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Failure to prevent economic crime - déjà vu or getting serious at last?

Khawar Qureshi QC considers the background to the proposed new corporate offence and asks whether it can be effective.

Oleg Dudko

In the first week of September 2016, Jeremy Wright QC, the attorney general, gave a speech at a conference in Cambridge in which he stated: ‘When considering the question of where the buck stops and who is responsible for economic crime, it is clear that the answer is to be found at every level, from the boardroom down. Both corporations and individuals are responsible.’

At the very same conference in 2014, in his first official engagement as the newly appointed AG, Wright signposted the need to deal with corporate offending by referring to the newly introduced Deferred Prosecution Agreements (DPA’s).  He also revealed that the (coalition) Government was considering a new offence of a corporate failure to prevent economic crime, ‘and the rules on establishing corporate criminal liability.’

Convicting a company

A company qua separate legal person cannot ordinarily be convicted of a criminal offence unless it can be established beyond reasonable doubt that ‘the directing mind and will’ of the company (which means a decision maker at executive or board level) committed the acts which constitute the offence and, importantly, also had the criminal intent to commit those acts. 

Unsurprisingly, in cases where criminality such as fraud or bribery has taken place, it is extremely difficult to impute or establish criminality. A cynic would no doubt say that some corporations actively use the ‘little men/women’ or ‘consultants’ as the conduits for illicit payments so as to insulate themselves from criminal responsibility.

It was precisely for this reason that Section 7 of the Bribery Act 2010 (which came into effect on 1 July 2011) created the offence of failing to prevent bribery, which provides the commercial organisation a defence if it could establish that it ‘had in place adequate procedures designed to prevent persons associated with [it] from undertaking such conduct.’

Dropping the proposal

Somewhat bizarrely, after the 2015 election and in answer to a question in Parliament, the justice minister stated: ‘Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the [Section 7 Bribery Act provision] and there is little evidence of corporate economic wrongdoing going unpunished.’

Whilst the minister was factually correct as to the first part of the statement, the latter part of his statement has the ring of Donald Rumsfeld’s ‘unknown unknowns’ about it, and, with respect is somewhat bereft of logic.

Bringing the corporate offence back from the dead

It is perhaps understandable that former PM David Cameron was concerned to establish the UK’s credentials in fighting economic crime such as fraud/money laundering/corruption/tax evasion. All the more so when he was facing serious criticism at an anti-corruption summit in May 2016 from world leaders alleging that the UK’s legal regime facilitated economic crime.

Cameron’s response was to write an article in The Guardian where he announced a consultation for a new law to widen the scope for executive responsibility.  He stated: ‘In addition to prosecuting companies that fail to prevent bribery and tax evasion, we will consult on extending the criminal offence of “failure to prevent” to other economic crimes such as fraud and money laundering so that firms are properly held to account for criminal activity that takes place within them.’

As the AG stated at the September 2016 Cambridge conference, ‘the intention of the government is not only to prosecute and to fine for breaches of the law, but to promote a culture of corporate responsibility.’

Will the proposed offence be effective?

Whilst there are as yet no convictions for violations of Section 7 of the Bribery Act 2010, the conclusion by the SFO of two DPA’s in November 2015 and July 2016 has significantly boosted the argument in favour of expanding the ‘adequate procedures’ requirement to other crimes such as money laundering, fraud and tax evasion. It is suggested this might promote a change in corporate culture and provide a deterrent effect.

The critics of the proposal point to the absence (as yet) of any actual prosecution under Section 7 of the Bribery Act, and the somewhat stark facts underpinning the two DPA’s as evidence of any real ‘track record’ in this regard.

Additional arguments raised include the risk of overloading corporate entities with an even heavier compliance burden, as well as potentially having a chilling effect on corporations which are subject to the jurisdiction of the UK authorities more generally. It is also suggested that clever corporate structuring (pushing control for more ‘sensitive’ transactions elsewhere) might neutralise the potential reach of the offence.

Some have pointed powerfully to the fact that the UK seems to be attempting to emulate the US approach to economic crime, with a very major difference. Mere mention of a potential investigation by the US authorities strikes a very strong sense of fear in all but the most brazen of corporate entities. That is in large part because the US authorities have been consistently and strongly supported with resources and expertise. The SFO (despite the best efforts of its present director and committed personnel) does not (as yet) command such support or generate such a reaction.

Indeed, some cynics have suggested that creating the offence might well undermine the SFO even further - if it is swamped with ‘self –reports’ as happened when money laundering became a crime, and the UK authorities were simply unable to cope with the deluge.

Concluding observations

The re-instatement of the proposed crime (if carried through) is on balance a positive step. However, it can only really impact by way of deterrence and promotion of a change in corporate culture if the Government provides the necessary resources and expertise to enable effective investigations to take place. 

Khawar Qureshi QC is a barrister at Serle Court and specialises in commercial litigation, international arbitration and regulatory matters. 

Posted by:

Khawar
Qureshi QC

19 September 2016

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