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Partner Paul Brehony discusses the current position regarding the failure to prevent corporate economic crime, following an amendment to the Financial Services Bill on 13 January in an attempt to hold businesses criminally liable for fraud, false accounting and money laundering offences committed by their employees, in Thomson Reuters.

Paul’s article was published in Thomson Reuters Regulatory Intelligence, 2 February 2021, and can be found here.

The glacial progress of long-proposed “failure to prevent corporate economic crime” legislation has finally taken a step forward of sorts. Some much-needed impetus was provided by recent parliamentary scrutiny earlier this month of the Financial Services Bill in which a new clause 4 was tabled, supported by a cross-party group of members of parliament.

The proposed amendment focussed on entities regulated by the Financial Conduct Authority (FCA) and put forward a new corporate offence of failing to prevent, facilitate and take reasonable steps to prevent a relevant financial crime offence. Those comprise offences under the Fraud Act 2006, false accounting, certain Proceeds of Crime Act 2002 (money laundering) offences, tax evasion, insider dealing and false accounting.

The reference above to glacial progress needs to be placed in the context of Conservative Party manifesto promises made in 2015 and of the Ministry of Justice’s (MoJ) 2017 call for evidence from stakeholders. The government’s response to the call for evidence was finally published in November 2020.

The government decided that the evidence was inconclusive and tasked the Law Commission to re-review the issue and provide options for reform. With the Law Commission’s report 12 to 15 months away, realistically legislative reform will not be on the cards until 2023 at the earliest.

Call for evidence; government response

The government response mooted five possible options for reform:

option (i) — legislation to replace existing (arguably inadequate) common law rules;

option (ii) — a recalibration of the law of vicarious liability to create a strict vicarious liability offence removing the need to prove any fault element such as knowledge or complicity at the corporate centre; a new failure to prevent financial crime offence (akin to existing bribery legislation and failure to prevent tax evasion in the Criminal Finances Act 2017), but which has available a statutory defence relating to the existence of adequate procedures:

one — option  (iii) — placing the burden of proof of establishing the adequacy of such procedures on the corporate defendant;

the other — option (iv) —placing it on the prosecution;

option (v) — investigating the scope for further regulatory reform, particularly in the financial services sector.

Unsurprisingly, there was wide agreement among respondents to the call for evidence that the “identification doctrine” significantly inhibited prosecution of corporates for economic crimes. Only a narrow majority, however, took the view that the existing criminal regulatory framework required reform to deter corporate misconduct. There was, however, no clear consensus about how best to replace the “identification doctrine”, or how best to recast corporate criminal liability to plug the gap. Although the “failure to prevent” models received most support, they still only attracted 46% of those canvassed.

One can therefore understand why the MoJ took the view that a more forensic analysis by the Law Commission was required. It is equally easy to understand the frustration of the cross-parliamentary group that supported clause 4, and of commentators and lobbyists, given the apparent industrial-scale government procrastination in progressing reform.

As matters stand, no bank has ever been prosecuted in the UK for money laundering, let alone received a deferred prosecution agreement. Dame Margaret Hodge, chair of the All-Party Parliamentary Group on Anti-Corruption and Responsible Tax, drew a stark comparison between regulatory activity in the UK and that in the United States. In 2019, for example, the UK imposed regulatory fines of £260 million. In contrast, the United States imposed $3 billion in criminal fines against six banks and nearly $6 billion in non-criminal fines against 31 banks. Some of these fines had actually been imposed on UK-headquartered institutions in the form of outsourcing the UK criminal law responsibilities, something which Dame Margaret considered “should be a source of national embarrassment”.

Further, the UK has been subject to significant criticism from the Financial Action Task Force (FATF) about its lack of “high-end” money laundering prosecutions. This embarrassment was compounded last September by documents leaked by the U.S. Financial Crimes Enforcement Network (FinCEN), which detailed $2 trillion worth of suspicious UK bank transactions and left the UK’s role as a prime money laundering hub in little doubt. FinCEN referenced the UK as a high-risk jurisdiction and compared it to offshore jurisdictions such as Cyprus. More than 3,000 companies registered in the UK are named in the report — more than any other country.

Is this really a failure of legislation or resource? When giving evidence to the House of Commons’ Treasury Committee earlier this month, Graeme Biggar, who leads the National Economic Crime Centre (NECC), called for an overhaul of the system of reporting © 2021 Thomson Reuters. All rights reserved. -2- potential money laundering, complaining that the NECC was drowning in a sea of low-quality suspicious activity reports (SARs) from risk-averse institutions, the vast majority were unnecessary and of little use.

Given the pressure on the NECC to focus on “high-harm SARs”, Biggar complained that this issue was a significant obstacle. Commendably, the NECC and the Home Office are putting in place newer IT and increasing staffing numbers in financial intelligence units responsible for processing SARS. Biggar appeared, however, to be flagging a wider “fitness-for-purpose” issue with regard to existing reporting thresholds and the inevitably cautious approach banks will take to protect themselves.

As matters stand, the NECC and the existing reporting regime prevented £172 million from falling into the hands of suspected criminals between April 2019 and March 2020. This needs to be placed in the context of FinCEN’s estimate that the volume of such activity runs into trillions.

Significant overhaul

A significant overhaul of corporate criminal liability appears inevitable given cross-party political support for such reform. There does appear to be a consensus that the “identification principle” operates as a significant handbrake to prosecutions under the existing regime and that a change is required.

Given the relative success of the UK Bribery Act 2010 and the enshrinement of the failure to prevent model in the Criminal Finances Act 2017, it seems the envisaged widening of the “failure to prevent” corporate offences is the likeliest way forward.

Given the probable effects of Brexit on an already beleaguered financial services sector, however, it was hardly surprising that one of the themes coming out of the government’s call for evidence was whether further regulation and criminal sanctions on top of what is already a heavily regulated financial services sector is the right way forward.

There may well be a need for a more holistic approach toward regulation of this sector. With the best will in the world, given postpandemic financial constraints, the government will not have the resource to police delinquent corporate behaviour properly unless and until it makes regulatory enforcement effectively self-financing, as is the case in the United States.

This may prove to be the ultimate destination, but the current direction of travel is to push these obligations further onto the private sector via punitive legislation exposing it to criminal liabilities which compel firms to bolster their systems, checks and balances. Whether this approach is truly “holistic” is a moot point.