The UK’s corporate crime rules – why urgent change is needed

Author: Susan Hawley

Summary

  • The Law Commission’s recent announcement that it will review corporate crime rules is a welcome and important step towards reforming the UK’s antiquated principle for prosecuting companies;
  • The government has given the Law Commission until the end of 2021 to come up with an options paper. It is unlikely that any legislative reform could be brought before Parliament before 2023 at the earliest on this timescale;
  • The Law Commission review should be urgently accompanied by a failure to prevent economic crime offence bringing fraud, money laundering and false accounting into line with bribery and tax evasion;
  • The introduction of a failure to prevent economic crime offence is needed to deter the burgeoning fraud in COVID-19 emergency measures, and to ensure fairness in enforcement response to this fraud;
  • It is also needed to bring the UK into step with its major allies – the EU and US, with the EU introducing new criminal laws for companies for money laundering in December 2020 – and to protect and promote the integrity of UK financial services and markets. 

 

Introduction

Last week, the Law Commission made a welcome and long-awaited announcement that it has been tasked with reviewing the UK’s corporate crime rules. At the same time the government released the results of its own review of these rules – a Call for Evidence on corporate liability for economic crime that it conducted three and a half years ago. 

The issue of corporate crime reform has been stuck in limbo in government since the spring of 2017. Back in 2015, the Conservative Party manifesto stated that it would make it a crime where companies fail to put in place measures to stop economic crime, such as tax evasion. 

However, while the government reformed rules on tax evasion (with the failure to prevent facilitation of tax evasion offence in the 2017 Criminal Finances Act), similar reform for other corporate economic crime offences such as fraud, money laundering and false accounting got left behind. 

Following changes in leadership, despite a strong ongoing focus by government on economic crime and particularly fraud, bold steps in this area have been held up by serious opposition from the Treasury and Business, Enterprise and Industrial Strategy Department. 

 

Passing up a mandate for reform?

In his introduction to the government’s response to its Call for Evidence on reform, the Lord Chancellor, Robert Buckland, states that the exercise did not provide a conclusive evidence-base on which to justify reform but raised important questions about the operation of the identification doctrine.” The document itself states that there “was no convincing majority on a preferred way ahead.”

However, looking at the results, it is clear that the government could definitely have chosen to interpret the results as a clear mandate for reform if there had been the political will to do so. 

The 62 responses came from a broad mix of academics, private sector, legal firms, prosecutors and civil society, but with 38 of them (or 61%) – ie a clear majority – from legal and business firms or business groups.

Out of these responses:

  • 52.5% of respondents thought that the current regime does not provide enough deterrence for corporate misconduct (compared to 30.5% who think it does); 
  • 75.9% thought the ‘identification’ doctrine inhibits holding companies to account; 
  • 66.7% thought the introduction of criminal corporate liability for economic crime would result in improved corporate conduct (with only 13.3 % saying it would not; and 
  • 51.6% of respondents thought there was a case for introducing a corporate failure to prevent economic crime offence as opposed to 35.5% who did not.

The consultation did throw up some contradictory responses, possibly in part due to poor drafting. For instance, responses were evenly split on whether regulatory approaches offer a better alternative to criminal ones. However, 73.6% of respondents went on to say that regulatory responses are not appropriate where companies commit serious crime. Furthermore, 48.2% thought a new liability regime was justified alongside the financial service regulatory regime compared to 30.4% who thought it was not.  

Set against these results, no doubt, for the government, was the fact that a third (34.5%) thought that law reform would have an adverse impact on competitiveness and growth and 75.4% thought business would have to put in new measures to adjust for a new economic crime offence with some saying this would impose considerable cost.

However, given the clear majority response to the consultation that companies are not currently being held to account adequately before the law, it is deeply concerning that the government chose to sit on these results for three and half years and take no action whatsoever. 

 

An important part of the jigsaw puzzle – the Law Commission’s focus on identification principle

The Law Commission has been tasked, according to its terms of reference, with reviewing whether the ‘identification principle’ – the antiquated doctrine for holding companies to account which requires proof that a company’s director intended for the crime to occur before it can be prosecuted – in particular is fit for purpose. 

Prosecutors have long argued that this principle is unfair, does not reflect the reality of modern large corporations and incentivises large companies to maintain poor corporate governance procedures. 

The last Law Commission review in this space in 2010 found that the principle “can make it impossibly difficult for prosecutors to find companies guilty of some serious crimes, especially large companies with devolved business structures.” 

Its recommendation that courts should not presume that the ‘identification’ principle applied has fallen on deaf ears, and without Parliamentary intervention, courts will continue to apply the identification doctrine. Several high-profile prosecutions of companies (including Barclays and Olympus) have collapsed as a result of the identification doctrine.

NGOs such as ourselves and Transparency International have long argued that the Law Commission should undertake a thorough review of how to reform the ‘identification principle’ alongside the introduction of a failure to prevent economic crime offence. 

This is because while the introduction of a failure to prevent offence has been proven to have an immediate impact on improving corporate behaviour, longer term reform of the identification principle is still needed to ensure fairness and deterrence.  

The reasons for this are as follows:

  • While large companies can be held to account solely through the failure to prevent offence, smaller companies can face charges both for this offence and the main economic crime offences creating an inherent unfairness in the law;
  • A failure to prevent offence is regarded by the courts as a lesser offence and incurs less sanction meaning larger companies face lower penalties as a percentage of their profits than smaller companies; and 
  • A failure to prevent offence does not currently incur mandatory debarment from public procurement, in the way that a conviction for a main offence does, meaning smaller companies face greater risks of being excluded from procurement. 

Reforming the identification principle is undoubtedly a complex task, and the Law Commission is exactly the right kind of body to do it. Its review however does not preclude the immediate introduction of a failure to prevent offence to ensure that companies are held to account for all economic crimes on the same basis.

 

Could the Law Commission review become just another navel-gazing exercise?

A real concern we have however with the announcement last week is the potential for the Law Commission review to end up as another navel-gazing exercise on the weaknesses of the law. There are some worrying signs that it could.

These include:

  1. How long it will take. The government has given the Law Commission until the end of 2021 to come up with an options paper – which certainly doesn’t send a signal that this is anything like a priority for government. It’s unlikely that any legislative reform could be brought before Parliament before 2023 at the earliest on this timescale.
  2. Lots of business-friendly brakes on reform in the Terms of Reference. Not surprisingly, given that the review is co-sponsored by two of the government departments that vigorously oppose reform in this area, the Treasury and Business, Enterprise and Industrial Strategy Department, the terms of reference require that any reform be balanced against impact on business and the need to ensure reform won’t impose “disproportionate burdens on business.” 
  3. No concrete commitment to act on the Law Commission’s recommendations. The government has strongly implied that it will consider the results of the Law Commission’s review alongside its own further evaluation of the impact of various regulatory and legal changes over the past few years including on costs to business before deciding on next steps. That gives it plenty of leeway to ignore the Commission’s findings.

 If the Law Commission review is to make a real impact that allows for change to the identification doctrine in this Parliament, it is essential that it comes up with some specific legislative changes ready for immediate consultation. Its terms of reference allow it to look at ‘the possibility of specific provision for particular offences’ and we urge it to ensure its consultation document includes specific options for legislative text for amending the identification doctrine for consultees to respond to. 

 

Why more urgent reform is needed 

There are two reasons why more urgent reform – through the introduction of a failure to prevent economic crime offence at the earliest opportunity – is needed. They are likely the same reasons it is being delayed: COVID-19 and Brexit.

COVID-19 and the burgeoning fraud crisis

Covid-19 has created a fraud crisis particularly in bailout funds, emergency procurement and the furlough scheme. The potential losses to the public purse are huge:

  1. The British Business Bank has estimated that fraud and credit risk in the Bounce Back Loan Scheme administered by the banks could cause losses to the public purse of up to  £34.4 billion; 
  2. Similar potential losses in the other two COVID loans schemes, the Coronavirus Business Interruption Loan (CBILS) and the Coronavirus Large Business Interruption Loan (CLBILS) have been estimated at up to £3.7 billion.
  3. HMRC officials have estimated that fraud and error on the furlough scheme could amount to £3.5bn.

The case for law reform in relation to fraud and false accounting is compelling and urgent to protect the integrity of UK government procurement and COVID-related bailouts. Without reform, prosecutorial efforts to recoup money lost to fraud as a result of COVID will be focused primarily on smaller players with the real risk that larger companies that engaged in fraud will be let off the hook. This could lead to real resentment about unfairness before the law.

Furthermore, the COVID loans were administered by the big banks, who held primary responsibility for preventing fraud in these loans, while raking in fees for doing so. With no failure to prevent fraud law in place, banks will know that their risk of criminal prosecution is nil. This has arguably seriously undermined incentives for banks to be as rigorous in preventing fraud in public money as they should be.

The introduction of corporate liability rules for fraud would not make it possible to hold large companies to account for fraud retrospectively but it would send a strong signal and help deter further wrongdoing in these schemes.

Brexit – UK increasingly out of step with global trends on corporate crime rules

As the Law Commission rightly noted when announcing the corporate crime review, without reform “there is a risk that the UK will fall behind international standards in the prosecution of economic crime.”

Already the corporate liability scene for economic crime has changed both in the UK and globally since the government’s 2017 review. In early 2020, the UK high court judgement in the Barclays case – the only prosecution of a major bank in the UK for financial fraud arising from the 2008 crash – narrowed the circumstances in which a large financial institution or company can be held criminally liable for fraud. 

Conversely, from early December 2020, under the 6th EU AML Directive, EU member states will have to hold companies liable criminally where a lack of supervision or control allowed money laundering by a person under its authority to occur. 

The UK chose not to opt into this Directive stating that it already largely complied. However, back in February 2017, then minister for security, Ben Wallace, told Parliament’s European Scrutiny Committee that if the UK were to opt in, the UK would either have to amend domestic law or negotiate out the provision on corporate liability. 

Without a criminal failure to prevent money laundering offence, the UK will fall behind EU countries. As ‘equivalence’ between the UK and EU on money laundering becomes an increasing source of contention in the final stages of Brexit negotiations, there are real questions as to whether lack of corporate liability reform could start to impact upon the ability of British financial services to maintain market access in the EU.

Meanwhile, research conducted in 2019 comparing financial crime enforcement in New York and London, as similarly sized financial centres, showed that the UK is at risk of outsourcing economic crime enforcement to the US which has one of the strongest regimes for holding companies to account globally.

In the decade after the 2008 financial crash, the US brought 20 criminal enforcement actions against banks in New York and imposed £25 billion in criminal and non-criminal fines for financial crimes such as Libor and Forex rigging and money laundering (£10 billion of which were imposed on UK headquartered banks and £6.4 billion or a quarter of which were criminal fines). By comparison the UK brought no criminal enforcement actions against London banks, and imposed £2.5 billion in regulatory fines (just a tenth of what the US imposed). 

While this might be good for the US Treasury, it’s a missed opportunity for the UK to show that it is serious about maintaining the integrity of the UK financial system. Furthermore, the US experience shows that strong corporate liability rules do not undermine economic competitiveness – one of the arguments used against reform in the UK.

Conclusion – UK’s reputation at stake 

Law reform in this area has always been a matter of what kind of country the UK wants to be. 

Do we want there to be fairness before the law for large companies and small companies? Do we accept that companies should face the increased costs of implementing good procedures to achieve the longer term public good of economic crime prevention? Is the government serious about tackling fraud and dirty money or will spurious arguments about economic competitiveness continually be used as an excuse to delay much needed reform?

The answers to these questions cannot wait for the Law Commission to complete its much needed review of the identification doctrine but require urgent action now.