The government on Monday resisted key amendments to the Economic Crime and Corporate Transparency Bill despite strong cross-party support including from prominent and well-respected former Conservative law officers.
These amendments – passed in the House of Lords after being tabled by Conservative Peers Lord Garnier and Lord Agnew – would have:
- Removed the exemption for SMEs from the new failure to prevent fraud offence
- Introduced a failure to prevent money laundering offence
- Helped protect law enforcement bodies from adverse costs when they pursue the assets of deep-pocketed suspects in civil recovery cases.
In this blog, we examine the government’s reasons for resisting these amendments and set out why the government should adopt these measures if it is serious about fighting economic crime.
Removing the exemption for SMEs in the new failure to prevent fraud offence
What reasons did the government give for opposing this amendment?
Minister Kevin Hollinrake opposed amendment 151, which removes the exemption for SMEs in the new failure to prevent fraud offence, on the following grounds:
- It would impose “significant and disproportionate burdens” without any “meaningful benefit”.
- It would apply to “every single UK business”, increasing the burden on UK businesses “more than eightfold”, from just under £500 million to £4 billion.
- While the Minister accepted that 99% of businesses would not be in scope, he claimed the new offence with the SME exemption would apply to 50% of all economic activity, which still leaves half of economic activity in the UK untouched by this new requirement to prevent fraud if the SME exemption is left in.
- The Minister added that “every case” of fraud or money laundering he has seen has been committed by larger companies – a claim that flies in the face of the evidence.
Why the government’s response is a missed opportunity to tackle fraud:
As various speakers highlighted, leaving in the SME exemption in the new fraud offence:
- Ignores the fact that small businesses would face minimal burdens. As former Attorney General Sir Jeremy Wright highlighted, the government could make clear in guidance issued for the offence what reasonable procedures would be proportionate for SMEs, and in what circumstances it would be reasonable not to have them at all.
- Misses a chance to raise anti-fraud standards across the board. The government acknowledged in its impact assessment that the exclusion of SMEs from the scope of the offence “will reduce the possible benefits and the potential for culture change,” a point echoed by Jeremy Wright.
- Leaves SMEs more vulnerable to fraud. Anti-fraud procedures to prevent companies committing fraud are largely similar to those that prevent them being victims to fraud. Several bodies from the Metropolitan Police to UK Finance have warned that SMEs are particularly vulnerable to being victims of fraud and encouraged them to proactively put in place anti-fraud procedures. So the failure to include SMEs in scope is a missed opportunity to help protect the SME sector from fraud more generally, as pointed out by Labour Shadow Minister Seema Malhotra.
- Is wrong in principle, as it introduces a criminal offence that does not apply equally to all businesses. As former Solicitor General and Secretary of State for Justice Sir Robert Buckland noted, there was no mention of an SME exemption in the Law Commission’s recommendation for a failure to prevent fraud offence, and there is no threshold in other failure to prevent offences. Buckland argued that stronger enforcement of corporate criminal liability laws would make the UK a more trusted place to do business.
- Leaves many professional enablers exempt. Dame Margaret Hodge noted that out of the 10,400 law firms in the UK, only 100 will be caught by the legislation as it is currently framed.
See our briefing for more details on this amendment.
Failure to prevent money laundering
What reasons did the government give for opposing this amendment?
The Minister rehearsed arguments that there is no need for amendment 158 which introduces a new failure to prevent money laundering offence because:
- It would duplicate existing offences in the Money Laundering Regulations (MLRs), and
- it would create a “serious level of confusion” and “unnecessary burdens”.
Why the government’s response is a missed opportunity to tackle money laundering:
As we have highlighted in various briefings and as several MPs noted in the debate:
- The government’s arguments for not introducing a failure to prevent money laundering offence miss the point that this could help transform the UK’s response to money laundering. The UK has a chronically poor record on prosecuting money laundering by big corporate actors (Seema Malhotra highlighted the single criminal prosecution of a company). A new offence would seriously focus minds and ensure that those outside the regulated sector – such as universities, political parties and PR firms – can be held to account when they launder criminal proceeds.
- It would not duplicate the MLRs, which require the prosecution to prove that a company took all reasonable steps and exercised due diligence to avoid committing the offence. By contrast, a failure to prevent money laundering offence would put the onus on the company to prove that it took reasonable steps to prevent the laundering. This is one of the reasons that Jersey has introduced a failure to prevent money laundering offence specifically for the regulated sector.
- The government could have addressed private sector concerns about burdens with greater clarity of guidance. As Robert Buckland observed, “companies already…face regulations anyway” so creating this new offence would not impose substantial new burdens on the regulated sector. The government could have made clear in guidance that properly implemented procedures required by existing regulatory requirements would have been sufficient for a defence against a prosecution.
See our briefing for more details on this amendment.
Cost protection for law enforcement in civil recovery cases
What reasons did the government give for opposing this amendment?
The Minister gave the following explanation for the government’s opposition to amendment 161:
- It would be a “significant departure from the loser pays principle”.
- However, noting the “strength of feeling” and the “potential merits of reform”, the government tabled an amendment in lieu imposing a statutory requirement for the Secretary of State to review the payment of costs in civil recovery cases in England and Wales and publish a report on its findings within 12 months.
Why the government’s response is a missed opportunity to ensure robust enforcement against dirty money:
- This amendment would help avoid the Bill being another paper tiger. UK law enforcement is chronically underfunded and frequently outgunned against well-resourced defendants. It is essential that the government puts the resources and protections in place to ensure it can be properly enforced. Protecting law enforcement from sky-high costs when they act reasonably against deep-pocketed suspects would be an excellent way to protect scarce public resources.
- The insistence on the “loser pays principle” does not take into account important exceptions in other areas of law. The courts have far more discretion on whether or not to impose costs on public bodies, including law enforcement, that bring unsuccessful regulatory or enforcement actions. Courts in these areas are allowed to take into account the ‘chilling effect’ that costs may have on the ability of public bodies to make reasonable enforcement decisions made in the public interest (see our previous blog for examples).
- The government’s limited concession on protecting law enforcement from excessive costs in civil recovery cases is too weak to be credible. As Robert Buckland argued, it is time government “grasped the nettle” and introduced this reform now rather than waiting for another report.
- The government amendment in lieu gives the Secretary of State huge leeway to undertake an unambitious and limited exercise, giving them powers to selectively “consult such persons” they consider “appropriate”. Ideally, the government should ask the Law Commission to conduct a review within twelve months of how the different costs regimes are operating as recommended by a senior judge. At the very least, the government should table a new amendment ensuring the report is fully independent and as wide a range of views as possible are sought.
See our blog and briefing for more details on this amendment.
To sum up
It is a real shame that the government has not yet decided to embrace these game-changing amendments – as well as others tightening up reforms to Companies House.
But it’s not too late for ministers to reconsider. When these amendments return to the House of Lords Peers may well urge the government to think again and send the amendments back to the Commons.
To make what is already an excellent Bill a truly outstanding one, the government would do well not to miss this opportunity again.
