Expanding Corporate Criminal Liability: Is Failure to Prevent Fraud Next?

This comes with a statement by the government that it will amend the Economic Crime and Transparency Bill (the “Bill”) now wending its way through Parliament to add further so-called “failure to prevent” offences.

It is not yet known exactly what form these offences will take, but in the amendment recently tabled by influential former Secretary of State for Justice Sir Robert Buckland, they would consist of new offences criminalising the failure by companies to prevent:

• Fraud;
• False accounting; and
• Money laundering.

In response, on 25 January 2023, Tom Tugendhat, the Minister of State for Security, promised that some form of failure to prevent provision would be included in the amendments introduced to the Bill in the House of Lords.

Existing Failure to Prevent Offences

As noted, there currently exist two failure to prevent offences: bribery and facilitation of tax evasion.

The Bribery Act’s corporate offence has been around longer and in reality applies to many more companies than the tax evasion offence. There is little doubt that it has had a great effect on the corporate world, one which the Government would like to see replicated in other spheres.

There have only been a handful of prosecutions for the corporate offence, and only that of Glencore, resolved through a guilty plea, was of any significance. But that is not where the true impact of the offence lies. Rather, it is in the change it has made to companies’ internal practices.

Since the introduction of the corporate offence, the amount of time, money, executive energy and other resources going into anti-bribery compliance by companies of all stripes operating in the UK has increased to a massive degree. This is because of a key feature of the corporate offence, shared by all current and planned failure to report offences. Companies can defend themselves from charges by showing that they had in place “adequate procedures” (in later legislation, this has been revised to “reasonable procedures”) to prevent bribery. The content of such procedures, at a suitably high level, was set out in government publications¹. 

This expansion of compliance is no accident.

While some may have problems of principle in using the criminal law to change companies’ compliance practices and improve their behaviour, successive governments in the UK have had no such issues. It was the intent of the Bribery Act that fear of being found guilty of so serious a crime would spur companies to change what they were doing, prevention being better than cure (though  not always cheaper). At the same time, that would relieve some of the burden on government, by requiring companies to police themselves.

So the new offences, both relating to bribery and tax evasion, led to a large expansion in compliance work, time spent on compliance, money spent one external compliance advisors, and so forth. Companies have evaluated and enhanced their internal policies, which is generally a good thing.

Have the offences reduced the incidence of bribery and tax evasion? That is harder to know, and as far as we can tell, no good studies have been published, but it is to be hoped… 

Fraud and False Accounting

Fraud offences have always been the likeliest candidate for expansion, for a number of reasons. 

First, frauds are often committed through companies in order to benefit the companies or their customers, and to disadvantage competitors or the public. So if companies and their customers benefit from fraud, it is only fair that companies should bear the burden of preventing it.

Second, law enforcement in the UK has done a terrible job, getting worse, of prosecuting fraud. According to the national crime statistics, convictions for fraud have fallen from 42,000 in 2011 to 13,500 in 2021².  As with bribery, the government wants the private sector to help with the job. (The extent to which this is an appropriate allocation of private and public resources is not a topic for this article.)

As for Sir Robert’s second category of false accounting, that is, in plain language, a species of fraud, and there is no reason that the new offence should not define fraud to include false accounting. Indeed, this is what the Law Commission has proposed (it considers “fraud” in this case should include the statutory and common law offences of fraud by false representation, obtaining services dishonestly, cheating the public revenue, false accounting, fraudulent trading, dishonest representation for obtaining benefits, and fraudulent evasion of excise duty).

Money Laundering

With money laundering, though, the need is much less obvious. While money laundering can be committed by any person or company, the greatest risk of money laundering exists at certain types of companies: those that handle other people’s money (banks, trust companies, solicitors etc), and those that deal in cash (casinos, high value dealers etc). Companies in these areas are grouped together by money laundering legislation as the “regulated sector” and Sir Robert would extend the failure to prevent money laundering offence only against companies in that sector. 

Yet those companies already have significant compliance obligations under the Money Laundering Regulations 2017 (as amended) and are subject to criminal prosecution for any failure of the regulations (even for something like failing to provide proper training). Sir Robert recognised this and stated in Parliament that he thought the current legislation did not go far enough. But we consider that the government will disagree, especially since a real purpose of this type of legislation is to increase the resources companies allocate to compliance – and there is no question that the Money Laundering Regulations have already achieved that aim.

What’s Next?

As noted, the Bill has now gone to the House of Lords, where the government will introduce these new amendments. No doubt such experienced members of the house of Lords such as former Supreme Court Justice Lord Sumption and former Attorney General Lord Goldsmith will ensure any such amendments are on sound legal footing. But there is little doubt that they will become law, given cross-party support.

When the new offences do take effect, there will be a time for companies to adjust, after which companies will unquestionably need to up their compliance game.

Companies of all sorts will need to have a much better idea of what kind of actions are taken on their behalf that could put them at risk. Because fraud (especially of the false accounting type) can apply to any business done by a company, anti-fraud compliance will need to be both broader and deeper than anti-bribery compliance (let alone tax evasion compliance).

Risk assessments will be particularly important, as will continued monitoring and review. Companies that are regulated will also need to live up to new regulatory expectations. In some sectors, the burdens may be huge and the choices invidious: banks, for example, will need to consider whether to vastly increase spending to stop all fraudulent bank transfers, or risk regular prosecutions. 

And no doubt there will be more prosecutions against companies than before.

As with the effects of the Bribery Act, we expect this will create a new paradigm for companies. Lawyers at Pallas are experienced in all types of financial crime compliance, investigations and defence, and we are ready to assist companies as they tackle this brave new world.