The Situation: Following years of lobbying by senior prosecutors and other commentators, the UK government seems set to introduce an offence of a corporate failing to prevent economic crime.
The Result: With the exception of bribery and tax offences, a corporate can currently be held criminally liable only for economic crimes committed with the guilty knowledge of those who are the directing mind and will of the company (the "identification principle"). The latest government proposals suggest such liability may be expanded such that corporations may be liable for other economic offences committed for the benefit of the company, including fraud.
Looking Ahead: Such a development would increase the risk of successful prosecution of corporates in circumstances where employees and others have committed offences with the intention of benefiting the company or its clients. Corporates will need to ensure they have sufficient internal systems in place to mitigate the risk and potential liability arising in such circumstances.
On 10 October 2022, then Government Minister Robert Buckland told an audience in London that the United Kingdom was about to change the rules governing corporate criminal liability. He said that legislative provisions required to introduce the change could be introduced as amendments to September's Economic Crime and Corporate Transparency Bill, noting that this would lead to a "dramatic move forward on the position here in England and Wales on failure to prevent [economic crime]".
The reform follows criticism of the identification principle and complaints that it creates obstacles to effectively tackling corporate wrongdoing, especially in larger, more complex organisations.
An example of the problems arose in the Serious Fraud Office's failed attempt in 2018 to prosecute Barclays Bank for allegedly conspiring with senior executives to defraud investors during a financial crisis-era fundraising. The identification principle was applied extremely narrowly, the court finding that the bank's managing director and financial director were not the directing will and mind of the company as they could not act on the transaction in question without board approval.
Buckland noted that a report drafted by the Law Commission (the "Report")—an independent statutory body responsible for reviewing the laws of England and Wales and recommending reforms—following its recent review of laws relating to corporate criminal liability provideda "very clear flavour of where policymakers are going and what is likely to emerge in legislation in the next year or so".
Of the options set out in the Report, the former minister's words suggest that a new failure to prevent offence is the most likely to be adopted. This would share many of the characteristics of the current offences of failure to prevent bribery and failure to prevent tax evasion. The Report sets out general principles which should be adhered to by those charged with drafting the new offence:
- The new offence would cover acts committed not only by employees but also associated persons, such as agents, working for the benefit of the corporate.
- A corporate would commit an offence only if the economic crime was committed with a view to benefiting the corporate or a client on whose behalf the corporate was providing services. This is an important qualification that did not appear when the government previously mooted introducing a similar offence in 2016.
- As with the failure to prevent bribery and the failure to prevent tax evasion offences, there should be an adequate procedures defence. This would allow companies to avoid liability by demonstrating the implementation of suitable procedures to prevent employees committing the relevant offence.
- While the existing failure to prevent offences relating to bribery and tax evasion can apply where the underlying conduct occurs overseas, it remains to be seen whether the new offence would have similar extraterritoriality.
- The government should be required to publish guidance on what constitutes adequate procedures (we would not expect the offence to enter into force until such guidance is published, which is likely to delay the effective date of operation for some time beyond the passing of legislation).
The final scope and timing of any such new legislation will be subject to the policy priorities of the incoming Cabinet.
Three Key Takeaways
- The proposed changes will improve the ability of UK prosecutors to successfully prosecute corporations for economic offences committed by employees and other individuals on the company's behalf.
- The potential amendments are part of a wider movement by governments around the world to have corporates make a positive and proactive contribution to the countering of economic crimes, including bribery, money laundering and fraud.
- If the changes are implemented, corporations will need to ensure that suitable procedures are in place to prevent economic crimes being committed for the benefit of the company.
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