UK legislators have proposed major amendments to the Economic Crime and Corporate Transparency Bill currently passing through Parliament. If adopted, the amendments would significantly expand the range of potential corporate crime offenses available to prosecutors, introducing new so-called “failure to prevent” fraud, false accounting and money laundering offenses for corporates, and — perhaps most radically — allow for the attribution of criminal wrongdoing to companies in circumstances where certain economic crime offenses are caused by the neglect of senior managers. Neil Swift, Craig Hogg and Louisa Keech of Peters & Peters Solicitors discuss the implications of these proposals on the compliance sector.
In England and Wales, historically, a company could be found guilty of certain economic crimes only when the “directing mind and will” of the company was involved in the offense, the so-called identification doctrine. But a series of possible amendments to the Economic Crime and Corporate Transparency Bill currently wending its way through Parliament could change all of that.
Significantly, the identification doctrine has typically been limited to wrongdoing caused by a small circle of directors and senior managers, disproportionately favoring large companies where decision making is more diffuse. As Director of Public Prosecutions Max Hill has acknowledged, the “restrictive application of the identification doctrine has caused challenges in enforcing corporate criminal liability.”
While the identification doctrine remains the general rule for attributing liability to companies in England and Wales, the scope of corporate criminal liability was expanded in 2011, following the introduction of the first “failure to prevent” (FTP) offense under the Bribery Act 2010, under which a corporation’s failure to prevent “associated persons” from committing bribery was criminalized. A separate, further offense of failure-to-prevent facilitation of tax evasion was introduced six years later via the Criminal Finances Act 2017 (CFA).
These two offenses effectively shifted the burden onto companies, which must show that they have adequate procedures to prevent bribery under the bribery act, or reasonable procedures in place to prevent the facilitation of tax evasion under the CFA to successfully defend a prosecution. While these developments were broadly welcomed at the time of their introduction, deepening the toolkit available to prosecutors to tackle economic crime, prosecutions for FTP offenses remained low and the residual obstacles associated with bringing prosecutions using the identification doctrine endured.
Fraud Section’s 2022: A Year of Individual Accountability, Cooperation With Foreign Authorities & Pushing Compliance Programs
Unpacking 12 months of DOJ Fraud Section cases: 342 individuals convictedRead more
Law Commission options paper and proposed bill
Against this backdrop, in November 2020, the government tasked the Law Commission with examining how it can improve the law on corporate criminal liability to ensure that corporations are held to account. In June 2022 the Law Commission published its high-level options paper, in which it outlined a number of potential reforms. These reforms included the introduction of further FTP offenses, notably FTP fraud, as well as retention of the existing identification doctrine, either in its current form or through adoption of a Canadian law-inspired model, allowing the acts and mental states of senior managers to be attributed to a corporation.
And then in September, the Economic Crime and Corporate Transparency Bill was introduced in the House of Commons. The bill has an expansive aim, being described by Tom Tugendhat, minister of state for security, as “focused on economic crime and corporate transparency for the purpose of passing a series of measures that are essential to ensure that we keep our country safe and our economic jurisdictions clean.”
Proposed amendments to the bill
In the most significant intervention in the bill’s journey through Parliament so far, in January MPs advanced major amendments that were discussed during the third reading in the House of Commons. Alongside proposals for new offenses of FTP fraud, false accounting or money laundering, proposals were made to amend the identification doctrine, drawing on the options paper. Under the proposals, fraud, money laundering, false accounting, bribery or tax evasion corporate crime offenses may arise where the underlying offending is committed with the “consent, connivance or neglect of a senior manager or senior managers.”
The definition of senior manager would include those who “play a significant role in the making of decisions about how the entity’s relevant activities are to be managed or organized” or “play a significant role in the managing or organizing of the entity’s relevant activities.” Notably, the proposals align with the option paper’s recommendation for the definition of senior manager to always include the CEO or CFO of a company. This would avoid the issues faced in the landmark case of Barclays in which it was found that even a corporation’s managing director and financial director acting jointly might not constitute the corporation’s directing mind and will if they did not have authority to engage in the conduct in question.
Under the proposed amendments, a company also commits an offense if, acting within the scope of their authority “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 offense” or “the senior manager who is responsible for the aspect of the organization’s activities that is relevant to the offense — or the senior managers collectively — fail to take all reasonable steps to prevent that offense being committed.”
Interestingly, while the proposed amendments would place liability on a corporate if a senior manager were to consent, connive or be neglectful in relation to a corporate crime offense, unlike the bribery act, the proposed amendments do not provide that where a company is guilty of the offense, any senior manager who consents or connives is also guilty of an offense themselves (although there is a separate proposed amendment to the bill for individual liability in relation to failure to prevent fraud, false accounting or money laundering). Given the proposed scope of individual and corporate liability in the area, the precise wording of the bill warrants close, ongoing examination if amended.
What do the proposed amendments mean for compliance?
The options paper notes that “far from creating incentives to ensure compliance, the [identification] doctrine rewards companies whose boards do not pay close attention.” The proposed amendments would certainly focus the minds of boards and senior managers with responsibility for a company’s activities. This is particularly the case within the finance sector, where the focus on potential fraud offending, for example, which as the Law Commission has acknowledged “can be committed in virtually any circumstance,” will require the implementation of more extensive policies and procedures to ensure that appropriate supervision is in place, given the wider test of consent, connivance or neglect.
This would be likely to present a serious compliance challenge: While bribery and tax evasion compliance controls have long been embedded within corporate culture given the existing FTP offenses and the criminal and regulatory liability regime under anti-money laundering legislation, increased training and internal supervision mechanisms are likely to be required to prevent senior management falling foul of any new fraud and false accounting negligence provisions (particularly in light of the potential wider introduction of FTP offenses covering similar ground).
Compliance teams would need to closely consider who constitutes senior management and falls within the definition outlined above. The formulation of senior management is welcomed: As first highlighted in the options paper, other formulations such as “high managerial agent,” as used in Australia, are far more ambiguous and fact- and circumstance-specific. By adopting more straightforward wording that is familiar to lawyers (the term is based on the principles of liability under Canada’s criminal code, and definitions from the Corporate Manslaughter and Corporate Homicide Act 2007 in England and Wales), corporate compliance teams would have an accessible body of guidance to aid in drafting internal policies and implementing targeted training.
At the time of this writing, the bill continues to progress through Parliament; a second reading took place in the House of Lords in February, and the House of Lords committee stage began this week. While the amendments have not been included in the bill as currently under review by the House of Lords, the House of Commons has signaled broad support for the inclusion of new corporate criminal offenses based on the FTP model, and a sweeping reform package encompassing amendments to the identification doctrine was also envisaged.
However, the potential direction of the identification doctrine and FTP offenses is still up for debate, with members of the House of Lords appearing to advocate for different approaches to the new provisions. Since the third reading in the House of Commons in January, Conservative and Liberal Democrat peers have proposed further amendments to the bill, including a clause that would create a statutory duty for regulators to prevent economic crime and a clause proposing wording for a narrower FTP facilitation of fraud offense. It has also been reported that small UK business may be exempted from the scope of the bill and that attempts to reform the identification doctrine could be scuttled altogether.
Regardless of the ultimate shape of the bill, the changes made in the area are likely to significantly increase the compliance burden for businesses, and compliance teams should track the developments and Parliament’s discussions closely.