As published on: cityam.com, Thursday 12 October, 2023.
New laws will soon change the landscape of corporate criminal liability for economic crime in the UK. The Economic Crime and Corporate Transparency Bill, which has been before parliament for over a year, contains two significant changes to hold corporations liable in their own right for economic crime. These changes address the criticism that for too long the law in this area has been unfit for purpose.
First, the legislation significantly expands the scope of persons whose criminal conduct can be attributed to a company. According to current law, an offence must be committed by the “controlling mind and will” of a corporation to trigger attribution to the corporation itself. The new law will render companies liable for economic crimes committed by “senior managers”, defined as individuals who play a significant part of the company’s activities.
Second, the bill introduces a new offence of failing to prevent fraud. A large organisation that fails to prevent fraud by an associated person who is committing fraud with the intention of directly or indirectly benefiting the company would be committing an offence under the new law.
In order to raise a valid defence, the company must demonstrate that it had reasonable procedures in place to prevent fraud. By operating in this way, the law effectively places a compliance burden on firms. The “failure to prevent” model has already been applied to the commission of bribery and tax evasion.
Will these changes lead to financial institutions facing greater risk of criminal investigation and prosecution? Whilst the widening of the identification principle will make the task of prosecutors easier, the law is still significantly narrower than the US model, under which the criminal acts of employees, committed in the course of their employment, are attributed to the corporations they work for.
For large, international financial institutions, with multi-layered complex management structures, “senior managers” are likely to be much removed from the level at which misconduct has typically arisen. For example, persons who were prosecuted for the benchmark rigging cases, like Libor, would certainly not have qualified as senior managers.
The failure to prevent fraud offence however captures conduct committed across the business, by persons “associated” with the firm. The definition of an “associated person” extends beyond employees and agents, to persons performing services for the company. If the failure to prevent fraud offence had been on the statute books 20 years ago, it would have captured the benchmark rigging cases.
In order to successfully defend a prosecution, institutions will need to show that they had reasonable procedures to prevent fraud. Successfully discharging that burden could be very difficult and prosecutors will likely have significant leverage to enter into plea discussions.
Of course, the new law cannot be deployed unless and until an appropriate case emerges and is investigated. A lot depends on the appetite of authorities to pursue a prosecution against a firm on a “failing to prevent” theory of liability. However, if they choose to use it, prosecutors like the SFO will have an additional and significant tool to use when the next banking scandal comes around. Until then, firms will be revisiting their assessment of fraud risk and reviewing their existing controls.