trial could have had a different outcome with the new legislation, whereby it was found that the senior executives did not represent the required “directing mind and will”. However, many market commentators agree that the SFO simply failed to charge the company with the correct counts and overreached, a criticism we made in relation to the Barclays case here. Commentary surrounding the failure of the SFO in this case will not be miraculously solved by reform of corporate criminal liability, but rather by sufficient funding and resourcing to allow the criminal authorities to utilise their powers effectively, especially in the non-regulated sector. In addition, had the FCA taken on regulatory action against the firm and individuals, it could have done so much more effectively via its powers. The utility and risk of the prosecution against Barclays was questionable.
Whilst it is undisputed that the identification principle is outdated and impotent, the fact that the new offence excludes smaller organisations, therefore only targeting companies that already have in place wide-ranging compliance regulations, is ultimately a huge impediment to the Act being used in practice.
The intersect of regulators means that regulatory and prosecuting bodies, such as the FCA and SFO, or SRA and SFO would need to work out who as primacy in an investigation. The FCA had regard to this question in their prosecutions of individuals under LIBOR/EURIBOR, staying enforcement action while SFO prosecutions were ongoing.
The Government factsheet neglects to mention what could happen if a criminal prosecution occurs and fails, thereby touching on the developing principle of double jeopardy which is enshrined in EU law in the civil law doctrine of ne bis in idem, and potentially binds the UK through the EU-UK Trade and Cooperation Agreement. This principle has four constituent elements: (1) two sets of punitive proceedings; (2) one of which has led to a final decision; (3) the subject of those proceedings is the same; and (4) the acts being judged are the same. This has been applied in the context of deferred prosecution agreements outside of the EU and works to explicitly avoid the unnecessary imposition of duplicative penalties in the context of investigations. It is consistent with the principle that there should be no “second bite of the cherry”.
Although the UK could depart from the strict application of “ne bis in idem” principle it is questionable how much it could do so under the Trade and Cooperation Agreement, and in any event, not in the case of a BRENTRY (Britain’s Re-entry to the European Union/ Common Market), which would necessitate a stricter adherence. Therefore, it follows that behaviour which is unsuccessfully prosecuted under a new ‘failure to prevent’ offence could not also be penalised by the regulators in a “second bite of the cherry”, who could have alternatively proceeded under systems and controls failings with regard to insufficient financial crime prevention.
With the new offence only targeting ‘large’ organisations, despite the former offences applying to organisations of any size, it also shows that lessons are not being learnt from real-life case studies. Had due consideration been given to the successes and failures of these offences, it is suggested that the government’s focus would be on tackling the non-regulated sector and focusing separate efforts on improvements and strength of the criminal authority powers.
Despite being described as the “gold standard on corporate criminal liability”, and an “international benchmark for compliance”, there have only been three convictions under section 7 since the Bribery Act’s introduction in 2011. The SFO offer an option for deferred prosecution agreements, of which there have been 12 since the Act’s introduction, yet the figures are still exceedingly low. All 19 of these companies have sat within the non-regulated sector. The success of the SFO has continually been under scrutiny and in its 2019-20 annual report, the SFO did not specify its annual conviction rate at trial, instead relying on a four-year success rate of 62%.
Therefore, given lead-in times for UK prosecutions and the current success rate of ‘failure to prevent’ offences, it seems unlikely that a ‘failure to prevent fraud’ offence will immediately transform the corporate fraud landscape as endorsed. The improbability of the offence’s success, combined with the issues levelled at it in this article make it feel like a losing battle.
Notwithstanding the principle of double jeopardy, and that there is no significant lacunae, the question of insufficient resources for any type of white-collar investigations and prosecutions remain.
Calls to scrap the SFO or put it together with the NCA feels like rearranging deckchairs on the Titanic. Without specialised white-collar courts, nothing will change in terms of speedy and effective investigation and prosecution of white-collar crimes. At the SFO’s current pace of investigations, an investigation from the entry into force of the Act could take 3 to 5 years, and any trial 2 to 3 years. Given that SFO cases usually go to Southwark Crown Court, with its track record of hung or discharged juries it is unlikely we will get any outcome capable of comment before the 2030 World Cup. Talk of a game-changer is premature at best.