Economic Crime - Anti-money laundering supervision and sanctions implementations Contents

4Legislative reform

184.One of the ways to ensure that the UK is a ‘hostile’ environment for economic crime is by ensuring there are prosecutions. However, questions have been raised as to whether the statutory framework is helping law enforcement achieve such prosecutions, especially with regard to actions by larger companies. Naomi Hirst argued that “[ … ] Our corporate criminal liability framework is simply not fit for purpose. For tax evasion and bribery, we have adequate failure-to-prevent provisions in place. For economic crime it is simply not the case”.242

185.In its written evidence to the Committee, the Serious Fraud Office outlined both the nature of the problem as it saw it, and its potential solutions. Its main concern was around the ‘Identification Principle’:

In respect of crimes which require proof of a mental element (such as dishonesty or recklessness), the attribution of corporate criminal liability is governed by the common law doctrine of identification or the Identification Principle.

Under the Identification Principle, a company can be fixed with criminal liability by establishing that a person who was the “directing mind and will” of the company at the relevant time carried out the acts and had the necessary mental state.243

186.The consequence of this ‘identification principle’ according to the SFO, was that:

The concepts behind the Identification Principle have been developed by the courts in a number of cases. However, there remains uncertainty as to who represents the directing mind and will of a company. It has generally been accepted that directors and senior officers of the company are likely to be capable of being directing minds in most cases. However, in large, multi-national companies, the day-to-day management of the business will typically be delegated to managers or subsidiary companies and there is currently a lack of clarity as to what level, and under what circumstances, the directing mind and will of the company can be fixed.

As a result, it is often impossible to prosecute the company, notwithstanding the fact that they may be the main beneficiary of the wrong doing.244

187.Naomi Hirst, Global Witness, also emphasised the imbalance in prosecutions between smaller and larger companies the ‘identification principle’ engendered, and the implications that might have for corporate governance. She argued that:

This is also about a matter of fairness when we are talking about the corporate criminal liability framework. Currently, under the system as it is, the identification principle, which requires a direct mind to be identified in order to charge a company, favours enforcement of small and medium enterprises. When you get to larger corporations, the identification principle as it currently stands actually incentivises quite poor corporate governance and is shielding the directing minds, the board, from actually knowing what is going on underneath them.245

The Solicitor General also appeared to be sympathetic to this view. He told us that:

At the moment in English law, we need to establish the controlling mind principle, which means that corporates that have a more exotic structure of management, Byzantine some would say, can get round that problem. There is plenty of direct evidence from prosecuting authorities, the SFO and CPS, which supports the contention that the bringing of prosecutions in the first place is difficult.246

188.Having identified the problem with the UK’s regime, the SFO argued for “two equally favoured and parallel options”. It called for:

1. Replacing the identification doctrine with a new principle for the attribution of corporate liability. This would set out the circumstances in which a company would be liable for the substantive criminal offence. The SFO’s proposal is that a company would be guilty of the substantive offence if a person associated with it commits that offence intending:

• To obtain or retain business for the company;

• To obtain or retain a business advantage for the company; or

• Otherwise to (financially) benefit the company.

This solution would provide a principled basis on which all companies would be liable for all substantive offences.

2. The introduction of a new offence of failing to prevent economic crime. This solution aligns well to the provisions of section 7 Bribery Act 2010, as well as the new Criminal Finances Act offence of failure to prevent tax evasion, and promotes consistency across the wider economic crime landscape. Section 7 of the Bribery Act has been proven to be effective in its application. This would allow for a quicker and consistent solution to this urgent problem.247

189.The United States provides an interesting comparator to the UK due to its differing framework for corporate liability. Naomi Hirst outlined the following advantages of the US system:

There is a debate to be had about what that offence looks like. It is worth considering that the DOJ [Department of Justice] in the United States have a definition of vicarious liability that they can use very easily, very successfully, and we are very far away from that. That is to the point where, from the outside, it might look like the UK is actually outsourcing some of our corporate prosecutions to other jurisdictions that can do this much easier than we can.248

Mark Thompson, then Interim Director of the SFO, also noted the implications of this difference in the law between the US and the UK:

They have significant advantages, particularly in respect of dealing with companies and corporate entities because their system relies on vicarious liability. If an employee of a bank is involved in money laundering, the bank is pretty much liable. We do not have that here, which makes it more difficult for British regulators and prosecutors to take the same action that our American colleagues take.249

Mr Thompson noted that “there are some corporate criminal fraud offences that could be prosecuted with a different regime”.250

190.The United States example was also explored by the Solicitor General:

Nobody can deny that [the United States] is not anything other than a very vigorous free market economy, and yet its criminal rules on corporate liability are very tight indeed. They have a system of vicarious criminal liability, which means that the corporate is responsible for the acts of the individual, even if the corporate has taken steps to stop or prevent the individual from wrongdoing. That is a model we need to look at that very carefully.251

However, the Solicitor General did note some potential drawbacks to the position taken by the US:

In going down the path of enhanced corporate criminal liability, we must not take away from the fact that there will be cases of rogue individuals who behave in a way that a well-intentioned company did not intend or wish. It would be a false choice for us to make, when it comes to prosecution, between corporates and individuals. This is one area where we need to have our cake and eat it. […] What draws me away from the American vicarious liability model is that it tends to focus very much on the corporate and not on the individual, in a way that the public would be concerned about.252

191.In his evidence Mark Thompson also provided a glimpse into the potential factors the Government may be considering around whether or not to legislate for these changes to the legislative framework:

The Government continue to consider whether it is necessary. My understanding of the Foreign Office’s position, for example, is that it was not necessary because the regulatory regime around senior persons in the City was sufficient to address a lot of this.253

Colin Bell, of HSBC, also argued that the FCA’s Senior Managers Regime effectively bound those in financial services:

As an approved person under the senior managers regime, with accountability for financial crime risk within HSBC, I feel that accountability very keenly. I feel bound by that statement of responsibilities. I think my colleagues and peers feel the same way. There has been a sea change in the way that is tackled, and we feel it. We really do feel it.254

192.However, in its evidence, the SFO argued that a regulatory response alone was not enough:

Regulation has an important part to play, but it does not meet the challenge. Regulation only covers a limited section of corporate activity and cannot affect non-regulated sectors and the SFO has several investigations underway into non-regulated businesses that illustrate this point. Regulation also tends to focus on procedures and record keeping rather than on the end goals of preventing and punishing offending. In addition, a regulatory sanction does not carry the weight or impact of a criminal conviction or the terms of a DPA [Deferred Prosecution Agreement].255

193.The Solicitor General also appeared unsympathetic to any attempts by industry to forestall reform. He told us that:

In any development of policy you are going to have debate, but in response to that I would say this. Companies and corporates have already brought in measures to deal with failing to prevent bribery and tax evasion and, if they have not, they ought to get on with it, because this is the law of the land. Frankly, if they brought in mechanisms and systems to deal with those particular aspects of criminality, it would not be a leap in the dark to extend them to economic crime more generally.256

The Government’s response

194.On 13 January 2017, the Government issued Corporate liability for economic crime: call for evidence.257 That call for evidence considered both the deficiency of the ‘identification principle’ and potential reforms to the law. The call for evidence closed on 31 March 2017. The Solicitor General accepted that there had been no follow up publication yet.258

195.Some witnesses appeared frustrated at the slow speed at which the Government was progressing on this issue. Naomi Hirst, Global Witness, referred to the consultation as “stalled”,259 noting that corporates were currently unable to be prosecuted.260 While Mark Thompson noted that “tackling companies is difficult” he also told us that “there are a number of proposals that have been looked at but have not yet borne fruit”.261

196.The Solicitor General argued though that there were legitimate reasons for the delay. In response to the Committee’s query as to whether the evidence that resulted from the consultation was not conclusive, he replied:

That is probably right at this stage. We have not formed a final view at all but, as I have identified, a lot of thinking is going on about what the precise model might be. I will give you an example. In the failing to prevent offences that we have already introduced, there are slight differences in the test between failing to prevent bribery and failing to prevent tax evasion. For example on tax evasion, an intent to benefit financially is not part of the test to be applied, but it is for bribery. I am sorry to be boring about detail, but we need to get the detail right before we go out there and consult.262

He also told us that the work had been moved from the Ministry of Justice to his own department, the Attorney General’s office.263

197.When the Committee queried whether preparations for the UK’s departure from the EU had hampered work in this area, the Solicitor General replied: “I have been rather busy on Brexit, as have my colleagues. Although some people think I have unbounded energy, I have to prioritise. This is a very important priority for me”.264

198.When asked if there was any way of pushing reform up the priority list, the Solicitor General noted

[…] frankly, debating it publicly like this and listening to not just your contributions, but the other witnesses who have given evidence oral and written, helps the process and highlights the point that, both in our manifesto and in the actions we have already taken, the Government are moving in a direction to help improve the culture in the UK.265

199.The Government’s proposals on reforming the law on corporate liability around economic crime have stalled. Though the Solicitor General realises the importance of this issue, preparations for Brexit seem, in part, to have waylaid this important work. Despite Brexit, the Government must progress domestic priorities. Without reform in this area, multi-national firms appear beyond the scope of legislation designed to counter economic crime. That is wrong, potentially dangerous and weakens the deterrent effect a more stringent corporate liability regime may bring.

200.There is clear evidence that legislative reform is required to strengthen the hand of law enforcement in the fight against economic crime. We recommend that the Government sets out a timetable for bringing forward legislation to improve the enforcement of corporate liability for economic crime. The Serious Fraud Office’s suggested reforms should be considered as part of those proposals.

201.The Solicitor General emphasised the importance of getting the detail of new legislation right. The consultation process can help with that task and need not be delayed until proposed legislation is in near final form.

202.We recommend that the Government responds to the evidence submitted in response to the 2017 Corporate liability for economic crime: call for evidence and undertake further consultation on proposals for legislation by the next Queen’s speech.

242 Q3

243 Written evidence from the Serious Fraud Office (ECR0068)

244 Written evidence from the Serious Fraud Office (ECR0068)

245 Q3

246 Q462

247 Written evidence from the Serious Fraud Office (ECR0068)

248 Q6

249 Q185

250 Q221

251 Q456

252 Q462

253 Q213