UK government set to introduce new Failure to Prevent offences

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UK government set to introduce new Failure to Prevent offences

UK government set to introduce new Failure to Prevent offences

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April 3, 2023

Corporate offences of "failure to prevent" have gradually come into force in the last 15 years in a bid to make firms directly financially and, in some instances, criminally liable for criminal misconduct undertaken by employees. Such direct accountability has largely focused on financial crime, in respect of a failure of firms to put in place appropriate systems and controls to counter offences of bribery (the UK Bribery Act 2010) and tax evasion (Criminal Finances Act 2017).

The alternative route to accountability for firms and their senior managers has been in holding them directly responsible for criminal offences or misconduct committed by the firm. This is best illustrated in the current approach to criminal prosecutions in respect of money laundering compliance, which creates liability where the misconduct can be shown to have been committed with the "connivance or consent" of the corporate body, or attributable to neglect on its part (from the Money Laundering Regulations 2007 onward). The same test is applied in the prosecution of a company officer under the Fraud Act 2006.

The UK government has now confirmed its intention to expand corporate accountability for compliance with financial crime requirements in its tabling of the Economic Crime and Transparency Bill. As described in the UK government policy paper, the purpose of the bill as created was to deliver a range of reforms to "tackle economic crime and improve transparency over corporate entities"¹. The bill's primary focus in its original form was on reforms to Companies House and on intelligence and information-sharing powers designed to assist firms in tackling money laundering and economic crime. However, in its journey through the House of Commons, the bill has been subject to a large number of proposed amendments, including the recommendation of the addition of new failure to prevent offences which are intended to be directly applicable to firms. Given the UK's toughening regulatory stance, it is perhaps unsurprising that this highly anticipated decision received cross-party support in Parliament in an attempt to curb white collar crime.

Although the new failure to prevent offence is not included in the current draft bill², it has been confirmed that the government intends to put forward a new offence during the committee stage of the House of Lords, which is set to take place from the end of March 2023.

Current position

Tackling white collar crime and toughening the UK's stance towards criminal activity has been at the forefront of the government's agenda for several years. In 2020, the UK government instructed the Law Commission to undertake a review of the "challenges faced by the criminal justice system" under the current corporate criminal liability legislative framework and to explore "options for reform that would avoid disproportionate burdens upon business"³. The Law Commission issued its corporate criminal liability options paper (the Options Paper) to the government in June 2022.

Among other items, the Options Paper emphasised that corporate criminal liability is currently determined according to the identification doctrine which in itself poses a barrier to prosecutions. Generally, to establish corporate criminal liability, prosecutors have to prove that the most senior officers of the corporate, namely those with the "directing mind and will", had the requisite criminal intent to commit the offence. It was noted in the Options Paper that the identification doctrine has made it easier to convict smaller companies for economic crimes committed by senior managers for the company's benefit. This is in part due to it being more difficult to account for wrongdoing in large businesses where responsibility for decision-making is dispersed.

In the absence of reform to the "identification doctrine", the Law Commission stated that there was an "even more compelling case" for additional measures, including introducing further failure to prevent offences to tackle economic crime⁴. The Law Commission made clear its views that a general failure to prevent offence would not be helpful, given its overlap with the UK Bribery Act 2010 and the Criminal Finances Act 2017, but did recommend a failure to prevent offence in relation to fraud. Unsurprisingly, since the publication of the Options Paper, there has been ample speculation that failure to prevent offences will shortly be enacted.

Which offences are likely to be caught by the new legislation?

No firm determination has been reached yet on which offences should be included within the regime. However, the tabled amendments that have received most traction have focused on an offence of failure to prevent fraud, false accounting and money laundering by "associated persons" which aligns with the recommendation of the Law Commission.

Fraud, of course, casts a very wide net, bringing in potential liability for firms for anything from a fraud committed against a single customer or supplier (for example, by obtaining services without intending to pay for them) to large-scale misrepresentation, false accounting, evasion of duty or fraudulent trading. However, the proposed amendments do appear to suggest a limit on liability to circumstances in which the firm itself would benefit from the fraud, which may give some comfort to firms as to the scope of the controls required.

It should be noted that the offence has the potential to go wider even than the current supported proposals, with some suggested amendments calling for a general failure to prevent economic crime offences⁵.

The current draft of the bill contains a schedule of "economic crime offences"⁶. This schedule includes theft and fraud offences, trade and export offences, forgery offences, tax offences, criminal offences under the Financial Services and Markets Act (of carrying out regulated activities without authorisation, issuing unauthorised financial promotions, dealing with transferable securities without an approved prospectus and misleading the FCA or PRA), offences related to terrorist financing, money laundering, bribery, misleading statements, tax evasion and sanctions.

At least one amendment already tabled for consideration by the House of Lords is for a broad "failure to prevent economic crime" offence, which may impose liability for a failure to prevent all of the listed offences in a finalised schedule. Indeed, it goes further and would also cover a failure to prevent facilitation of economic crime, which it should be noted includes not only the economic crime offences listed but also acts which would have been an economic crime offence if committed in the UK. This in particular opens the door in our view for the possibility of any new bill creating criminal liability for a failure to prevent sanctions breaches.

Potential routes to conviction

The precise shape of the new offence is not yet crystallised, but based on the proposed amendments (which were subsequently withdrawn on assurances being provided by the Minister for Security) we consider that the offence is likely to be framed in one or both of the following ways:

either the new offence could follow the Bribery Act and Criminal Finances Act model and impose a strict liability offence on a commercial organisation that had failed to prevent a relevant offence, save where it can show that it had in place adequate procedures designed to prevent its employees and other relevant persons from engaging in the relevant misconduct⁷; or
it could expand the current Money Laundering Regulations and Fraud Act model and legislate for direct criminal liability for firms and senior managers in circumstances where an offence was committed with the "consent, connivance or neglect of a senior manager".

Failure to Prevent

This approach would be likely to make it easier to prosecute corporate organisations for criminal activity. While the offences are yet to be fleshed out in full, it is likely that they will follow the legislative framework applied to the current failure to prevent offences. There will need to be a predicate substantive offence in each case, which in turn triggers the strict liability offence. In essence, it would remove the requirement to prove criminal intent on behalf of the corporate organisation, provided the criminal offence is committed for its benefit, or to benefit another person to whom services are provided on its behalf. A corporate organisation will be able to rely on a defence if it can prove that it had adequate controls and measures in place to prevent the offence.

Consent, connivance or neglect

The alternative approach would not create the starting point of a strict liability offence and therefore a prosecuting authority would have to evidence the "consent, connivance or neglect" of the officer charged. However, it would include liability where there was evidence that an offence was committed with the knowledge, and potentially authorisation, of the senior manager, where a blind eye is turned, or where there is negligence which has enabled the criminal offence to take place. This is likely to have some overlap with the failure to prevent offence, where a prosecuting authority seeks to rely on a failure of that senior manager to either put in place, implement or effectively monitor effective systems and controls where they had a responsibility to do so.

What could the penalties be?

Whilst nothing has been decided, it is notable that, for each of the existing failure to prevent offences, the penalties which may be imposed include an unlimited fine and/or lengthy custodial sentences.

Examples of recent financial penalties which firms should bear in mind include the NatWest conviction in respect of money laundering control failures, which resulted in a £264 million penalty⁸ and the failure to prevent bribery conviction of Petrofac which resulted in a fine of £47 million⁹.

Will it make a difference to firms?

It is worth considering whether these offences go beyond the current regulatory framework or if they merely increase the regulatory burden on corporate organisations. The current money laundering framework is extensive and imposes obligations via the Money Laundering Regulations (MLRs) on various entities operating within risk sectors.

Those organisations which are either regulated and authorised by the FCA or PRA, or are registered with HMRC under the Money Laundering Regulations, are already required to have adequate controls and measures in place – so the creation of this new offence is likely to prompt fundamental questions as to what more is needed. In reality, however, the regulatory burden may be minimal for these organisations as they are likely to have, or should have, appropriate AML measures already in place. Indeed, those that did not have such measures arguably should have already received a wake-up call following the FCA's criminal prosecution of NatWest last year.

For firms, the costs, time and practical challenges they face in ensuring compliance with MLRs are widely known, and one indirect impact of the proposed new offences may create challenge in recruiting and retaining competent Money Laundering Reporting Officers (MLROs), who will no doubt consider themselves further exposed due to the strict liability nature of the proposed offence. Both financial and non-financial services organisations may well find themselves paying higher remuneration packages to fill these roles.

One notable difference between existing liability under the MLRs and the proposed new failure to prevent offence is that the latter would be unrestricted and apply to all corporate organisations, regardless of the sector in which they operate. While at first this may seem to be a fundamental change, in reality those sectors operating in non-high-risk areas are likely to have to evidence far less strict controls to be compliant – nonetheless, controls should be considered and documented.

Of course, firms, and in particular regulated firms, are also obliged to have broader financial crime controls in place to prevent and detect financial crime, including fraud, anti-bribery and corruption, and sanctions. Outside the regulated sector, firms should have already considered their financial crime controls, although given the lack of direct regulation of those controls, we recognise that these are often less developed, and issues may only be detected where a crystallised risk event occurs – which may be too late under the new regime.

Getting ready for the change?

We anticipate that the government will publish guidance on what prevention procedures an organisation can put in place, as was previously carried out in relation to the Criminal Finances Act 2017. This is likely to be an incredibly difficult task given the different risks faced by firms operating in different sectors, and it is arguable that, rather than raising standards, any setting out of minimum expectations may risk a reduction in qualitative, risk-assessed and targeted controls to a tick-box exercise to meet minimum requirements. It may well be, therefore, that any guidance issued is necessarily very high level.

Our clients have been asking whether there are any steps that they should be taking now, in anticipation of any change to legislation. In our view, it would be good practice for firms to consider the potential change as part of their horizon-scanning and factor in a review of their financial crime controls in the round to ensure that they are appropriate, proportionate, tailored to the risks of the business, implemented and robust. A holistic review should consider controls in place to prevent and detect bribery and corruption, money laundering and counter terrorist financing, fraud and financial crime, and sanctions breaches, and should include both training programmes and whistleblowing arrangements.

If you require further assistance or would like to discuss the likely implications of the proposed new offences and how this may impact your firm, please contact Katharine Harle, Sarah-Partridge Smith or a member of the Dentons Regulatory and Investigations team. To discuss your sanctions control framework, please contact Roger Matthews.