Crime, fraud and investigations 2017: Criminalisation of compliance failures

​A consultation is expected in early 2017 on a broad new form of corporate criminal liability, which will elevate the importance of compliance programmes.

In brief

  • A two part consultation process is promised in early 2017 on a new offence of failing to prevent economic crime.

  • The proposed scope of this offence, and particularly the kinds of criminality it will be designed to catch, are as yet unknown.

  • The Criminal Finances Bill will bring into law a new offence of failure to prevent tax evasion in early 2017.

An “extension” of the Bribery Act

In the first half of 2017, we are likely to see a consultation on proposals to extend the “failure to prevent” model of corporate criminal liability to other economic offences. The proposal to introduce a corporate offence of failure to prevent economic crime has its origins in section 7 of the Bribery Act 2010, which created an offence for a commercial organisation of failing to prevent bribery by associated persons acting on its behalf. Under section 7, a company is strictly liable unless it can prove that it had “adequate procedures” in place at the time the underlying offence was committed.

This formulation is an exception to the general rules of corporate criminal liability, which provide that a company can be found criminally liable only for the actions of those individuals who represent its “directing mind and will”, typically its senior management. The difficulties of proving criminal liability by anything other than the smallest of companies under this principle are well documented. “Failure to prevent” offences place greater focus on companies’ compliance programmes as a means of avoiding criminal liability: companies will be criminally liable for acts committed by their employees, agents and contractors unless they have sufficient procedures in place to prevent them. In this sense, the failure to prevent model criminalises companies’ compliance failures.

In recent years there have a series of proposals to extend the section 7 Bribery Act formulation of corporate offending to other economic crimes. The proposal was first made in 2013 by David Green, Director of the Serious Fraud Office (SFO) (see our commentary at the time). In December 2014, the Government announced as part of its Anti-Corruption Plan that it would examine the case for a possible new offence, and in 2015, the Conservative Party listed a new offence as a manifesto pledge. Despite attracting cross-party support and much press and industry comment, a statement from Junior Justice Minister Andrew Selous MP on 28 September 2015 suggested that the proposal had been dropped from the Government’s agenda (see our commentary).

It appeared instead that any new offence might be confined to the field of tax evasion. A new offence of failure to prevent tax evasion was consulted on and is now set to come into law with the passing of the Criminal Finances Bill in early 2017. The offence adopts the same formulation as section 7 of the Bribery Act, albeit with a different standard of defence. A company will be strictly liability for failing to take reasonable steps to prevent a person associated with it from facilitating the evasion of tax by a taxpayer. It will be a defence that the relevant company had in place such prevention measures as it was “reasonable in all the circumstances” to expect it to have. For an in depth analysis of this offence, see our article. For more information on the Criminal Finances Bill, see this article.

The potential scope of a new UK offence

More recently, the proposal for a broader “failure to prevent” offence appears to have regained political momentum. On the eve of the 2016 International Anti-Corruption Summit, then Prime Minister David Cameron re-emphasised the Government’s commitment to criminalising failures to prevent crimes of dishonesty or fraud by a company’s agents. Attempts have also been made to introduce a form of this offence through an amendment to the Criminal Finances Bill.

In November 2016, Labour MPs proposed a new clause that would introduce a criminal offence of failing to prevent persons associated with a company from committing offences under:

  • section 1, 6 or 7 of the Fraud Act 2006
  • section 17 of the Theft Act 1968
  • section 327, 328 and 329 of the Proceeds of Crime Act 2002, or
  • the common law of conspiracy to defraud.

On 08 December 2016, Conservative MP Sir Edward Garnier QC tabled two possible amendments to the Criminal Finances Bill. In both instances, the amendments he proposed mirrored the Labour MPs’ proposals, except for the scope of underlying offences that trigger the corporate offence. In one formulation, he defined economic criminal offence as “any of the offences listed in Part 2 of Schedule 17 to the Crime and Courts Act 2013”, therefore linking the failure to prevent offence to any crime for which a company can enter a Deferred Prosecution Agreement. In a further formulation, Sir Edward listed 14 offences, including fraudulent trading under section 993 of the Companies Act 2006 and misleading the FCA.

The known unknowns

Following these attempted amendments to the Bill, a statement was made by the Minister for Security, Ben Wallace MP, confirming the Government’s intention to conduct a two-part consultation process that “will openly request and examine evidence for and against the case for reform and seek views on a number of possible options.” The process will begin with a call for evidence, the results of which will determine whether the Government consults on firm proposals. This statement was echoed in the House of Commons on 09 December 2016 by the Attorney General, Jeremy Wright QC.

Whilst it is therefore likely that some form of consultation process will occur, with the call for evidence likely to take place early 2017, it is unclear what the focus of the consultation will be. It is yet to be confirmed whether the Government will consult on the draft legislation of a new offence or conduct a wider consultation on the general principles relating to corporate criminal liability.

In relation to the specific offence of failure to prevent economic crime, we identified a number of issues at the time the proposal was revived (see our article). These issues remain largely unsolved. None of the formulations tabled so far address the critical issue of whether a company can be criminally liable for failing to prevent an offence where it is the victim. In section 7 of the Bribery Act, the associated person must be acting for the benefit of the company to trigger the corporate offence. This element is not present in the failure to prevent the facilitation of tax evasion offence, and was not included in any of the possible formulations tabled as amendments to the Criminal Finances Bill.

Given that there are two different standards of compliance-related defence for bribery and for the facilitation of tax evasion offences, (showing the company had “reasonable” or “adequate” procedures), it also remains to be seen what formulation of the defence (if any) will be adopted in relation to any offence of failing to prevent economic crime. As was the case with the Bribery Act, Simmons & Simmons will be taking an active role in the consultation on any proposals, and we will welcome your input as part of that. We will keep you informed as further details emerge.

The focus on compliance failures is not unique to the UK; see our article on pan-European developments.

Update

A consultation on a new form of corporate criminal liability was issued on 13 January 2016

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.