Failure to prevent fraud, and money laundering?

Two months ago I wrote a blog following the release of the UK government’s fact sheet in respect of the new ‘failure to prevent fraud’ offence due to be brought in as part of the Economic Crime and Corporate Transparency Bill. The last few weeks have seen some interesting developments that propose to further strengthen the bill, two of which are particularly relevant:

• Amendments to the proposed offence passed by the House of Lords; and
• A proposed expansion of the identification doctrine for economic crime offences

Proposed amendments to the failure to prevent offence

Until a few days ago, the failure to prevent offence looked to have been narrowed to exclude money laundering (ML), I thought in recognition of the existing ML regime. However, peers have now extended the proposed offence to money laundering. The ML deed in question, as for fraud, needs to be for the benefit of the organisation to be in scope. There is no proposed restriction of the offence to the existing AML ‘regulated sector’ which will therefore require a broader set of sectors and organisations to formally consider ML risk to the organisation for the first time. For the regulated sector, it will be interesting to see how this will interact with the ML Regulations, the offences under which have a lower evidential threshold than this proposed failure to prevent approach.

In addition, the House of Lords has for now removed the limitation that the offence would apply only to large organisations (as defined by the Companies Act 2006). I raised two months ago that I would expect that, as the bar is raised for large organisations, this expectation will trickle down to smaller organisations as a result of their engagement with those in scope larger businesses through supplier and other types of relationships. All large organisations will wish to ensure that its robust fraud risk management framework covers their extended enterprise (supply chain, agents, joint ventures etc.). However, there is no doubt removal of this size restriction will increase the risk landscape for smaller organisations.

These proposed amendments will now go back to the House of Commons for the third reading so it is quite possible that we will see further changes made over the coming weeks.

Expansion of the identification doctrine

Under the current law, the “identification doctrine” means that a corporate can only be convicted of a criminal offence where there was the “directing mind and will” of the corporate. The interpretation of directing mind and will has been very restrictive, only those who exercise the powers of the company under the articles of association (i.e. directors) or those under delegated authority from the board have so far been capable of incurring liability on behalf of the corporate.

This has made prosecution of economic crime offences very challenging, in particular, given the complex corporate structures of many of today’s larger organisations. Arguably, it also puts smaller firms at a disadvantage as identification of the directing mind is often easier to identify in a smaller corporate.

The new government proposal will bring “senior managers” within scope of who can be considered to be the directing mind and will of a corporate. In practice this will likely broaden the extent of employees capable of incurring liability on the company's behalf. This reform will only apply to economic crimes, including fraud, bribery and ML.

There may be some degree of overlap with the new offence of failure to prevent fraud although it is important to note that firstly the failure to prevent offence provides a much broader scope for liability as the company can be liable for the acts of any employees at any level within the organisation, and third party "associated persons". Secondly, mitigating this broader scope, the failure to prevent offence is coupled with the "reasonable procedures" defence whereas there is no corresponding defence related to this expansion of the identification doctrine.

Summary

The new failure to prevent offence will sit alongside the existing failure to prevent offences for bribery and tax evasion (note the SFO have already prosecuted under the bribery offence and the HMRC have live criminal investigations under the tax offence). These offences demonstrate the breadth of economic crime responsibilities for organisations and in combination with this expansion of the identification doctrine brings a greater risk of prosecution for an organisation around economic crime. This will no doubt increase the demands upon corporate Ethics and Compliance teams to ensure robust risk and control frameworks are in place and embedded within the organisation and that they are supported by a strong culture of integrity and doing the right thing. Whilst the practical impact will flow through over the coming years, as the change will be prospective and complex economic crime offences typically take a number of years to investigate and prosecute, corporates would be wise to start their preparations now for this impending change, which will likely come into force at some point in 2024.