The future of UK corporate “Failure to Prevent” offences?
August 06, 2019
On 8 March 2019, the House of Commons published a report (the “Report”) following an enquiry into economic crime launched a year before by the Treasury Committee. The Report concluded that there is clear evidence that legislative reform will be required in the UK’s fight against economic crime.
In parallel, in an interview published on 18 March 2019, the Solicitor General explained that there were compelling reasons for the creation of a new Corporate Criminal Offence of “ailing to prevent economic crime”. So far, the failure to prevent (“FTP”) model has been used in two statutes: the Bribery Act 2010 (“UKBA”) and the Criminal Finances Act 2017 (“CFA”). In both statutes, companies can be held criminally liable, if they fail to prevent the offences of bribery and facilitation of tax evasion respectively. The reforms being considered could target additional areas of economic crime such as money laundering, false accounting and fraud. Reactions to the introduction of a more general FTP economic crime offence have been mixed.
CONTEXT: WHAT IS A FAILURE TO PREVENT OFFENCE
Currently, much corporate criminal liability is governed by common law and requires evidence of deliberate and dishonest behaviour from a ‘controlling mind’ of a company. The well established litigated identification principle was set out in the leading case of Tesco Supermarkets Ltd v Nattrass. Under the principle, a company can be found guilty of a corporate crime, if it can be proven that the ‘directing mind’ of the company knew about or played a part in the offending.
Under both the UKBA and the CFA, the liability of companies is extended to make them responsible for those who perform services for or on behalf of a company (as an “Associated Person”). These offences place greater responsibility on a company to prevent criminal activities undertaken in the course of acting for and on its behalf and, consequently, make the company criminally liable if it fails to do so. The company may avoid prosecution if it can show that it has implemented, “reasonable procedures” under the CFA or “adequate procedures” under the UKBA, designed to prevent bribery/facilitation of tax evasion. HMRC published a list of 6 recommendations for companies to follow (and it is likely these principles will be applicable to any future FTP offences). The six recommendations are as follows: (1) risk assessment; (2) proportionality of procedures; (3) top level commitment; (4) due diligence; (5) communication and training; and (6) monitoring and review. The success of a company’s defence depends upon whether its preventative procedures are deemed sufficiently proportionate to the risks.
As such, the FTP offences are shifting the onus onto companies to prove (to a civil standard - on the balance of probabilities) that they had adequate or reasonable procedures in place. FTP legislation encourages companies to assess their corporate criminal risks and take steps to mitigate them. As a result, it can strengthen management accountability and improve conduct as senior management work to ensure a culture of corporate compliance.
MIXED RESPONSES TO REFORMS
However, it is interesting to note that the recent Economic Crime Plan (the “Plan”) published on 12 July 2019 did not mention a potential expansion of the corporate criminal liability rules beyond bribery and tax evasion. The Plan briefly mentions that the Government will develop a long-term resourcing model for economic crime reform by March 2020 and explains that The Ministry of Justice is “shortly” due to issue a response to the Call for Evidence on Corporate Criminal Liability (the “Call for Evidence”) report published in January 2017. The Call for Evidence set out five possible areas for reform including a variant of the FTP model. The Plan might therefore intentionally avoid this topic due to the imminently awaited response to the Call for Evidence.
WHAT COULD BE AFFECTED/WHICH REFORMS
If a new FTP economic crime offence is enacted, the scope of the reforms will need to be assessed. In these circumstances the Government’s starting position is that the offences should firstly apply to a restricted list of the most common serious economic crime offences, which could be added to if necessary by secondary legislation. The Report explains that this list could comprise:
- The common law offence of conspiracy to defraud;
- The offences in section 1 of the Fraud Act 2006: fraud by false representation; fraud by failing to disclose information; and fraud by abuse of position;
- The offence of false accounting at section 17 of the Theft Act 1968; and
- The money laundering offences at section 327 to 333 of the Proceeds of Crime Act 2002: concealing criminal properties, arranging the facilitation of the acquisition of criminal property by or on behalf of another person, acquisition of criminal property and failing to disclose knowledge of any laundered property.
The Serious Fraud Office (“SFO”) is in agreement with this approach. Indeed, Hannah von Dadelszen, the Head of Fraud at the SFO, commented “the failure-to-prevent model…[should] apply more broadly to wider economic crime,” including to offences under the Financial Services and Markets Act 2006.
The National Crime Agency has urged caution, in spite of being in support of this reform movement.
We await further guidance on this area, particularly in relation to the breadth and structure of any new FTP offences, along with applicable penalty regimes.
Should the Report’s recommendations lead to reforms, companies would be well advised to revisit their compliance policies and procedures. The imminently awaited response to the Call for Evidence will give us further details on the next steps the Government plans to take against economic crime.
Our team of lawyers and mutli-disciplinary specialists can help you to identify gaps in your compliance policies by conducting targeted risk assessments. The involvement of appropriately qualified lawyers in this process means that any subsequent investigations commenced may be covered by legal professional privilege.
We will continue to monitor the progress of the independent review and will produce an update on any material developments expected at the end of 2019, including the response to the Call for Evidence on Corporate Criminal Liability.