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Expansion of failure to prevent: The theory is almost reality
Louise Hodges
Since our last update on the progress of the Economic Crime and Corporate Transparency Bill, Parliament has taken its summer break, and the British weather has been through all its seasons and back again.
But are we any closer to getting new corporate criminal offences on the statute books? The unavoidably non-committal answer is ‘yes and no’. In this article we chart the progress of the potential new failure to prevent fraud offence, but also the late introduction of amendments to extend the persons who can be the “directing mind and will” of a corporate body in order to establish corporate criminal liability.
New corporate offence(s)
As we wrote in March, the challenge of prosecuting companies by way of the common law ‘identification doctrine’ (where a prosecutor has to prove that a company’s ‘directing mind and will’ participated in a crime in order to attribute liability to the company) has become more difficult in the last few years. The use of the “failure to prevent” (FTP) approach has worked in the context of bribery, although it has been less successful in the context of tax evasion. Nonetheless, some advocates of reform have argued for the extension of the failure to prevent model to fraud and economic crime more generally.
We have previously written in detail about the frequently tortuous journey taken by lawmakers in order to get to the point where a new failure to prevent fraud offence was included in the Economic Crime and Corporate Transparency Bill (the Bill). The relevant amendments have now passed all of the main stages of consideration in both the House of Commons and House of Lords. During that process, an additional corporate offence of failure to prevent money laundering was also proposed but this was not supported by the government and debate on that point has somewhat lengthened the Bill’s passage through Parliament.
A limited scope?
Another amendment – proposed by the government – was one which limits the scope of the fraud offence such that it would only apply to 0.5% of companies (those which are not classified as small and medium-sized enterprises (SMEs)). This generated heated debate in the House of Lords, with a number of peers from across the political spectrum speaking out against this approach, which has not featured in either of the failure to prevent offences already on the statute book.
Lord Edward Garnier KC, a Conservative peer, former solicitor general, and original sponsor of the Bill, described the proposed limitation as “absurd”. During the House of Lords debate on 11 September, he noted that “the law requires no more than a proportionate approach to the facts relevant to the company or partnership in question”. In other words, compliance programmes should be proportionate to the organisation’s size, risk-profile and resources. Swayed by his and other interventions, the Lords proposed a far more limited exemption, under which only the very smallest, “micro”, enterprises would fall outside the scope of the offence.
However, two days later, the Commons rejected that proposal, insisting that the scope of the offence should be limited to large companies. In marshalling its votes, the government pointed to the risk of significantly increased one-off and recurrent costs to businesses which would be “disproportionately shared by small-business owners”. The Lords must now consider this part of the Bill again — but are not due to do so until 18 October.
Where does the balance lie? Whereas bribery and tax evasion are relatively discrete offences where the risk-profile of a sector or type of business is more easily established, “fraud” is a much broader concept so that establishing a proportionate approach sufficient to establish a defence could be much more problematic. The debate on this point has not been helped by the absence to date of official guidance on the reasonable anti-fraud procedures the government would expect a company to have in force in order to afford it a defence to the proposed new offence. That guidance will not see the light of day until after the Bill has been passed, but before the new law comes into force.
Progress on broader reform
Importantly, the Bill has also become the vehicle for a much wider, and in many ways much more significant, reform of corporate liability. On 14 June 2023, the government introduced into the Bill an amendment to the identification doctrine, which is the legal test for determining whether the thoughts and actions of a natural person (that is to say, a human being) can be attributed to a legal person (that is to say, a company or other corporate body) so that the corporate body is held criminally liable for the person’s actions. Under this reform, a corporate body will be criminally liable where a “senior manager”, acting within the actual or apparent scope of their authority, commits a relevant crime. For now, the reform has been limited to offences covered by the Bill and so to cases of economic crime (including fraud, bribery, tax evasion and some money laundering offences). During the Parliamentary debate, however, the government announced that it plans to expand this approach to cover other types of crime when a suitable Bill is before Parliament.
Is the future clear?
Research, consultation, discussion and debate on the topic has been ongoing for more than a decade, and while it may be worth spending a few extra weeks and months to get the law right, businesses – along with their leaders and advisers – need clarity and concrete action more than ever. The guidelines on what is a proportionate approach to preventing fraud will form an important part of the clarity. We fear, however, that the issue of the exemptions will not go away after the Bill has, eventually, been passed.
FURTHER INFORMATION
If you require advice in relation to any matter raised in this blog, criminal records or any criminal offences please contact a member of the 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.
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