UK: Failure To Prevent Offence May Be Introduced In The UK In The New Economic Crime And Corporate Transparency Bill

The Economic Crime and Corporate Transparency bill (the "Bill"), which is currently progressing through Parliament, is reportedly due to include provisions introducing a new failure to prevent offence affecting corporates, following statements by a UK Government minister during debates surrounding the Bill. In this briefing we outline the background to this development and anticipated next steps.

1. Corporate criminal liability reform

There has been a long-standing debate regarding the desirability of reform to corporate criminal liability. The most substantive review of this topic to date is comprised in the Law Commission's June 2022 options paper. This discusses a range of potential reforms, from retaining the existing identification principle to introducing specific 'failure to prevent' offences, including failure to prevent fraud by an associated person (as well as computer misuse and human rights abuses), and various civil options. Importantly, the Commission ruled out a broad failure to prevent economic crime offence given the overlap with other failure to prevent offences and challenges faced by companies in adopting reasonable procedures to tackle broad economic crime.

Whilst the Law Commission identified a number of broad principles that it considered the law ought to reflect, the nature of the consultation meant that the options paper did not contain detailed proposals regarding the drafting of any new offences. Instead, it was anticipated that the Government would consider the options, select one or more for further consideration, and engage in more detailed consultation if it was considered that reform of the law was appropriate. On 10 January 2023, the Government, in its response¹ to the House of Commons Justice Committee, stated that it recognised the current law does not adequately hold organisations and their senior persons to account for offences committed by the corporation and their associated persons and that it would collaborate with others across Government to consider the options paper and determine a case for strengthening the law on corporate criminal liability, including the creation of an offence for failure to prevent fraud.

Additional background to the debate on corporate criminal liability reform, and a detailed discussion of the Law Commission's options paper, can be found here.

2. The Economic Crime and Corporate Transparency Bill

The draft Bill was published in September 2022 and will, when enacted, introduce a number of measures to tackle economic crime, including significant reforms to Companies House and limited partnerships, amendments to the Proceeds of Crime Act 2002, and the provision of new enforcement powers to the Serious Fraud Office, among others. The original draft did not incorporate any failure to prevent offence or options for reforming corporate criminal liability laws. During the Committee stage of the House of Commons, an attempt was made by Dame Margaret Hodge MP to introduce a 'failure to prevent fraud' offence, but this was not taken forward. For a detailed briefing on the Bill, please see our briefing here² and/or contact us for a recording of our webinar on the subject.

Prior to and during the passage of the Bill, the Government has faced growing calls from campaigners and some MPs to introduce a failure to prevent offence. For example, in November 2022, the House of Lords Fraud Act 2006 and Digital Fraud Committee published a report, identifying the scale of fraud and calling on the Government to introduce a new corporate criminal offence of 'failure to prevent fraud' – although the scope of this envisaged offence was unclear, and potentially different from the Law Commission's indicative proposal. More recently, Robert Buckland MP (former Lord Chancellor and Secretary of State for Justice) and Dame Margaret Hodge MP have spearheaded cross-party MP support for amendments to the Bill in this area.

On 25 January 2023, in an upping of the ante, several MPs from both main parties, moved to bring amendments³ to the Bill which included, notably:

1. A new offence of failure to prevent fraud, false accounting or money laundering;
2. A new basis of criminal liability for senior management;
3. An expansion of the identification doctrine – which would create a new route for companies to be criminally liable, irrespective of the proposed 'failure to prevent' offence;
4. A New Office for Whistleblowers; and
5. An obligation on the Government to produce a report into options for corporate criminal liability for economic crime

3. Proposed offences

The proposed amendments have not been incorporated into the Bill at this stage (see 'next steps' below). We set them out here for completeness, but note that any draft offence introduced by the Government may not track these proposals

Proposed failure to prevent offence

Under the proposed new failure to prevent offence, a relevant commercial organisation "C" (defined in similar terms as under the Bribery Act 2010) would be guilty where:

• A person "associated with C"⁴ commits a fraud, false accounting or an act of money laundering (or aids and abets such offences);
• intending to (i) confer a business advantage on C or (ii) confer a benefit on a person to whom A provides services on behalf of C.

It would be a defence, however, for C to prove that at the relevant time, that it had reasonable procedures in all the circumstances to prevent persons associated with C from undertaking the conduct. Furthermore, a company would not commit the offence where it could prove the conduct was intended to cause harm to C.

Proposed expansion of the identification doctrine

The amendments also seek to expand corporate criminal liability by making it an offence for a corporate where:

• the offence is attributable to the neglect of a senior manager⁵;
• one or more senior managers engage in conduct, whether by act or omission, such that, if it had been the conduct of only one representative, that representative would have been a party to the offence; or
• the senior manager who is responsible for the aspect of the organisation's activities that is relevant to the offence — or the senior managers collectively — fail to take all reasonable steps to prevent that offence being committed.

This contrasts with the current position, whereby the prosecution generally needs to prove that the 'directing mind and will' of the company carried out the underlying conduct with the necessary culpability in order for company to be liable.

Proposed senior manager offence

Notably, the amendments also seek to introduce individual liability for failure to prevent fraud, false accounting or money laundering in instances where a senior manager or corporate officer⁶:

The offence, if enacted, would be punishable by up to 7 years' imprisonment.

Neither the failure to prevent bribery or failure to prevent tax evasion offences create individual liability in this way – the seemingly low threshold of 'awareness of risk' would be a very significant extension of the current law.

The amendments, if enacted, would also represent the most significant expansion of corporate criminal liability laws since the Bribery Act 2010; introduction of further negligence-based criminal liability would capture a wide range of behaviour, and present significant risks to companies.

4. Next steps

The amendments were discussed during the Third Reading of the Bill in the House of Commons. The Bill has now been passed to the House of Lords. As noted above, the amendments have not been included in the Bill 'as sent' to the House of Lords – but this was on the basis of an assurance by Tom Tugendhat MP, Minister of State (Minister for Security), that the Government intends to address the need for a "failure to prevent" offence and will introduce it in the House of Lords. At present, the Government's proposals in this regard are pending.

The next step is the Bill's Second Reading in the Lords. It is not clear what specific provisions the Government intends to include the Bill, or what, if any, impact assessment has been (or is intended to be) conducted. Any amendments may therefore not follow the form proposed in the House of Commons. The Government has, however, signalled an intention to move quickly and introduce legislative changes which it appears to think will assist in tackling a perceived 'epidemic' of fraud⁷.

We have previously suggested that any proposed failure to prevent offence should, if introduced at all, be evidence-based and considered on an offence-by-offence basis. Any extension of corporate criminal liability, particularly based on the negligence of senior officers, would bring additional compliance costs for companies in circumstances where many face increasing financial uncertainty and economic challenges; and it is entirely unclear if such extended liability would in fact reduce corporate misconduct. Introducing a new 'failure to prevent money laundering' would also appear to be duplicative of the existing criminal and regulatory liability regime under the anti-money laundering legislation.

The amendments proposed in the House of Commons are undoubtedly problematic for companies, and would result in significant changes to the compliance landscape. The Government's proposals, if and when introduced, will therefore need to be followed closely as the Bill progresses through Parliament.

Footnotes

1 https://committees.parliament.uk/publications/33421/documents/181645/default/

2 Please also see our snapshot of Companies House reforms here.

3 https://publications.parliament.uk/pa/bills/cbill/58-03/0205/amend/economic_day_rep_0125.pdf

4 It is unclear what the definition of this is, specifically in the context of a new failure to prevent offence, but it is likely to replicate similar provisions in the Bribery Act 2010 – ie a person who performs services for or on behalf of that entity, including in, but not limited to, the capacity of an employee, agent or subsidiary.

5 "Senior manager" being defined as: (1) an individual playing a significant role in (i) the making of decisions about how the entity's activities are to be managed or organised, or (ii) the actual managing or organising of the entity's relevant activities; or (2) the Chief Executive or Chief Financial Officer.

6 "Officer" being defined as meaning a director, manager, associate, secretary or other similar officer, or a person purporting to act in any such capacity. Such definition is likely to catch a broader number of persons at SMEs than at larger companies.

7 Fraud accounts for approximately 41% of all reported crime against individuals in England & Wales, according to "Fighting Fraud: Breaking the Chain", House of Lords Fraud Act 2006 and Digital Fraud Committee report (12 November 2022), para 2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.