Following a recent debate in the House of Commons on the 4th of September 2023 and continuing our series of briefings for professionals and senior company officers, we look at the Economic Crime and Corporate Transparency Bill and Government proposals for a new failure to prevent fraud criminal offence.

As one of the centrepieces of the Government’s program of measures in the Economic Crime plan 2 (2023 to 2026) the new failure to prevent fraud and false accounting offence targets economic crime in the corporate sector. This briefing includes changes that were made to the proposed legislation following a debate in the House of Commons on the 4th of September 2023 which considered revisions to proposals made by the House of Lords earlier this year.

Importantly, the new law specifically targets conduct by large corporate and commercial organisations not individuals. The key characteristics of the new offence are:  

• Expanded criminal liability for large commercial organisations. The offence is designed to capture conduct by larger corporations, not SME’s a fact confirmed by Kevin Hollinrake, the Minister introducing the proposals in the Commons.  During the Parliamentary debates there has been some controversy over the thresholds for triggering liability under the Act. At present it is suggested that corporations meeting at least two of the three following qualifying criteria will fall under its purview:

  • More than £18 million in total assets

  • More than 250 employees

  • Turnover in excess of £36 million per annum

• The failure to prevent model: Under the existing law on corporate liability prosecutors must link the criminal conduct alleged to actions taken by individuals who represent the “directing mind and will” of an organisation (see our discussion in our earlier BSQ briefing here). Marking the Government’s commitment to move away from this “identification doctrine” the new proposals adopt the now familiar “failure to prevent” model employed in the Bribery Act 2010. The Commons debate earlier this month left these proposals unchanged. A qualifying corporate entity will be guilty of an offence where:

  • A person associated with the organisation commits (or aids and abets) fraud or false accounting for the benefit of the organisation.

  • And the organisation fails to prevent the offence.

The Reasonable Procedures Defence

A defence is available where corporates can show that they had “reasonable” procedures in place designed to prevent fraud and false accounting offences. Further guidance on what is required to meet this standard will accompany the legislation when it is implemented.

Interestingly, the standard required is seen as less onerous than the “adequate” procedures threshold employed in the Bribery Act. This subtle but important difference may be motivated by a desire to reduce the burden of increased compliance on businesses because of these measures. In any event, the legislation is intended to act as an incentive for corporations to change their behaviour and attitude to economic crime by ensuring they have effective fraud deterrence and compliance measures in place to mitigate against it. 

Jurisdiction

Conduct in the UK by foreign companies doing business here as well by corporations based in the UK will be caught by the new Act.

 Corporations will also be liable for the conduct of a person associated with the business which could include its agents, employees, and subsidiaries. 

Penalties

An unlimited fine is the maximum punishment that can be imposed.

Conduct

This mode of liability applies to the main Fraud Act 2006 offences such as fraud by false representation or failing to disclose information, fraud by abuse of position and obtaining services by deception. Other fraud offences such as cheating the public revenue are also caught.

Rejecting an amendment put forward by the House of Lords, the Commons debate has now also confirmed that money laundering is not within the ambit of the proposals.  Taking the view that HMRC and the FCA already use the robust legal provisions within POCA and other legislation to tackle this problem, the Government position is that further legislation in this area is unnecessary. This was a controversial stance given the frequent references in a spirited debate in Parliament over the prevalence of dirty money in the UK financial system. It is a point that this and any future Government is likely to have to revisit soon.

A key driver behind the proposals it to make it easier to prosecute large companies for economic misconduct.  This is principally achieved by dispensing with the ‘identification doctrine’ eliminating what has long been perceived as the main obstacle to conviction in any prosecution for criminal misconduct.   

There will also be more scope to prosecute companies for types of conduct that are not caught under the current law. For example, under the new provisions a corporation could be liable for the act of any employees at any level within the organisation as well as for the conduct of third-party “associated persons.”
 

BSQ specialise in representing senior company officers and staff who may find themselves under investigation in connection with allegations of corporate misconduct. As well as facing potential criminal charges as individuals, invariably their employer as a corporate entity will also be under investigation. In BSQ’s experience senior company officers would be well advised to seek separate legal representation at the outset as there will invariably be a conflict of interest with their employers, Carefully checking the terms of their professional insurance to ensure it covers legal expenses in criminal investigations and prosecutions is also recommended.  

For more information on our expertise in representing individuals in fsuch cases, please see our financial criime solicitors’ services page.

If you require advice or assistance in connection with a financial crime allegation please contact our London offices.