Introduction
In November of last year, the Digital Fraud Committee of the House of Lords published its paper entitled Fighting Fraud: Breaking the Chain1. The findings of the report are stark, including the loss of some £4bn to fraud in the previous year, of which £1.9bn was from individual victims2. The report outlines the need for legislative reform in the UK to prevent, amongst other issues, fraud, money laundering and false accounting.
Before the House of Lords now is the Economic Crime and Corporate Transparency Bill (“The Bill”) which proposes the introduction of a significant new statutory offence: the failure to prevent fraud.
Economic Crime and Corporate Transparency Bill: Background
One of the findings of the Digital Fraud Committee’s report is that “organisations that make up the fraud chain are not uniformly incentivised to tackle fraud”. Whilst this may be said to be a simplification of the often competing regulatory and contractual obligations facing many organisations, there is more than kernel of truth to the suggestion that by not proactively enabling fraud, organisations have sought to deny accusations of not doing enough to prevent economic crime.
On Monday 27 March, The Bill reached the Committee Stage in the House of Lords, following the completion of the Second Reading in February. The Bill follows on from the Economic Crime (Transparency and Enforcement) Act 2022, put in place following the Russian invasion of Ukraine. At the forefront of the reforms proposed by The Bill is the enhancement of Companies House’ powers to take a more prominent role in the fight against economic crime.
The Bill also envisages reforms to the law concerning limited liability partnerships, the register of overseas entities, the confiscation of cryptoassets and the sharing of information between sectors for the detection/prevention of economic crime.
However, perhaps the most significant element of The Bill for litigators will be the proposed (by former Justice Secretary, Robert Buckland) introduction of the corporate offence of failure to prevent fraud – more specifically, the failure to prevent fraud, false accounting and money laundering. The proposed new offence follows the “failure to prevent” offence first introduced by the Bribery Act 2010 and is aimed at those intermediaries found not to have reasonable or adequate measures in place to prevent fraud, false accounting and money laundering from taking place.
The Bill has passed through the House of Commons and is now with the House of Lords. In the House of Lords, The Bill has undergone the First and Second Reading and is now at the Committee Stage, involving a detailed line by line examination of the separate parts. All being well, The Bill will now proceed to the Report Stage and a Final Reading before receiving Royal Assent.
Failure to Prevent – The Proposed Offences
The exact and final wording of The Bill is, of course, yet to be determined but it is understood that the proposed new corporate offence is to be expressed as follows:
4 Offence of failure to prevent fraud, false accounting or money laundering
(1) A relevant commercial organisation (“C”) is guilty of an offence under this section where—
(a) a person (“A”) associated with C commits a fraud, false accounting or an act of money laundering, or aids and abets a fraud, false accounting or act of money laundering, intending—
(i) to confer a business advantage on C, or
(ii) to confer a benefit on a person to whom A provides services on behalf of C, and
(b) fails to prevent the activity set out in paragraph (a).
(2) C does not commit an offence where C can prove that the conduct detailed in subsection (1)(a) was intended to cause harm to C.
(3) It is a defence for C to prove that, at the relevant time, C had in place procedures that were reasonable in all the circumstances and which were designed to prevent persons associated with C from undertaking the conduct detailed in subsection (1)(a).
The above proposed-wording marks a significant reduction to the threshold required to obtain a successful judgment where fraud is concerned. The government’s view is that the proposed offence will be engaged where a company and/or its senior management fail to prevent such wrongdoing by other if it occurs on their watch, even when they are not directly involved in the procurement of the same.
Failure to Prevent – Identification Doctrine and Scope
Presently, for a company for be fixed with criminal liability, the “identification principle” must be satisfied. The doctrine has been the subject of some criticism in recent years, not least for its antiquated status when compared against the modern nature of economic crime, but also for making the prosecution of large financial and corporate bodies for economic crimes prohibitively hard.
The Law Commission’s recent report noted that the doctrine “makes it harder to apply the rule to larger, complex corporations and incentivises poor corporate governance”3. There has been a move to address difficulties with securing convictions with bribery and the facilitation of tax evasion, through the failure to prevent offences set out in the Bribery Act 20104 and the Criminal Finances Act 20175, but until now fraud has remain unaddressed.
The test for the satisfaction of identification principle was set out in Tesco v Nattrass6 and provides that a corporation will only (subject to limited exceptions) be liable for conduct carried out by a person holding, at the relevant time, the status and authority to constitute the body’s “directing mind and will”.
This must be a person with the required “status and authority”. This would normally be members of the board of directors of the corporation, although in some circumstances, where there had been a “total delegation” to another person, that person might represent the directing mind and will of the corporation.
The proposed offence of failure to prevent fraud does not require the satisfaction of the identification doctrine, thus circumventing the need to affix a corporation with liability for the actions of its senior member(s).
Scope of the Offence
The proposed wording of the offence indicates that a “relevant commercial organisation” would be criminally liable for fraud where a person “associated” with that company commits an offence of fraud (or false accounting or money laundering) and the company fails (whether by reason of inadequate systems and/or checks).
The only apparent defence to the offence is, similarly to the Bribery Act 2010, having reasonable procedures in place to prevent associated persons from undertaking the fraudulent conduct.
Penalties
The Bill introduced direct criminal liability for senior managers or officers who take (or fail to take) a decision, which knowingly results in an offence of fraud, false accounting or money laundering. If the offence is proven, then the penalties include potential imprisonment and/or a fine (the exact levels of which have not been set out by The Bill).
Comment
The Bill’s proposed incorporation of an economic crime not requiring the satisfaction of the identification doctrine has been opposed by some parties citing that, as a matter of principle, economic crimes should require a mens rea. There remains, of course, a credible suggestion that proper funding of the Government and Law enforcement bodies responsible for fighting economic crime is a more appropriate and long term alternative to the offence proposed by The Bill. Strikingly, the Government’s much vaunted (and delayed) three year Economic Crime Plan (2023 – 2026) was, largely, silent on this point.
The recent House of Lords report pithily summarised the state of play as regards passive attitudes towards the present facilitation of fraud: “Until all fraud-enabling industries fear significant financial, legal and reputational risk for their failure to prevent fraud, they will not act”7. The Bill’s proposed incorporation of a failure to prevent fraud offence, will no doubt cast fear into those (even unwitting) enabling stakeholders in fraudulent transactions.
There can be little doubt that a successful fraud in the modern day requires the involvement of third parties, particularly professional and financial service providers. Those parties should properly share and lessen the significant burden presently carried by the victims of economic crime.
1 https://committees.parliament.uk/publications/31584/documents/177260/default/
2 ONS, ‘Crime in England and Wales: year ending June 2022 (27 October 2022): https://www.ons.gov.uk/peoplepopulationandcommunity/crimeandjustice/bulletins/crimeinenglandandwales/yearendingjune2022
4 s. 7, Bribery Act 2010
5 ss. 45 and 46, Criminal Finances Act 2017
6 Tesco Supermarkets Ltd v Nattrass [1972] UKHL 1 AC 153
7 https://committees.parliament.uk/publications/31584/documents/177260/default/
Kit Smith (Managing Associate) is a member of Keidan Harrison LLP’s Dispute Resolution Team.
