What does failure to prevent mean for the accountancy sector?

A comment made by Minister of State for Security Thomas Tugendhat during a debate on the Economic Crime and Corporate Transparency Bill (the Bill) on 25^th January has sparked a flurry of media reports and speculation. Tugendhat was confirming that the government supported the inclusion of new corporate criminal offences, based on the failure to prevent (FTP) model, in the Bill.

A legislative update of this nature has been in the political pipeline for at least the last seven years, driven in part by the challenge of prosecuting companies by way of the common law ‘identification doctrine’, which requires that a company’s ‘directing mind and will’ participated in a crime in order to attribute liability to the company itself. There have been a number of consultations, calls for evidence, reports, debates and attempts to amend the law since 2015. But Tugendhat’s comments represented the first time a minister has specifically confirmed the government’s support for the introduction of new FTP offences in an imminent Bill.

In 2017, the government issued a Call for Evidence on options for reform of corporate liability for economic crime. This produced no clear consensus on exactly what a new corporate liability offence should look like, although a significant majority of respondents agreed that the adoption of the FTP model would result in improved corporate conduct, despite the need for companies to put in place additional compliance measures. After considering the results of the Call for Evidence, the government asked the independent Law Commission to undertake a detailed review of the law in this area, with a particular focus on economic crime. The resulting Options Paper, published in June 2022, rejected the idea of a broad failure to prevent economic crime offence, due in part to the potential for excessive overlap with the existing FTP offences found in the Bribery Act 2010 (the BA) and Criminal Finances Act 2017 (the CFA). The paper proposed a more limited offence of failure to prevent fraud, and also noted that offences relating to human rights abuses, ill treatment or neglect, and computer misuse had been proposed during the consultation process. Offences relating to money laundering and false accounting were not put forward in the Options Paper.

In November 2022, Margaret Hodge MP proposed amendments to the Bill which would have added to the statute book new corporate offences of failure to prevent fraud, false accounting and money laundering. The first two offences would apply to companies of all types, while the third would apply only to those operating in the regulated sector and already subject to the UK’s money laundering regulations, including accountancy firms as well as banks, estate agents and lawyers. These amendments were debated and then withdrawn after the government assured the Committee that it was looking at whether such reforms could be introduced. Then, on 25^th January, after debate on amendments supported by Sir Robert Buckland KC MP (and which mirrored those previously proposed by Hodge), the government went one step further. Tugendhat agreed first that reform of the law is required, confirmed that his department had been carefully considering the Law Commission’s recommendations and how improvements can best be made, and finally stated that the government intends to address the need for new FTP offences when the Bill is looked at by the House of Lords.

The 2022 Options Paper included four key principles which the Law Commission considered to be appropriate for future FTP offences: companies should only be liable where the relevant conduct was undertaken by an individual with a view to benefitting the organisation, but not if the intention was to harm the organisation itself; a defence of reasonable prevention procedures (similar to that found in the CFA) should apply; the government should be required to publish guidance on such prevention procedures; and there should not be a presumption that the FTP offence would extend to conduct carried out by employees or agents overseas.

The draft clauses put forward most recently, which have been widely backed at a cross-party level, were broadly in line with the first two of these principles, and it is likely that the third would follow naturally. Tugenhadt’s brief comments, and his suggestion that he would  welcome discussion with Buckland on the matter, appear to indicate that the government will take the same approach in its amendments to the Bill, although this is by no means certain. The extent to which the government does so will be determinative of the extent to which the new law affects companies and how they respond.

We now appear to be closer than ever to this taking place. New criminal offences of this nature will undoubtedly strengthen prosecutors’ hands, in the same way as the advent of the Bribery Act allowed for significantly easier prosecution of companies and led to a number of high-profile criminal settlements with significant financial penalties attached.

In terms of compliance, accounting firms will be able to draw from their experience in implementing ‘adequate’ anti-bribery and ‘reasonable’ anti-facilitation of tax evasion procedures, as well as their familiarity with the criminal offence of false accounting found in the Theft Act 1968. Nevertheless, new corporate offences of this nature will bring an increased compliance burden, particularly for accounting firms and others in the regulated sector who will need to consider procedures relating to three new criminal offences; in most cases, and at a minimum, new risk assessments, policies and training will need to be developed by most firms.

A number of questions remain open, including which agency or agencies will take responsibility for enforcement of the new offences, and how effective they will be; and whether the guidance on reasonable prevention procedures will be sufficiently detailed, and issued in a timely manner.

The Bill’s second reading in the House of Lords is scheduled for 8^th February, when it is hoped that the government’s position will become clearer.

This article was first published in Accountancy Daily on 2nd February 2023.

FURTHER INFORMATION

For further information on the issues raised in this blog post, please contact Louise Hodges, Alun Milford or a member of our criminal litigation team.

ABOUT THE AUTHORS

Louise Hodges is a specialist in corporate crime, financial crime, FCA investigations, and serious and complex fraud. She is widely recognised as a leader in this field and leads Kingsley Napley LLP's cross practice financial services team and internal investigations team.

Alun Milford is a Partner in the Criminal Litigation team and specialises in serious or complex financial crime, proceeds of crime litigation and corporate investigations. He has particular knowledge and experience of issues surrounding corporate crime and deferred prosecution agreements.