Enforcement and breadth of new UK 'failure to prevent' measures will be key

30 January 2023 15:59 by Martin Coyle

UK City

Moves that would see UK companies being held to account for failing to prevent financial crime have been long awaited by regulators and campaigners alike, but enforcement will be key to proving the worth of the changes.

Last week security minister Tom Tugendhat indicated that the government would look to introduce a “failure to prevent” measure in the country’s House of Lords, Parliament’s unelected upper house.

The announcement came towards the end of the parliamentary debate on the Economic Crime and Corporate Transparency Bill, the second piece of UK legislation designed to crack down on dirty cash since Russia’s invasion of Ukraine.

The government hopes to transform the UK’s poor record in capturing companies at the heart of wrongdoing, although more details are needed on how the law will work and how prosecutors will be empowered to go after errant corporations.

Amendments to that bill put forward by former justice minister Robert Buckland were removed following Tugendhat’s pledge. Buckland had called for individuals and companies to be held directly accountable for money laundering, fraud and false accounting offenses if they didn’t do enough to prevent wrongdoing.

Prosecutors currently have a tough job proving fraud by companies as they have to demonstrate that a “directing mind” of the company intended to commit an offense. This can be extremely difficult in large corporates with many levels of management.

The Serious Fraud Office’s high-profile prosecution of Barclays and Barclays Bank over its multibillion-pound capital raising from Qatar at the height of the financial crisis faltered on this point.

While details of the government’s move are not yet clear, observers say the legislation could operate in a similar way to the Bribery Act 2010, where companies can be prosecuted for failing to prevent bribery.

That law has been successfully used by the SFO through deferred prosecution agreements, which have seen hundreds of millions paid by errant companies into the government coffers — even if big-ticket corporate prosecutions haven’t materialized.

Following Tugendhat’s announcement, Buckland said he was pleased with the move: “These new offenses, which I have recommended, will make it easier to prosecute organizations for crimes because prosecutors will only need to prove that the organization lacked ‘reasonable’ or ‘adequate’ controls to prevent the crime,” he said.

Campaigners also gave the decision a cautious thumbs up. Various groups have long called for the changes. In January 2021, hope seemed lost after lawmakers dropped similar proposals following a lack of parliamentary support.

The government had tasked the Law Commission, an independent body that reviews legislation in England and Wales, with looking at all aspects of corporate liability. After some delay, the commission reported back in June last year, with a set of proposals that critics described as weak.

It put forward a series of options for the government to consider. Included was a failure to prevent fraud clause, but none for failing to prevent money laundering or a general catch-all of economic crime.

Kevin Hollinrake, the government minister who is leading the economic crime bill alongside Tugendhat, at the time said the proposals risked rolling out the red carpet for criminals. Campaigners hope that Hollinrake, who has long called for changes, will add impetus to the push for changes.

Last week’s announcement appears to have turned the dial on the topic. Attention will now shift to how the measures are included in the economic crime bill and how far they will go. The hope is that they aren’t watered down in any way and cover all aspects of financial crime.

Another detail to watch is what help and resources enforcers like the SFO are given to enforce the measures. The agency has been tainted by its failures to hold large corporates to account in recent years, despite some notable successes.

It will need appropriate resourcing to ensure any shiny new powers can be used effectively, or the fanfare over the changes will be short-lived. In any event, enforcement for the new offenses will likely be years away as the changes will take time to bed in.

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