Economic Crime and Corporate Transparency

Committee (5th Day)

Amendment 84A

84A: After Clause 180, insert the following new Clause— “Failure to prevent fraudFailure to prevent fraud (1) A relevant body which is a large organisation is guilty of an offence if, in a financial year of the body (“the year of the fraud offence”), a person who is associated with the body (“the associate”) commits a fraud offence intending to benefit (whether directly or indirectly)—(a) the relevant body, or(b) any person to whom, or to whose subsidiary, the associate provides services on behalf of the relevant body.(2) But the relevant body is not guilty of an offence under subsection (1)(b) if the body itself was, or was intended to be, a victim of the fraud offence.(3) It is a defence for the relevant body to prove that, at the time the fraud offence was committed—(a) the body had in place such prevention procedures as it was reasonable in all the circumstances to expect the body to have in place, or(b) it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place.(4) In subsection (3) “prevention procedures” means procedures designed to prevent persons associated with the body from committing fraud offences as mentioned in subsection (1).(5) A “fraud offence” is an act which constitutes—(a) an offence listed in Schedule (Failure to prevent fraud: fraud offences) (a “listed offence”), or(b) aiding, abetting, counselling or procuring the commission of a listed offence.(6) For the purposes of this section a person is associated with a relevant body if—(a) the person is an employee, agent or subsidiary of the relevant body, or(b) the person otherwise performs services for or on behalf of the body. (7) Whether or not a particular person performs services for or on behalf of a relevant body is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the body. (8) Where a relevant body is liable to be proceeded against for an offence under subsection (1) in a particular part of the United Kingdom, proceedings against the body for the offence may be taken in any place in the United Kingdom.(9) Where by virtue of subsection (8) proceedings against a relevant body for an offence are to be taken in Scotland—(a) the body may be prosecuted, tried and punished in a sheriff court district determined by the Lord Advocate, as if the offence had been committed in that district, and(b) the offence is, for all purposes incidental to or consequential on the trial or punishment, deemed to have been committed in that district.(10) A relevant body guilty of an offence under this section is liable—(a) on conviction on indictment, to a fine;(b) on summary conviction in England and Wales, to a fine;(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.(11) In this section—“relevant body” means a body corporate or a partnership (wherever incorporated or formed);“sheriff court district” is to be read in accordance with the Criminal Procedure (Scotland) Act 1995 (see section 307(1) of that Act).(12) In this section “financial year”—(a) in relation to a UK company, has the meaning given by the Companies Act 2006 (see section 390 of that Act);(b) in relation to a relevant body that is not a UK company means—(i) any period in respect of which a profit and loss account of the relevant body is required to be made up (by its constitution or by the law under which it is established), whether that period is a year or not, or(ii) if the body is not required by its constitution or the law under which it is established to draw up a profit and loss account, a calendar year.”Member’s explanatory statement This clause together with new clauses (Fraud offences: supplementary) to (Failure to prevent fraud: miscellaneous), Lord Sharpe of Epsom’s amendments at page 173 lines 21, 33, 36 and 37 and page 315 line 20 and new Schedule (Failure to prevent fraud: fraud offences) provide for a new offence of failure to prevent fraud.

My Lords, in moving government Amendment 84A, I will also speak to other government amendments in this group, which create a failure to prevent fraud offence. I first thank the many noble Lords in Committee today for their continued engagement on these amendments and corporate criminal liability more generally. These conversations have been robust but constructive, and I am sure that we will have a lively debate today.

Let me start by reiterating the Government’s commitment to reform of corporate criminal liability— CCL—and to tackling fraud. That is why, in 2017, the Ministry of Justice issued a call for evidence; then, in November 2020, the Government commissioned the Law Commission to explore further this area. The Law Commission report was published in June last year. The Government have been reviewing the report and its extensive consultation and working with relevant stakeholders, including prosecuting agencies, to explore options for reform. My ministerial colleagues and I are of course also grateful for the extremely helpful insight and input from various noble Lords in this House and Members in the other place.

The tabling of these amendments to introduce a new failure to prevent fraud offence is a major and tangible demonstration of action. This offence will crack down on fraudulent practices by corporations. It is one part of the Government’s wider fraud strategy, due for publication shortly. Under the new offence, a large organisation will be liable to prosecution where fraud was committed by an employee, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. The new offence will help to protect victims and cut crime by driving a culture change towards improved fraud prevention procedures in organisations and by holding organisations to account through prosecutions if they profit from the fraudulent actions of their employees. We are giving law enforcement and prosecutors the powers they have asked for to tackle organisations that defraud consumers, other businesses, investors and the taxpayer.

84AA: After Clause 180, in subsection (1), leave out “which is a large organisation” Member’s explanatory statement This amendment, along with consequential amendments to Amendment 84C, would extend the Government’s failure to prevent offence to all relevant organisations regardless of size. Instead of allowing the Government to amend or remove the applicability to large organisations, these amendments would apply the offence to all organisations by default, with the Government able to restrict it to large organisations by affirmative resolution.

My Lords, I rise to speak to the amendments in my name. As the Minister has set out, amendments were brought forward in the other place on Report by Sir Robert Buckland and Sir Bob Neill. The Government undertook to produce their own amendments, which they have indeed done. We should recognise that these amendments, on failure to prevent fraud, are a positive move forward, but they are overdue. Without sounding too churlish, had this offence been in place at the time of the financial crisis, the authorities could have had effective prosecutions during, for example, the Libor and Euribor scandals. So, good news, but there are some qualifications, as set out in my amendments.

The government amendments have a considerably reduced scope in limiting it to large businesses, which was certainly not the intention of the Buckland/Neill process in the other place. As we have heard, there is an exemption for small and medium-sized businesses, but it does not address the fact that SMEs are just as much, if not more, at risk of fraud as big companies. It is just as important to encourage them to have the right procedures in place as it is large companies.

Hence my Amendments 84CA, 84CB and 84CC. Together, they seek to amend the Government’s amendments, extending their failure to prevent offence to all relevant organisations regardless of size. Instead of allowing the Government to amend or remove the applicability to large organisations, these amendments would apply the offence to all organisations by default. However, the Government would be able to restrict it to large organisations by a subsequent affirmative resolution, if experience required them to do so.

The Minister said that small and medium-sized enterprises had been excluded to avoid a disproportionate burden on them. It would be useful for him to explain on what basis that assessment has been made and what evidence there is to support that. We have not seen it, so it would be very useful to know. In my view and that of others, the carve-out for SMEs is short-sighted and unnecessary. The Law Commission did not accept arguments for thresholds to apply to failure to prevent offences in its June 2022 options paper and the House of Lords rejected exemptions for SMEs when scrutinising the Bribery Act 2010. SMEs are not excluded from AML or the National Security and Investment Act, so why have the Government taken this view in this case?

My Lords, I thank my noble friend Lord Sharpe for the courtesy he has shown to me and other noble Lords in holding meetings, along with his officials, to explain the Government’s case on failure to prevent and the adjustment of the law of corporate liability. It has been very helpful to have some understanding of where they are coming from and where they intend to go. It is fair to say that he was more forthcoming in those meetings than he was in providing an explanation for the SME carve-out this afternoon. I thank not only him but the noble Lord, Lord Fox, for tabling his amendments, which I support, and for his mention of the amendments I have tabled.

The amendments that I have tabled are exactly the same, almost to the semicolon, as amendments that I have tabled not only in this Parliament, since the 2019 general election, to Bills dealing with economic and financial crime, but also to Bills that I spoke to when a Member of the other place. I have taken an interest in how we deal with economic crime since I became the Solicitor-General in 2010. I appreciate that that was a long time ago and that my noble friend the Minister probably did not have a particular interest in the subject all that time ago. None the less, I appreciate that many will find what I have to say unoriginal, not least because I have said it so many times before but also because it aligns with what others on all sides of the House and in both Houses have been advocating for some little while.

I will first deal with the SME carve-out, which is provided for in one of the government amendments. I suppose it is fair to say that half a loaf is better than no loaf and that a bird in the hand is better than two in the bush. However, after nearly 15 years, following the banking crash of 2008-09, the subject of economic crime and corporate misfeasance has been if not on the top of everyone’s agenda every day then certainly close to it. For the Government to come up with a carve-out in the way that they have—bear in mind that we are only talking about failure to prevent fraud at the moment—is disappointing.

Two or more of those.

My noble friend Lord Leigh is entirely right: you have to pick two of this lucky trio and you are away.

One only has to think briefly about start-up businesses and the pressures that they come under when they may have very few employees and a turnover of much less than the Government indicate to realise that the danger of an associated person committing an act of fraud is not predicated on the size of the company. It is also possible to say that there will be people who will so construct their corporate affairs that each bit of their corporate existence is by some happenstance just below or well below the Amendment 84C cut-offs.

In any event—I have bored my noble friend the Minister with my feeble sense of humour on a number of occasions—there is no similar cut-off for failure to prevent bribery under the Bribery Act 2010 and no equivalent cut-off under the Criminal Finances Act 2017. Although my noble friend tells me that, after much consultation and because they do not wish to impose unnecessary burdens on business, the Government have come up with these numbers, as I think the noble Lord, Lord Fox, indicated, I have yet to hear a reason why they have landed on those figures or why as a matter of principle they have chosen to have a carve-out at all.

Here comes my feeble joke, so stand by. A burglar of five foot four should be prosecuted just as vigorously as a burglar of six foot six. There is no carve-out for small people committing crimes and there should be no carve-out for small businesses that fail to prevent crimes. When the prosecuting authorities—I look with respect at the noble Lord, Lord Macdonald of River Glaven—come to consider whether it is in the public interest, assuming that there is evidence, to initiate the prosecution, no doubt one of the factors that they will take into account is whether it is in the public interest to pursue that prosecution, bearing in mind the small size of the company and the mitigating steps that it took to do its best to avoid an associated person committing a criminal offence.

One looks at the guidance to the Bribery Act 2010. Throughout that document, there are references to proportionality and essentially, in longer words, to common sense. Is it common-sensical to prosecute a company, no matter what its size, that has done its best to avoid associated people committing crimes of one sort or another? Here we have, out of the blue, not on the recommendation of the Law Commission or of any other sentient organisation that I can think of, a decision to produce the carve-out in Amendment 84C. It seems to me that the Government are missing a trick here and that, in pursuing that amendment, they will send a message, in the modern jargon, to all sorts of bad actors that the way to get around the tedium of complying with the law is just to have a very small company, or at least one that employs only 249 people. I express my deep disappointment that the amendment is before us, just as my noble friend is no doubt disappointed that he has to listen to me talking about it.

The second area of concern is that, although there is some acknowledgement in the Government’s set of amendments of criminal offences other than fraud, we are way short of the list that can be found in the schedule to the Crime and Courts Act 2013, where there are, as I indicated in an earlier session in Committee, approximately 50 criminal offences that have to do with economic crime. Some are as simple as theft and some go right the way through, including fraud, to matters such as false accounting. But in that list are plenty of criminal offences that would be appropriate to add in to the “failure to prevent” regime. If we do not do it now—it is unlikely that there would be a vote in this Committee—I fear that the subject will be revisited on Report, where a Division may loom rather more obviously. I have a suspicion that a well-advised House of Lords might find it convenient to vote in favour of more aggressive reform in this area.

I shall not go on for too long about the principle behind failure to prevent. I have mentioned the SME carve-out, which I think is a mistake, and the limited number of criminal offences covered in the Government’s case by failure to prevent. What we need to be more sensible about is the fact that my noble friend Lady Morgan and her committee have produced a thoroughly thought-through and valuable report, explaining why the Government are not going fast enough and far enough and why this is timely—and, indeed, why we are late—and why this Parliament should grasp this opportunity in its last 18 months or so to move things along. There are plenty of people out there who will be itching to see that we take only a half or a quarter of a step, which would give them that freedom to misbehave. It is time that we did something about it.

I accept that my amendments dealing with the adjustment of the law on corporate criminal liability are there as a wish—I have absolutely no doubt that they will not find the Government’s approval—but they are also proposed as a spur to encourage the Government to make proper, timely and expeditious use of the failure to prevent regime. I know very well that the Victorian identification principle for establishing corporate liability worked well in the 1830s, 1840s, 1850s and 1860s, when most businesses were small in terms of the number of directors—the people who made up the directing mind and will of the company—so it was not as difficult then as it is now, with vast international companies with regional, national and continental boards, to work out where the directing mind and will is to be located. In the Victorian era, you would probably get two or three men—very often two or three brothers—who essentially ran the company, and they were the directing mind and will. If they oversaw a criminal act by the company, it was easy to nail the company.

In 1912, the United States decided that the directing mind and will—the identification principle—was no longer apt to deal with corporate criminal liability and it went across to a vicarious liability system. All things being well, I would advocate support for that system, but we are not going to get that politically and I do not think the legal establishment is yet ready for a vicarious liability system. So the failure to prevent regime is a compromise between Victorian criminal law and the American law of 1912.