On 8 February 2023, the U.K. Government confirmed its intention to propose that a new “failure to prevent” corporate criminal offence be included in the Economic Crime Bill, along similar lines to the “failure to prevent bribery” offence under section 7 of the Bribery Act 2010 (the “Bribery Act”) and the two “failure to prevent the facilitation of tax evasion” offences introduced by the Criminal Finances Act 2017 (the “Criminal Finances Act”).
It is anticipated that a new failure to prevent fraud offence would borrow concepts from the Bribery Act and Criminal Finances Act, and make it an offence for a company to fail to prevent fraud by an associated person, with the only defense being that the company had reasonable procedures in place to prevent fraud or that it was reasonable not to have such procedures in place.
The Background and Next Steps
As explained in our Client Alert “Regulatory Landscape: What to Watch for the UK and the EU in 2023”, reform to the UK corporate liability regime has been long debated, with prosecutors arguing that the current law – requiring them to prove that those individuals with the necessary “directing mind and will” of the company performed the necessary criminal act and had the necessary state of mind (known as the “identification principle”) – makes it exceptionally difficult to prosecute large global organizations for criminal offences. It is argued that it is hard to link companies with a diffuse structure to the offence of a controlling officer. The identification principle has been pointed to as the reason for the acquittals in a number of recent criminal cases, including a high-profile failed prosecution in which the Chief Executive Officer and the Chief Financial Officer were held not to be the “directing mind and will” of the relevant company.
Whilst a reform of corporate criminal law in the U.K. has been on the backburner for over 15 years, in June 2022 the U.K. Law Commission finally published an options paper on corporate liability. The Law Commission found that the current law poses “an obstacle to holding large companies criminally responsible for offences committed in their interests by their employees” and incentivizes poor corporate governance, by “reward[ing] companies whose boards do not pay close attention” and penalizing those that do. The Law Commission set out several options for reform.
During the Second Reading in the House of Lords on 8 February 2023, Lord Sharpe confirmed that the U.K. Government intends to put forward a new failure to prevent offence during the Lords Committee stage. This stage is expected to begin in the next few weeks, and will then, as relevant, undergo a further reading in the House of Lords before going back to the House of Commons. If the proposal is passed, it will receive Royal Assent and become an Act.
Although it is difficult to predict with any certainly when any Act could come into force, the process for the implementation of the Bribery Act might offer some guidance. The Bribery Act came into force approximately 15- months after it received royal assent, following a series of consultations, guidance, and amendments.
Issues under Consideration
There are a number of issues which remain under consideration by the House of Lords.
Importantly, any new failure to prevent offence fraud would have to be clear as to its scope. The Law Commission has recommended limiting it to core fraud offences including fraud by false representation, obtaining services dishonestly, the common law offence of cheating the public revenue, false accounting, fraudulent trading, and fraudulent evasion of excise duty.
The House of Lords must also consider issues such as ensuring that any new offence does not overlap with other existing offences, the ability of the Government to draft adequate statutory guidance on the procedures that a company needs to have implemented to prevent the commission of the offence, whether to extend directors' individual criminal liability to “failure to prevent” offences, and whether the new offence should operate extra-territorially (like the key provisions of the Bribery Act and Criminal Finances Act do).
The Likely Consequences of a New “Failure to Prevent Fraud” Offence
As with the introduction of the “failure to prevent” offences under the Bribery Act and Criminal Finances Act, companies will need to have in place, and to be able to demonstrate that they have in place, adequate policies and procedures to detect and prevent fraud.
In demonstrating that a company has adequate procedures in place to prevent the commission of an offence, we anticipate that a company will be required to demonstrate its commitment to principles similar those required by the Bribery Act: namely that (i) procedures are proportionate to the risks it faces and to the nature, scale and complexity of the commercial organization's activities. They are also clear, practical, accessible, effectively implemented and enforced; (ii) top-level management are committed to preventing fraud by persons associated with it; (iii) it has assessed the nature and extent of its exposure. The assessment is periodic, informed and documented; (iv) the company applied due diligence procedures, taking a proportionate and risk-based approach; (v) the company took steps to ensure that its policies and procedures are embedded and understood throughout the organization through internal and external communication, including training, that is proportionate to the risks it faces; and (vi) it monitors and reviews procedures and makes improvements where necessary.
Finally, it is anticipated that a new failure to prevent fraud offence would make it easier for criminal prosecutions to be brought against companies, given that it will no longer be necessary for a prosecutor to show that the “directing mind and will” of the company was involved in the wrongdoing. This could lead to more enforcement action.
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