On 4 September 2023, all eyes will be on the House of Commons as it considers the Lords' amendments to the Economic Crime and Corporate Transparency Bill in the third and final stage.
Two of the most significant amendments were proposed by Lord Garnier, and both concern the failure to prevent fraud offence. For details of the failure to prevent fraud offence, see Employers' new criminal liability for fraud and Economic Crime and Corporate Transparency Bill.
The first amendment aimed to eliminate the exemption for small and medium-sized enterprises (SMEs). The government had argued that SMEs should not be burdened unnecessarily with the cost of developing and implementing reasonable procedures to prevent fraud. However, Lord Garnier deemed it absurd to limit the offence to large organisations, which only make up 0.5% of UK corporates. Lord Vaux also emphasised that having reasonable procedures to prevent employee fraud should be a basic requirement for any business.
Failure to prevent money laundering
The second amendment sought to expand the failure to prevent fraud offence to include money laundering. Although there were previous calls for this extension, the government claimed that the existing Money Laundering Regulations (MLRs) were sufficient to address money laundering. However, Lord Garnier argued that this missed the point. The MLRs set obligations for financial institutions to comply with, but his proposal aimed to establish an offence for failing to prevent employees and associates from committing Proceeds of Crime Act (POCA) money laundering offences.
Extension of the identification principle
Another significant amendment to the Economic Crime and Corporate Transparency Bill received a lot less fanfare. On 20 June 2023 the government announced that it was seeking to extend the identification principle for economic crime offences.
The identification principle determines whether companies can be prosecuted for the actions of their staff. Under the current test established in 1972, a company can only face prosecution for a crime if it was committed by staff who represent the "directing mind and will" of the company. However, with the evolution of complex corporate structures and governance models since the 1970s, identifying the "directing mind and will" in large companies has become nearly impossible. Conversely, smaller companies faced a disadvantage as it was easier to identify such individuals when there were only one or two directors.
The government's proposal is to adopt a similar approach to the corporate manslaughter offence. This means that companies will be held liable for economic crimes committed by their senior managers. The determination of who qualifies as a senior manager will focus on an individual's roles and responsibilities within the company, rather than their job title. The offence will also cover situations where a senior manager instructs a junior employee to carry out illegal activities.
As currently drafted, the reform to the identification doctrine will encompass a defined list of economic crimes. Interestingly, this list includes bribery and tax offences already covered by failure to prevent offenses, as well as a wide range of other economic crime offences.
This means that, in addition to the failure to prevent offences, companies could face prosecution for money laundering, sanctions violations, and terrorist financing offences committed by senior managers. Unlike with the failure to prevent offences, there will be no statutory defence for a company to demonstrate that it had adequate procedures in place. A company can only rely on its preventative measures to mitigate the penalty.
For companies, the key will be to ensure that their economic crime policies and procedures effectively prevent senior managers from engaging in illegal activities.
The Economic Crime and Corporate Transparency Bill is now in its final stages of passage through Parliament and is expected to receive royal assent by the end of the year. Lord Garnier's amendments will likely be the subject of intense debate in the Commons on 4 September 2023, and their acceptance remains to be seen. On the other hand, the government's proposed extension to the identification principle is expected to face less opposition.
Even without Lord Garnier's amendments, the inclusion of the failure to prevent fraud offence for large corporations and the extension of the identification principle to a wide range of economic crimes will significantly enhance the fight against economic crime.
Now is the time for companies of all sizes to review their economic crime policies, procedures, and training to ensure that they both effectively prevent senior management from committing economic crimes and meet the adequate procedures defence threshold.
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