Corporate criminal liability and the failure to prevent fraud: a glacial advance

Following the recent debate of the Economic Crime and Corporate Transparency Bill, the publication of the House of Commons Justice Committee Report (“the Report”), which both took place earlier this month, and the Law Commission Report on Corporate Criminal Liability, which was published in June 2022, the Government is facing mounting pressure to introduce a failure to prevent fraud offence.

The lack of dedicated funding for the investigation and prosecution of fraud means that it is an attractive option for the Government to focus on prevention and make companies responsible for the implementation of preventative compliance programmes.

There are growing pressures on the Government to expand the current failure to prevent model to include other financial crime offences. The model is already well established following the corporate failure to prevent bribery offence introduced in 2011 by the UK Bribery Act, and the more recent failure to prevent facilitation of tax evasion offence introduced in 2017 under the Criminal Finances Act; corporate entities have therefore become accustomed to the need to have adequate or reasonable procedures in place to provide a defence if bribery or tax evasion facilitation occurs through an Associated Person¹. 

Despite House of Common debate and the Law Commission recommendation, there remains uncertainty as to the formulation of any new  failure to prevent fraud offence .  A failure to prevent fraud offences would likely focus on fraud committed by an Associated Person, for the benefit of an organisation. This would not address the significant volume  of external fraud , nor internal fraud where the organisation is itself the victim.

The Economic Crime and Corporate Transparency Bill

On 13 October 2022, the second reading of the draft Economic Crime and Corporate Transparency Bill (“the Bill”), took place.  It contained a raft of measures including new and expanded powers for Companies House, the Serious Fraud Office and the National Crime Agency.

During the debate at the second reading of the Bill Mr Andrew Slaughter MP², stated  that “[t]he Bill has many, many omissions. We have heard about the lack of corporate liability and the lack of provisions on whistleblowers, but we can add to that …  we still have nothing on failure to prevent”.

Whether an amendment to the Bill is tabled shortly to include a new failure to prevent fraud offence remains an unknown.  What we do know is that the Law Commission, in its recommendations on Corporate Criminal Liability, recommended further consideration of a specific failure to prevent fraud offence.  We note that this recommendation was explicitly referenced during the debate in the House of Commons as one of the “[two] strongest options” and “the Government are carefully assessing the options presented and are committed to working quickly to reform criminal corporate liability”³.

House of Commons Committee report - Fraud and the Justice System

Fraud has devastating consequences for  victims, who in many instances are the most vulnerable in society.

The reach and personal impact was summarised by the Chair of the Justice Committee, when releasing the findings of the Report, published by the cross-party House of Commons Justice Committee. Sir Bob Neill MP noted that “[f]raud currently accounts for 40% of crime and the figure is growing. People are losing their life savings and suffering lasting emotional and psychological harm”.

The Report, published on 18 October 2022 called on the Government  “to revolutionise the way in which we fight fraud, ensuring it is given greater priority and resourcing across the justice sector to boost prevention, investigation and prosecution alongside improving the treatment for victims of this crime”.

The clear findings of the Report are that more must be done to combat fraud both in terms of prosecution  but perhaps more critically identification and prevention.

The Report identifies that “[o]nly 2% of police funding is dedicated to combatting fraud despite it accounting for 40% of reported crime”.

One option  for prevention is the introduction of a failure to prevent offence for fraud; Lisa Osofsky, Director of the SFO, told the Committee that “a ‘failure to prevent’ offence was top of her wish list for changes she would like to see”.

However, the Government when assessing the benefits of a further failure to prevent offence will need to consider whether it will tackle fraud against the average person, and achieve the desired effect of reducing fraud.

Impact on organisations

One of the fundamental questions legislators must grapple with is whether a failure to prevent fraud offence would be drafted such that the conduct would need to be established as being for the benefit of the company/ for a client. 

It was the recommendation of the Law Commission that “organisations should only be liable if the conduct was undertaken by the employee or agent with a view to benefitting the organisation directly, or benefitting a person to whom the employee or agent was providing services on behalf of the organisation. The organisation  could therefore be liable if the conduct was intended to benefit it indirectly by assisting a client (but not if the intention was to harm the organisation itself)”. At the outset, companies may be shielded from risk if they receive no benefit directly or indirectly.

So what would the impact of a failure to prevent fraud offence be for organisations? The short answer is that it could be very significant if a corporate was found to be guilty of such a failure.

However the impact is greater than conviction risk alone.

A failure to prevent fraud offence has been debated as a means to encourage better corporate behaviours and oversight and therefore act as a preventative measure to lower levels of fraud. The Crown Prosecution Service (“CPS”) conveyed that opinion where they responded to the Committee that the CPS was in favour “to promote a failure to prevent change in the legislation, not so much because it will lead to more prosecutions of companies, although it might if it were on the statue book, but because it will drive better corporate behaviours and switch the responsibility of companies to there being an onus on them to have proper systems in place to protect people from fraud in the first place, rather than being reactive to fraud that is happening⁴”.

As the views of the CPS are clear – an additional failure to prevent offence tackling misrepresentation and further dishonest behaviour – will not lead to more prosecutions of companies. It will, however, require organisations to further expand existing compliance measures and absorb the additional costs of implementing, and monitoring those controls.

The concept of failure to prevent offences is based on criminalising compliance failures  placing an increasingly heavy burden on companies rather than properly and appropriately funding law enforcement agencies.

Authored by Olga Tocewicz and Nick Roper.

References

1 A person who performs services for, or on behalf of, a commercial organisation.

2 Shadow Solicitor General

3 Mr Dean Russell MP

4 Q68, Gregor McGill - https://committees.parliament.uk/oralevidence/9938/html/