15 March 2019 - Post by:
“Multi-national firms appear beyond the scope of legislation designed to counter economic crime.” This was the damning conclusion of a House of Commons Treasury Committee report on Economic Crime published last week. Those hoping that the UK government has forgotten about its manifesto commitment to reform corporate liability for economic crime will be disappointed. Recent events suggest that pressure is mounting to get the job done.
In 2017 the UK government issued a call for evidence on reforming corporate criminal liability but have yet to publish their response. Supporters of reform (including Lisa Osofsky, the recently appointed Director of the SFO) argue that the current law on corporate attribution means that it is difficult to make large companies liable for economic crime. Attribution requires evidence of a ‘directing mind and will’ at a senior level of the company – something that is certainly harder to prove in large companies. The Government said last week that it would be reporting on the outcome of the consultation later this year. One suspects that it has had its hands rather full recently.
The possible shape of reform
So what shape might possible reforms take? The 2017 call for evidence considered 5 options:
- Amendment of the identification doctrine
- Strict (vicarious) liability offence
- Strict (direct) liability offence
- Failure to prevent as an element of the offence
- Regulatory reform on a sector by sector basis
The fourth option is the one that is most often called for by supporters of reform. It contemplates the creation of a new corporate criminal offence of failing to prevent economic crime. The UK already has corporate offences for failure to prevent bribery and the facilitation of tax evasion but not other types of economic crime, such as money laundering, fraud or offences of misleading the market.
Director of SFO wants US style vicarious liability
Lisa Osofsky’s preference is for US style vicarious liability, where a company is liable for the acts of an employee committed during the course of their employment and, at least in part, which benefit of the company. A recent Corruption Watch report states that between January 2008 and December 2018, there were 20 successful criminal actions against New York and London-based banks which extracted more than £25bn in both criminal and non-criminal fines, whilst in the UK there were no successful criminal prosecutions against a bank, and just under £2.5bn imposed in non-criminal fines. It is figures like these that have led to calls for reform.
However, Lisa Osofsky has indicated that introducing a wider corporate offence of failing to prevent economic crime would be a step in the right direction.
The Solicitor General’s view is that having already brought in measures to deal with failing to prevent bribery and tax evasion, it would not be a ‘leap in the dark’ for corporates to extend them to economic crimes more generally.
Not everyone is in favour of reform however. Mark Thompson, the then Interim Director of the SFO, reported to the Treasury Select Committee that whilst the SFO favours reform, the Foreign Office is seemingly of the view that reform is not necessary as the Senior Managers and Certification Regime already addresses the problem, and many corporates who are either regulated within the financial services sector, or listed on a regulated exchange, would agree.
Consultation on a new offence – may be this year?
We are likely, perhaps this year, to see a consultation on a new failure to prevent offence. Further pressure on the UK Government is mounting:
- The House of Lords Select Committee post-legislative scrutiny of the Bribery Act 2010 published on 14 March urges the government to “delay no more” in reaching a conclusion on whether to extend the failure to prevent offence to other economic crimes, and even gave some drafting tips on an ‘adequate procedures’ defence. The report stated that none of the evidence that it had seen, which had been submitted to the 2017 call for evidence, opposed the creation of such an offence and many supported it.
- The Corruption Watch report published last week stating that prosecutions and penalties for a range of financial crimes committed over the past decade shows that the UK has “a serious problem in holding companies to account” compared with the US.
- A group of cross-party MPs, in a letter to the prime minister on 6 March, has called for a new failure to prevent economic crime offence to be introduced at the earliest opportunity.
The Solicitor General, in his evidence to the Treasury Committee, stated that he wanted to “get the detail right” before launching a consultation. He is likely to be referring here to the details of a new failure to prevent economic crime offence.
Failure to prevent model not suitable for all types of economic crime
It remains to be seen what the elements of any new offence will be. Clearly, the failure to prevent offence would not a suitable model to adopt for all types of economic crime, only the most serious.
Economic crime committed by employees (or associated persons, if the proposed model extends to capture these) does not always result in a benefit to the company and indeed companies and their shareholders are often the victims of fraud committed by their employees, not the beneficiaries of it. If there is any extension, it is arguable that this should be limited to where the company itself materially benefits from serious misconduct through increased revenue or other benefits, such that it is in the public interest to prosecute.
The right time?
Some may wonder whether the timing is right for reform. Should the UK be focusing instead on trying to attract more investment, and companies willing to establish a place of business in the UK in the wake of the uncertainty caused by the ongoing Brexit negotiations? On the other hand, some will point to the need to ensure that good corporate governance and the duties owed to the public at large are upheld. Some will no doubt view this is the first step to ensuring that we do not continue to see the UK used for widespread economic crime, and that we seek to limit the vast amounts of money laundered on its shores.