Today, veteran economic crime campaigner Margaret Hodge MP put forward some bold and crucial amendments to the Economic Crime and Corporate Transparency Bill currently going through Parliament to dramatically improve how big companies and senior executives can be held to account for economic crime.
In a highly positive development, the government responded by saying it is taking this extremely seriously and looking at whether these reforms could be introduced in the Bill.
Why we need reform
Prosecutors have for years argued that when they take on big multinational companies for committing serious economic crime such as fraud and money laundering, they do so with one arm tied behind their backs because of the UK’s current laws.
In June this year the Law Commission finally published an options paper on corporate liability – a review first promised over 15 years ago but repeatedly put on the back burner by governments of the day. The Law Commission found that the current rules for prosecuting big companies, based on what is known as the identification doctrine – which requires prosecutors to prove that a director of an organisation intended for the crime to occur – poses “an obstacle to holding large companies criminally responsible for offences committed in their interests by their employees.”
The Commission found that the current status quo is unfair against small companies – which risks diminishing “confidence in the criminal law” – and incentivises poor corporate governance, by “reward[ing] companies whose boards do not pay close attention” and penalising those that do.
Long time coming
Reform to the corporate liability regime has been long promised and long delayed. A 2015 Conservative Manifesto committed to make it illegal for companies to fail to put in place measures to prevent economic crime. A 2017 Ministry of Justice consultation on the issue was sat on for three and half years, finally concluding that there was not enough evidence to pursue reform. This was despite the fact that 76% of respondents said the identification doctrine stopped companies being held to account for economic crimes and 66.7% of respondents saying corporate liability reform would result in improved corporate conduct.
Parliament meanwhile has repeatedly called for reform. The Treasury Select Committee described the current status quo on corporate criminal liability for economic crime in 2019 as “wrong, [and] potentially dangerous.” These calls have significantly ramped up this year, with four different select committees urging the government during 2022 to introduce corporate liability reform, including the Treasury Select Committee (again), the Foreign Affairs Committee, the Justice Committee and the House of Lords Fraud Act 2006 and Digital Fraud Committee.
What’s on the table
The Hodge corporate liability amendments included:
- the introduction of failure to prevent fraud (including false accounting) and money laundering offences,
- a reform of the identification doctrine itself and
- a provision to ensure greater liability for directors where there is consent, connivance or neglect on their part.
These amendments are broadly in line, though go somewhat further, than what the Law Commission recommended in its review. The Law Commission was clear that both reform of the identification doctrine (to broaden it out to where crimes are committed with consent or connivance of senior managers, and to cover collective negligence) and specific failure to prevent offences, particularly in relation to fraud were desirable.
It was less clear however about the need for failure to prevent money laundering, or about when and how directors should be held to account – while acknowledging that the current way in which directors are held liable was highly unsatisfactory.
The Bribery Act shows the way forward
Failure to prevent offences, particularly in the relation to bribery (though less so for tax evasion), have been shown to improve corporate behaviour and help prosecutors hold companies to account.
In 2010 the government introduced a failure to prevent bribery in the Bribery Act for companies. It is noticeable that out of 11 Deferred Prosecution Agreements agreed between the Serious Fraud Office and corporates, nine are for failure to prevent bribery and just three for fraud. The result is that of the £1.7 billion in fines that the SFO has brought in through DPAs, just 10% is accounted for by fraud fines. It is highly unlikely that companies are committing less fraud than bribery in the conduct of business – all the indicators suggest otherwise.
There is increasing recognition that a failure to prevent fraud offence would make companies up their game on preventative measures which could significantly aid the battle against the UK’s burgeoning fraud epidemic.
At the same time, amending the identification doctrine could enhance the SFO’s ability to take on big companies for committing bribery not just failing to prevent it. It’s fairly likely, for instance, that the SFO was held back from taking on the Glencore parent company rather than just its smaller UK subsidiary in its recent case against the mining giant because of weaknesses in the identification doctrine.
Tackling the UK’s dirty money problem
The case for a failure to prevent money laundering is more controversial. There is no doubt that the UK has a dismal record on prosecuting high-end money laundering. In 2018, when the global anti-money laundering watchdog, FATF, reviewed the UK, there were 180 high-end money laundering investigations underway. Since that review, there has been just one prosecution of a big corporate (Natwest last year) for failing to comply with the UK’s Money Laundering Regulations. There has yet to be a single corporate conviction for active money laundering under the Proceeds of Crime Act.
The UK ducked out of the 6th European Union Anti-Money Laundering Directive, implemented across the EU by December 2020, which requires corporate criminal liability for money laundering to be introduced where there is a lack of supervision or control. It is also increasingly falling behind in rankings on imposing corporate anti-money laundering fines. Kroll found that in 2020, the UK was seventh in the world in terms of the value of anti-money laundering fines imposed – behind the US, Hong Kong, Sweden, Australia, the Netherlands and France. Meanwhile, the UK’s own Crown Dependencies are stealing a march on the UK, with Jersey introducing a failure to prevent money laundering offence in June this year, and Guernsey looking increasingly likely to.
Whether the UK should beef up the criminal offences in the Money Laundering Regulations or go the way of Jersey to ensure that it ups its game on tackling big enablers of dirty money is still unclear. What is clear is that the government needs to review very seriously what is holding prosecutors back from landing serious criminal penalties on banks, law firms, accountants and others and make sure it closes this gap.
To sum up
At the end of the day, corporate prosecutions are crucial for the fairness of our justice system, and for creating a credible deterrence against economic crime. They are also crucial to ensure that the private sector plays its part in tackling economic crime by having robust, meaningful preventative procedures in place. Let us hope that the winds of change are finally beginning to blow the right way on this issue.