Financial Services Bill

Written evidence submitted by Spotlight on Corruption (FSB06)

About us

Spotlight on Corruption is an anti-corruption charity that works to end corruption within the UK and wherever the UK has influence. We undertake detaile d, evidence-based research on the implementation and enforcement of the UK’s anti-corruption laws. Our vision is for a society where strong, transparent, and accountable institutions ensure that corruption and associated economic crime is not tolerated.

Suggested amendment for the Bill

Under section ‘Insider dealing, money laundering etc.’ insert new clause, introducing a criminal offence of failure to prevent economic crime, with particular reference to fraud, money laundering and false accounting.

Rationale

1. Spotlight on Corruption believes that there are several important reasons for the urgent introduction of a failure to prevent economic crime offence as outlined in this amendment. These reasons are:

· to promote strong corporate governance and deter wrongdoing in the financial sector after the UK leaves the EU (protection of market integrity);

· to create a level playing field for how large and small companies are held to account for economic crime, particularly in response to the burgeoning fraud crisis resulting from COVID-19 (fairness);

· to ensure that the UK does not fall behind international standards on prosecuting economic crime (equivalence); and

· to create a level playing field on how liability is attached to companies across different economic crimes within the UK (consistency).

Compatibility with the Law Commission review

2. On 3rd November 2020, the Law Commission announced that it has been asked by the government to review the UK’s corporate criminal liability rules and suggest options for reform. [1] There are several reasons why the urgent introduction of a failure to prevent economic crime offence is compatible with this longer-term review and, in our view, complements it.

3. Firstly, the focus of the Law Commission’s Terms of Reference is, rightly in our view, on whether the ‘identification doctrine’ is fit for purpose. [2] The identification doctrine is not superseded by a failure to prevent offence but rather continues to apply to substantive (or "main") offences under respective legislation regardless of the introduction of a failure to prevent offence.

4. The identification doctrine as it applies to "main" offences continues to create unfairness in the law between smaller companies (who can be held to account for both a "main" offence and the failure to prevent offence) and larger companies (who can only realistically be prosecuted for a failure to prevent offence).

5. A failure to prevent offence is regarded by the courts as a ‘lesser’ offence than a "main" offence, owing to the fact it does not involve intent, and incurs lesser penalties than conviction for a "main" offence. [3] Furthermore, a company convicted of a "main" offence faces mandatory exclusion from public procurement, whereas a company convicted of the lesser offence of failure to prevent only faces discretionary exclusion. [4] This leaves smaller companies at greater risk of proportionately higher fines and of being excluded from procurement compared to larger companies. This would appear to be directly at odds with the government’s stated intention to level the playing field for SMEs in government procurement. [5]

6. Secondly, the Law Commission’s review will take some time. The Commission is due to come up with an options paper towards the end of 2021. This means that any legislative reform is unlikely to take place before 2023 at the earliest, if at all. The result is that serious gaps in, and unfairness before, the law will remain in the meantime which require urgent remedy.

7. While it is entirely right that the Law Commission take time to evaluate how to reform the identification doctrine – a complex legislative task affecting all corporate crime – the immediate gaps in the law can be addressed by the introduction of a failure to prevent offence for fraud, money laundering and false accounting.

8. The failure to prevent offence is a tried and tested offence which has already reaped significant corporate governance benefits in relation to fighting bribery and tax evasion. The House of Lords Bribery Act Committee has described the failure to prevent offence, "as particularly effective, enabling those in a position to influence a company’s manner of conducting business to ensure that it is ethical, and to take steps to remedy matters where it is not." [6] Meanwhile, when HMRC consulted on the failure to prevent tax evasion corporate offence, it found that stakeholders generally understand this model well and its requirements, [7] and it therefore ensured consistency and minimised the burden on business. [8]

9. Furthermore, a failure to prevent offence as HMRC stated in its consultation, "does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law." [9] A failure to prevent offence therefore, is not about introducing new areas of criminal law, but making sure that the existing criminal law applies equally and fairly to all.

10. To ensure proper consultation with the private sector, it is essential that the amendment contain a clause requiring the relevant Secretary of State to produce guidance for business with respect to what procedures are necessary to provide a defence in relation to the offence. The production of this guidance would be an opportunity for extensive consultation with business about how compliance requirements created by the offence fit with existing regulatory compliance requirements.

Protection of market integrity

11. Without reform in this area, as the Treasury Select Committee noted in March 2019, "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." [10]

12. In 2017, the government itself recognised, in introducing the new corporate criminal offence of failure to prevent the facilitation of tax evasion in the Criminal Finances Act 2017, that without reform of the corporate liability regime:

· Provided an incentive for senior management to turn a blind eye to wrongdoing in order to shield the corporate body from criminal liability;

· Disincentivised the reporting of wrongdoing to senior members of corporate bodies who might be obliged to report the behaviour. [11]

13. The government has recognised therefore that without a failure to prevent offence for specific economic crime offences, perverse incentives for bad corporate governance are created. It is noteworthy that 66.7% of those who replied to the government’s Call for Evidence on corporate liability for economic crime thought that corporate liability reform for economic crime would result in improved corporate conduct with only 13.3% saying it would not. [12] In its consultation document for this Call for Evidence, the government explicitly recognised that in the context of the Bribery Act, the failure to prevent offence had incentivised companies to address and mitigate bribery risks. [13]

14. A clear example of corporate wrongdoing impacting upon market integrity is the rate-rigging scandal, LIBOR and FOREX. In the UK, there were no corporate criminal prosecutions for this wrongdoing by banks despite the fact that in several prosecutions of individuals by the SFO defendants stated that their managers knew what they were doing. [14] In comparison, the US brought criminal enforcement actions against 12 banks for the same wrongdoing and imposed £3.4 billion in criminal fines. [15]

15. While regulatory fines for LIBOR and FOREX were imposed in the UK, it is noteworthy that 73.6% of those responding to the Call for Evidence thought that solely regulatory responses are not appropriate where companies commit serious crime.

16. The government has stated in its response to the Call for Evidence that this situation has been remedied by the introduction of the Financial Services Act in 2012 which makes it an offence to make misleading statements in relation to benchmarks. However, there is no corporate offence in the FSA and it is therefore not clear that prosecutors would be able to hold companies to account were similar conduct to reoccur.

17. A failure to prevent economic crime offence would help raise corporate governance standards and deter corporate wrongdoing. As the UK’s transition period with the EU comes to an end, this would help maintain the UK’s reputation as a financial centre where business is done with integrity, and ensure that companies that seek to operate here do so with high standards.

Fairness

18. Equality before the law is a fundamental principle of the rule of law. The uneven application of the law to small and large companies for corporate crime is therefore a matter of grave concern. While, as we have noted above, the Law Commission should rightfully look in detail at how the identification doctrine impacts upon corporate equality before the law, the introduction of a failure to prevent offence would have an immediate impact by bringing large multinational companies within the reach of prosecutors for economic crimes.

19. The issue of equality before the law is particularly evident in the case of corporate fraud. Two recent judgements show that fraud and false accounting on government procurement contracts, and financial fraud by large financial bodies are virtually impossible to prosecute.

20. In the 2019 when the Serious Fraud Office (SFO) reached a Deferred Prosecution Agreement (DPA) with Serco on fraud involving contracts with the Ministry of Justice, it had to do so with its subsidiary, Serco Geografix Ltd. Despite the fact that senior management at the parent company, Serco, knew and arranged for the procurement fraud against the MOJ, and was the beneficiary of the fraud, Serco could not be a party to the DPA because of the current corporate liability rules. [16] A prosecution of the parent company would have failed if Serco had chosen not to enter into an agreement with the SFO through its subsidiary.

21. The 2020 judgement dismissing the prosecution case against Barclays bank for conspiracy to commit fraud – the only corporate prosecution for 2008 financial crisis misconduct – meanwhile imposes the narrowest interpretation to date of the current corporate liability rules. In the words of one legal commentator, the judgement: "effectively removes companies with widely devolved management and functioning boards and sub committees from the reach of criminal prosecutors." [17] Without Parliamentary intervention, this interpretation will determine the future viability of corporate fraud investigations and prosecutions.

22. The UK is facing a burgeoning fraud crisis, particularly in relation to emergency procurement and government bailouts resulting from the COVID-19 pandemic. Fraud in government backed loan schemes could cost the public purse up to £30 billion. [18] Fraud in the furlough scheme could cost a further £3.5 billion. [19]

23. It is imperative that the government and law enforcement are seen to be responding to this crisis in an even-handed way that holds all those who commit fraud to account equally. However, with current rules, there is a high likelihood that if large companies have engaged in fraud they will be beyond the reach of prosecutors. There is a real risk that this will undermine public confidence in any response to the fraud, and heighten perceptions that large banks and companies are above the law.

Equivalence or parity with emerging international standards

24. The Law Commission has recognised in its recent announcement that "without action to reform this area of law, there is a risk the UK will fall behind international standards in the prosecution of economic crime." [20]

25. The risk of the UK falling behind international standards is particularly pronounced in relation to money laundering. From December 2020, the 6th EU Anti-Money Laundering (AML) Directive comes into effect which requires EU member states to have corporate criminal liability for money laundering.

26. Under Article 7 of the 6th AML Directive, corporate liability must include where an offence has occurred as a result of lack of supervision or control by a person in a leading position. [21] Under Article 8, countries must impose effective, proportionate and dissuasive sanctions which include both criminal and non-criminal fines. A failure to prevent money laundering offence would ensure immediate and full equivalence with Article 7.

27. The UK has opted out of this Directive stating it already largely complies. However, at the time of its review by the European Scrutiny Committee in February 2017, then minister for security, Ben Wallace, noted that if the UK had opted in to the Directive, it would have had to amend domestic law with regard to corporate criminal liability for money laundering or negotiate the provision on corporate liability out. [22]

28. The government has recognised that it primarily deals with corporate money laundering breaches through regulatory action. For instance, in its November 2020 response to the Call for Evidence, it notes that "alternative means of redress are available against firms within the money laundering regulated sector, although these will often be civil rather than criminal." [23]

29. In the context of the Sanctions and Money Laundering Regulations (SAMLA) 2018, the government rejected an amendment introducing a failure to prevent money laundering criminal offence on the grounds that there are ‘no regulatory gaps’ for money laundering following the introduction of the Senior Managers Regime (SMR) and the 2017 Money Laundering Regulations (MLR). [24]

30. It is important to note that while both the SMR and MLR have improved the UK’s regulatory armour for tackling money laundering, neither operate as a substitute for corporate criminal liability for the main money laundering offences under the Proceeds of Crime Act (POCA). These offences are still governed by the identification principle.

31. Although the MLR 2017 is primarily a regulatory regime it does impose a criminal offence for breach of the relevant requirement to have proper anti-money laundering procedures in place (Regulation 86). Such a breach is punishable by a fine or up to 2 years imprisonment. By comparison, a criminal offence under the main POCA offences is punishable for up to 14 years imprisonment.

32. The MLR offence is therefore clearly a minor criminal offence in comparison to POCA offences. While the MLR criminalises the failure of businesses to put in place the proper procedures, a failure to prevent money laundering offence would criminalise the failure to prevent a crime, for which businesses would have a defence that they had proper procedures in place. Although there is overlap which would need to be calibrated in any guidance issued, they are fundamentally different offences, addressing entirely different types of corporate criminality.

33. Furthermore, there has been little criminal enforcement of the MLR. While HMRC has brought three prosecutions of individuals under the MLR 2017 since they were introduced, the FCA has brought none. The FCA meanwhile has only one criminal investigation and one dual track criminal and regulatory investigation for breaches of the MLR 2017 underway. [25]

34. The lack of a failure to prevent money laundering offence is likely to put the UK increasingly at odds with emerging practice in the EU as the 6th AML Directive is rolled out. This has the potential to impact upon whether the UK’s money laundering regime remains equivalent to the EU regime – a potential source of tension in UK-EU relations which could ultimately increase the risk of financial services losing market access. It will also have implications for financial services operating in the EU who will have to develop compliance procedures which reflect the new Directive at an EU level while operating to a lower standard of corporate criminal liability within the UK.

35. It is also likely to put it at odds with emerging practice globally. In the UK’s 2018 FATF evaluation, reviewers noted that "the UK’s ability to prosecute large legal persons from criminal ML [money-laundering] offences under POCA [Proceeds of Crime Act] and notable predicates such as fraud remains limited due to difficulties in proving criminal intent." It also noted that it was "difficult to determine whether the level of high-end ML prosecutions and convictions is fully consistent with the UK’s threats, risk profile and national AML.. policies." [26]

36. The UK is already well behind jurisdictions such as the US which routinely impose criminal enforcement penalties as well as regulatory penalties for money laundering. Between 2008-2018, the US imposed nearly £3 billion in criminal fines on New York based banks, and a further £6 billion in regulatory penalties. By comparison, the UK imposed just £260 million in regulatory penalties on London based banks. [27]

37. It is unlikely that the UK will be able to either achieve equivalence with EU corporate criminal liability standards for money laundering or significantly increase its high-end money laundering prosecutions without reforming the corporate liability regime in relation to POCA. The introduction of a failure to prevent offence would be the quickest and easiest way to achieve both.

Consistency

38. Given that bribery and tax evasion usually involve an element of money laundering and often fraud, it is inconsistent to have different models of corporate liability operating for different economic crimes.

39. Fraud, false accounting and money laundering impose just as serious costs to society as bribery and tax evasion. The National Crime Agency estimates money laundering costs the UK more than £100 billion a year. [28] The 2016 Annual Fraud Indicator meanwhile put the cost of fraud to the UK economy at £193 billion with public procurement fraud costing the government £10.5 billion a year. [29] This is likely to have significantly increased as a result of COVID-19. For comparison, the government estimates that tax evasion, for which the government has introduced new corporate liability standards, costs the UK treasury £5.3 billion. [30] There is no estimate for corruption and bribery.

40. The lack of consistency between the offences has been highlighted frequently by prosecutors as hindering their work on economic crime. The lack of consistency between offences also undermines the government’s flagship Deferred Prosecution Agreement regime which applies to all economic crimes, as listed in Schedule 17 of the Crime and Courts Act 2013. [31] Companies that face a realistic prospect of conviction are more likely to self-report their wrongdoing and cooperate with prosecutors in order to receive a DPA, whereas companies that face little prospect of conviction have little incentive to do so.

41. There are, finally, strong financial reasons for having an adequate corporate liability regime. The failure to prevent bribery offence has resulted in income for the UK Treasury from criminal fines imposed of £1.3 billion. By comparison, the SFO has brought in £199.3 million in criminal fines from corporate fraud offending through DPAs in the past five years.

42. While offences should by no means be introduced in order to create a revenue stream, the effective prosecution of strong corporate liability laws is an effective way of ensuring that financial bodies and companies that engage in wrongdoing pay high penalties which deter future wrongdoing. These fines can help fund further enforcement to amplify deterrence.

43. Furthermore, and most importantly, the failure to prevent offence incentivises companies to put in place procedures that prevent economic crime thus helping to reduce the enormous costs these crimes impose on society. This is potentially one of the most significant ways in which the private sector can contribute to the fight against economic crime.

19 November 2020