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Enforcing corporate liability for economic crime - is it all worthwhile?

by: (AML/Financial Crime Course Director) on

During my career in law enforcement I worked on or managed dozens of major corporate fraud enquiries working with agencies such as the SFO, FBI and SEC. I remember being regularly frustrated when employees committed offences such as false accounting or conspiracy to defraud for the benefit of the companies they represented.

Whilst they were exposed to the full force of the law as individuals, we were unable to hold their employers to account – who often had gained from their dishonesty.

This can’t be right, and the government is currently consulting on provisions that have the potential to address the gap in the law.

This short article considers the proposals, arguing that they are necessary and overdue. It finishes by touching on the implications for businesses in the UK.

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Corporate liability for economic crime – proposals

On 13 January the UK government opened a consultation on its proposals to reform the law on corporate liability for economic crime. This called for evidence in response to a number of options that have the effect of changing the way in which companies can be held to account for the criminal actions of their employees.

Current provisions for corporate liability rely on the identification principle. This principle allows for corporate entities to be convicted for the criminal acts of their directors and senior managers that represent the directing mind for the business.

CPS Legal Guidance notes that this is restricted in application to the actions of the Board of Directors, the Managing Director and perhaps other senior officers who carry out functions of management and speak and act as the company.

Not surprisingly there have been relatively few successful prosecutions of corporate entities as board members have either been unaware of the criminal actions of their staff, or have insulated themselves through layers of management and obfuscation.

Five options are considered in the call for evidence that range from strengthening the ‘directing mind’ test for employees - to strict (vicarious) liability of companies for the actions of their employees. Possibly the most likely model is based on the ‘failure to prevent’ offence contained in section 7 of the Bribery Act. In this instance, a defence would be provided if the relevant company could show it had adequate procedures to prevent the economic crime from taking place.

The term ‘economic crime’ is of course broad in nature. The proposals suggest that this should include fraud as defined by the Fraud Act 2006, false accounting and money laundering.

Is this necessary and proportionate?

Detractors have suggested that this will further increase the legal and regulatory burden carried by UK businesses – encouraging companies to locate elsewhere. Some have countered however, asserting that a country’s reputation for financial integrity can encourage inward investment.

In any event the arguments to increase the burden carried by businesses in this area must be convincing, necessary and proportionate. I suggest they are, and there are three reasons I say this.

The first reason is already mentioned in the introduction but I can amplify by way of an example. Some years ago I investigated a publicly listed company that had grown aggressively during a 12-month period, meeting a board agenda for growth by taking over rival companies.

It achieved this in part by exaggerating its size and asset base. Eventually the false accounting came to light, but by that time the takeovers were complete and the market had moved on. The company had achieved its objectives but the accountants that had cooked the books under severe pressure from the board were the only individuals to carry the can.

The proposed new offences would, I suggest, rightly hold the company to account for the actions of the employees – particularly (but not exclusively) when the business benefited as a result. From a law enforcement perspective this seems to be both practical and fair.

A second reason recognises the sheer scale of fraud within the UK. The 2016  Annual Fraud Indicator published by the University of Portsmouth estimates the level of private sector fraud as £144 billion p.a. The report notes that the eye watering figure may be conservative given the reluctance by many businesses to release commercially sensitive data. To put the figure into context, the NHS budget for 2015/16 was £116.4 billion.

Reducing this level of fraud will of course entail a range of measures targeting companies, consumers and the criminal community. These proposals however have the potential to make a significant contribution.

Turning to a third consideration, in October last year at the Conservative Party Conference Theresa May promised to get tough on irresponsible corporate behavior. The proposals to legislate for failure to prevent economic crime gives expression, at least in part, to this intention.

The Prime Minister’s commitment taps into public fatigue at a succession of high profile corporate scandals including VW, LIBOR, PPI, BHS and tax avoidance on an industrial scale.

A fascinating report by the Centre for Crime & Justice Studies at the University of Liverpool sheds further light on public attitude towards corporate misbehavior. Of the British residents surveyed 95% reported that they viewed a bank knowingly overcharging as being on a par with, or more serious than, the crime of handling stolen goods.

90% reported that an investment firm manipulating a stock price was again on a par with or more serious than handling stolen goods. The report reveals public concern of a bias in the criminal justice system against relatively low-status offenders in favour of, for instance, banks and investment firms.

The proposed legislation has the potential to redress the balance, increasing the accountability of corporate entities whilst encouraging responsible governance and behavior.

What difference will this make?

It’s natural to ask what all this will mean in practice. At present businesses tend to focus on preventing themselves from becoming victim to fraud with for instance, segregation of duties, defined authorisation levels, audit and escalation processes designed to limit exposure.

The emphasis will change to include, not only these controls, but also measures to prevent fraud or money laundering committed by employees or agents of a firm. Policies and procedures will be required alongside whistleblowing provisions and of course appropriate training.

Whilst we don’t yet know the outcome of the consultation it is reasonable to anticipate change. The Prime Minister has warned us and we need to start preparing by ensuring we have the skills and knowledge to meet the challenge.

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2 Comments :

irene said...
In most cases there is sufficient evidence that indeed the BODs and the MDs have actually used powers bestowed upon them to hurt the very institution that they were tasked to head and manage effectively. The law should therefore not be applied sparingly but the same team of managers must be brought to book and punished accordingly.
June 14, 2017 09:24
irene said...
Economic crimes should be heavily punished in whatever part of the world because such affect all the citizens of the universe whether directly or indirectly. In Kenya, the president has threatened to sign into law a bill proposing to hang those convicted of economic sabotage.
June 14, 2017 09:18

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