Corporates wanting to rely on the reasonable “prevention procedures” defenses to the “failure to prevent” offences will need to take action.
Legislation pending in Parliament is going to introduce major changes to the way corporates are prosecuted for financial crime in the United Kingdom. This includes foreign companies and those operating in the U.K.
The changes are:
- For most financial crimes, a company will now have committed an offence if a “senior manager” has committed the offence; and
- The introduction of two corporate offences of failing to prevent fraud, both of which can impact foreign companies operating in the U.K. as well as U.K. companies.
This new legislation, the Economic Crime and Corporate Transparency Bill 2023 (ECCT), is the latest effort by authorities to reform corporate criminal liability. Currently a corporate, for most offences, is only liable if a person who is the corporate’s “controlling mind and will” had the necessary criminal intent. This usually requires culpability at the board level.
The ECCT is expected to pass into law in the last few months of 2023.
Corporates Criminally Liable If Senior Manager Is Criminally Liable
What Is the Offence?
The first of the new offences is intentionally broad in scope. The ECCT (Section 195 in the current bill) states that:
[I]f a senior manager of a body corporate or partnership (the “organisation”) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force, the organization is also guilty of the offence.
This offence creates a much simpler route for conviction of a corporate.
Who Is a “Senior Manager”?
A “senior manager” is anyone who plays a significant role in making decisions about how the whole or a substantial part of the activities of the organization are managed or organized, or who plays a significant role in the actual managing or organizing of those activities.
Which Corporates Are Covered Under the ECCT?
Any company or partnership incorporated or formed anywhere in the world falls under the purview of this legistlation.
Does It Apply to Actions Outside the U.K.?
Yes. The ECCT is clear that the actions do not need to take place within the U.K.
How Can a Foreign Company Be Liable?
If the senior manager in question committed the offence in the territory of the U.K., then the fact that the corporate is a foreign company will offer no protection; the foreign corporate will be liable.
If the senior manager committed the offence outside the U.K., then the corporate will only be guilty if it could have committed the relevant U.K. offence by actions outside the U.K. There will be few offences that can be committed by a non-U.K. person through actions wholly outside the U.K.
What Are the Defenses?
There are no statutory defences available for a corporate and no requirement of any sort of active or passive participation, knowledge or consent.
What Crimes Does the ECCT Cover?
This new rule will apply to a specified list of financial crimes and not to all offences.
Included are a variety of fraud and tax evasion offences, breaches of the Financial Services and Markets Act 2000 and the Financial Services Act 2012, as well as offences under the Bribery Act and breaches of any sanctions regulation issued under the U.K.’s Sanctions and Anti-Money Laundering Act 2018 (i.e., the entirety of the U.K.’s post-Brexit sanctions offences). Also included are export control offences, various anti-terrorism offences, offences under the Fraud Act 2006 and anti-money laundering offences under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017.
What Are the Penalties?
The penalties are not specified in the ECCT. The penalties will be as per the underlying offence.
Failure to Prevent Fraud
What Is the Offence?
The corporate will have committed the “failure to prevent fraud” offence if a person associated with it commits the underlying fraud offence intending to benefit the corporate.
Who Is an “Associated Person”?
This includes employees, agents and subsidiaries as well as any others who provide services to the corporate.
To Which Corporates Does It Apply?
The corporate in question can be incorporated anywhere in the world. As currently drafted, there are two separate but related offences―one that applies to all corporates, and a second that only applies to a “large organization” (defined as meaning over 250 employees, over £36 million in annual turnover or more than £18 million in balance sheet assets). It is unclear if this duality is intended and will survive into the final law.
Does It Apply to Actions Outside the U.K.?
The legislation is silent on this point. The contrast to the next offence under the ECCT, which makes clear that actions can be committed anywhere, may well carry the intent that this offence is specific to actions within the U.K.
What Are the Defenses?
It will be a defense for the corporate to show that either:
- It had in place reasonable prevention procedures designed to prevent the commission of fraud; or
- It was not reasonable to expect the corporate to have reasonable prevention procedures in place.
The ECCT calls for official guidance to be published, much like the guidance previously published for the other “failure to prevent” offences such as the Bribery Act 2010. This is very likely to include a requirement for a risk assessment, followed by policies and procedures designed to mitigate the identified risks, calibrated for the size and complexity of the business, as well as periodic review and renewal.
What Crimes Are Covered by the ECCT?
For now at least, this new offence is limited to specified categories of fraud, namely:
- Cheating the public revenue (i.e., tax evasion);
- False accounting and false statements by company directors under the Theft Act 1968;
- Fraudulent trading under Companies Act 2006; and
- Most of the offences under the Fraud Act 2006, including fraud by false representation, fraud by abuse of position, fraud by failing to disclose information, participating in a fraudulent business of a sole trader and obtaining services dishonestly.
What Are the Penalties?
The fines are potentially unlimited. It is unclear at this stage whether the Sentencing Council will provide sentencing guidelines for this offence.
Failure to Prevent Fraud and Money Laundering
What Is the Offence?
The corporate will have committed the “failure to prevent fraud” offence if a person associated with it commits the underlying fraud offence intending to benefit the corporate.
Who Is an “Associated Person”?
As before, this includes employees, agents and subsidiaries as well as any others who provide services to the corporate.
To Which Corporates Does It Apply?
The corporate must either be formed in the U.K. or carry on a business, or part of a business, in the U.K.
Does It Apply to Actions Outside the U.K.?
The underlying actions do not need to take place in the U.K.
What Are the Defenses?
The same defenses are available; the corporate can show that either:
- It had in place reasonable prevention procedures designed to prevent the commission of fraud; or
- It was not reasonable to expect the corporate to have reasonable prevention procedures in place.
While there is no reference to published guidance in relation to this offence, it is likely that the guidance will be extended to cover this offence as well.
What Crimes Are Covered Under the ECCT?
Despite the addition of “money laundering” in the offence title, as currently drafted, money laundering is not included and the underlying offences are the same as for the other failure to prevent fraud offence.
What Are the Penalties?
The fines are potentially unlimited.
Are There Any Other Differences?
As the bill currently stands, a deferred prosecution agreement is only available for the first of the failure to prevent fraud offences. This may well be rectified in the final legislation.
Further Changes
The ECCT contains two further changes relevant to financial crime enforcement in the U.K. The first is that the ECCT creates immunity from civil liability for business-to-business disclosures of “concerns about risks of economic crime.” This gives civil immunity for the disclosure of otherwise confidential information on a particular customer (or potential or former customer) held by one asset-holding body, such as a bank or other financial institution, to another asset-holding body in relation to the risks of economic crime.
No such immunity is given to disclosures by lawyers, accountants, auditors and tax advisers if certain conditions are met relating to the protection of privilege.
The second is specific to solicitors in that the current cap on financial crime-related fines that the legal regulator can impose will be removed entirely, alongside an expansion of what constitutes professional misconduct to include “an act or omission which had the effect of inhibiting the prevention or detection of economic crime.”
Action Items
- Corporates wanting to rely on the reasonable “prevention procedures” defenses to the “failure to prevent” offences will need to take action.
- From the few contested convictions under the Bribery Act’s “failure to prevent” offence, it is clear that having generalized policies or accounting controls are unlikely to be sufficient.
- Corporates are encouraged to review their existing policies and procedures as part of preparing for the enactment of the ECCT.
- Once published, the steps required by the official guidance should be followed.
About Duane Morris
Duane Morris attorneys have experience with conducting risk assessments and policy reviews under the U.K.’s other “failure to prevent” offences and are ready to assist.
Duane Morris is closely following developments with the ECCT, and will provide further updates as the bill comes into law and when the guidance is published.
For More Information
If you have any questions about this Alert, please contact Mark Handley, any of the attorneys in our White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.