At the 34th Cambridge Symposium on Economic Crime, UK Attorney General Jeremy Wright announced government plans to introduce a new corporate offence, which could potentially see company boards held liable for failing to prevent money laundering, false accounting, and fraud.
Although media reports have suggested that the offence will be part of the Criminal Finances Bill, law firm Herbert Smith Freehills LLP argues that this is unlikely, as the consultation has yet to be launched.
However, whether the offence is included within the Criminal Finances Bill, or in a future piece of legislation, it’s clear this could be a radical shakeup for UK companies.
During his speech, Mr Wright set out why he felt a change was needed. He explained that:
‘Under existing law, a company only faces criminal liability if prosecutors can prove a sufficiently senior person knew about the criminal conduct. It can be extremely hard to prove this, especially in large companies with complex management structures’.
Barry Vitou, head of global corporate crime at law firm Pinsent Masons, echoed the concerns of the Attorney General, highlighting that the current system made it ‘practically impossible’ to hold company boards to account.
The Attorney General also stated that the current system encourages company directors to distance themselves from company operations. An example of this was seen recently on BBC Breakfast, when Mike Ashley, founder and deputy chairman of Sports Direct, confessed ‘you’d be surprised at how little I knew of what was going on in our warehouses’. This was in response to questions over the company’s working practices.
The limitations of UK law has also become apparent in the wake of the financial crisis. Tom Hayes, former trader at UBS and Citibank, was convicted of fraud for manipulating the Libor rate (the interest rate banks charge each other for short-term loans). He was sentenced to 11 years in prison, as well as being ordered to pay £878,806, under the Proceeds of Crime Act. However, his employers – UBS and Citibank – were unable to be prosecuted under UK law.
This position is in stark contrast to the United States, where US authorities have held several international banks liable. In 2015, Swiss bank UBS agreed to pay a $545m fine for its involvement in the rigging of foreign exchange and Libor benchmarks.
What is being proposed?
Mr Wright explained the government plans to extend the scope of ‘failure to prevent’ offences to include economic crimes such as money laundering, false accounting, and fraud.
At present, the UK’s ‘failure to prevent’ legislation covers bribery and will soon include tax evasion. The Bribery Act 2010 creates an offence for companies who fail to prevent staff from bribing another person on their behalf. However, the legislation provides a statutory defence for companies who can prove that adequate procedures and systems are in place to prevent bribery.
By incorporating this defence, Mr Wright believes he can make a real difference in preventing economic crime. He hopes that by introducing this new offence it will promote a culture of corporate responsibility, where company boards lead by example and take action to stop crimes occurring in the first place.
Impact on companies
Andre Spicer, Professor of Organisational Behaviour at Cass Business School, argues that the new offence may enable employees to get away with bad behaviour, allowing them to blame a lack of systems, rather than taking responsibility for their own actions.
Further, it may turn senior management positions into a ‘poisoned chalice’. However, Professor Spicer concedes that it’s unlikely that there will be a shortage of people looking to become senior officials, though it could make positions less attractive.
Interestingly, he suggests that ‘strategic ignorance’ may develop within companies, where senior management encourages staff not to pass on information that might make them appear responsible. This was the case in the Volkswagen scandal, where junior staff edited negative behaviour out of emissions reports.
Impact on tackling economic crime
The success of any new legislation is usually determined by the fine details and how well it works in practice. In terms of enforcement, Law Society president Jonathan Smithers emphasises that:
‘…it’s equally important to ensure the Serious Fraud Office is armed with the resources it requires to pursue complicated cases against large financial services companies’.
Additionally, the compliance burden placed upon companies will also play an important role in its success. Simon Airey, Partner at DLA Piper, explains that new legislation will likely result in significant costs, in terms of management time and the associated administration. Many companies are still struggling to meet their obligations under the Bribery Act. So, if new legislation is felt to be unduly onerous by companies, then it may prove challenging to ensure compliance.
There is a global mood to tackle matters such as corruption, tax evasion and money laundering, and although the precise details are unknown, it’s very likely that new legislation will be introduced.
In terms of economic crime, this legislation is a message that the excesses that contributed to the worst financial crisis since the Great Depression, will not be tolerated. For company boards, it provides an opportunity to reflect on their corporate culture, and to consider how new legislation may impact their business.
By Steven McGinty, Idox