49: After Clause 30, insert the following new Clause—
“Review of penalties for insider dealing and financial services offences
(1) Within six months of the day on which this Act is passed, the Treasury must commission a review of penalties for insider dealing and financial services offences (“market abuse”).(2) The review under subsection (1) must include statistics relating to—(a) the perceived level of market abuse,(b) the number of arrests for market abuse, and(c) the number of successful convictions for market abusein each of the last five financial years.(3) The review under subsection (1) must also contain a summary of steps being taken by Her Majesty’s Government to ensure market abuse offences are identified and punished. (4) Within one month of the review under subsection (1) being completed, the Treasury must—(a) lay the document before both Houses of Parliament, and(b) make a statement responding to the review, including a declaration of whether and how the Treasury will act to—(i) increase the resources available to those charged with investigating market abuse,(ii) modernise and reform the United Kingdom’s suspicious activity reporting regime, and(iii) ensure greater consistency in the intensity of supervision across different parts of the financial services sector.(5) After the requirements under subsection (4) have been met, the Treasury may by regulations enact such reforms of market abuse provisions that are identified in the review.(6) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This probing amendment seeks to understand what steps the Government is taking to improve identification and punishment of market abuse. It asks for the Treasury to outline proposals for enacting recommendations from a 2018 evaluation by the Financial Action Task Force, the global money laundering and terrorist financing watchdog.
My Lords, we now come to the section of the Bill that introduces measures to deter financial crime, whether insider dealing or money laundering. None of us in this Grand Committee can be content with this country’s attempts to limit financial crime. Headlines that cry that London is the “money laundering capital of the world” may embody journalistic exaggeration, but, sadly, they are not that exaggerated.
I will first speak to Amendment 50 in my name and then turn to Amendment 49 in the names of the noble Lord, Lord Tunnicliffe, and myself. I admit that Amendment 50 is constructed in a rather peculiar way, and I am grateful to the clerks for that ingenuity and for allowing me to make what I believe to be an important point concerning money laundering legislation.
The measures in Clause 31, to which Amendment 50 refers, derive from the EU fifth money laundering directive and the UK response to the examination of UK anti-money laundering measures by the Financial Action Task Force. An important outcome of the FATF examination was Her Majesty’s Government at last announcing measures to deal with the scandal of Companies House.
One of the political puzzles of the past 10 years is that Conservative Prime Ministers have regularly referred to the register maintained by Companies House as a gold standard, a beacon of openness and an example to the rest of the world. In fact, the manner in which the register is constructed is the key element in those headlines that describe London as the money laundering capital of the world.
The scandal derives from the fact that Companies House does not verify the beneficial ownership of companies registered there. Companies House is a library in which any shameful book can be deposited. There are so many shameful books that have been deposited, and that is a matter of record. Just to take a couple of the more colourful examples, the Mafia managed to set up one UK firm with a director named as Ottavio Il Ladro di Galline—Ottavio the chicken thief. His occupation was listed in Companies House as truffatore—fraudster. Another company had an address that translated as “Street of the 40 Thieves”. At the moment, the Companies House register includes almost 4.5 million UK businesses, but it operates in much the same way as it did 150 years ago. That means that criminals have been able to set up seemingly legitimate shell companies without even the most basic identity checks.
My Lords, it is a pleasure to speak on day four of proceedings in Committee on the Financial Services Bill. In doing so, I declare my interests as set out in the register.
I want to speak to Amendment 51, standing in my name. The purpose of this new clause can be simply stated: what is the purpose of the KYC—“know your customer”—requirements? It is one of the top TLAs—three-letter acronyms—in financial services, but is it fit for purpose? Does it achieve what we would want? Does it feel modern in outlook? Does it feel inclusive? It not only goes to the heart of a number of other amendments in this group; it really is a key underpin, and the adoption of this amendment would transform our KYC system and approach in this country. We have to ask those questions: what do want KYC for; what does it need to contain; when do we need it, and in what form?
Amendment 51 seeks, on passage of the Bill, a review of KYC requirements that considers a number of elements in order to seek to transform our approach to KYC. My first point concerns the question of inclusion, and I draw this broadly. Whom do we want to come within, in what form and through what means? For example, asking for paper documentation seems not only outmoded but somewhat exclusionary. Where is the level of efficiency in the current provisions? We have the ability to have “atomic settlement”. The current KYC feels a million miles away from a settlement in a millionth of a second. My final point addresses exactly that question of outdatedness. We have one of the greatest financial services sectors in the world. The big bang in the 1980s revolutionised the City of London, but it goes much beyond that when we consider our role in fintech, not just in London but across the UK, and the Kalifa review on that very subject, published only last week. We are leading-edge in so many ways when it comes to our financial services. KYC in no sense reflects, represents or leads that technological position.
My Lords, I speak to Amendment 51A, which invites the Government to reduce the number of anti-money laundering supervisors so that we can have consistent application of standards and effective regulators.
Dirty money is a huge danger to every country on this planet. The full extent of dirty money sloshing around in the UK is not known, although some authorities estimate that around £100 billion a year may be laundered through our banking and financial system. Transparency International’s report, Hiding in Plain Sight, examined 52 cases of global corruption and noted that despite a plethora of form-filling and regulators, some 766 UK-registered business entities were involved in laundering stolen money.
The threat of money laundering to national security is well documented in the Intelligence and Security Committee’s July 2020 report, Russia, which stated that
“the arrival of Russian money resulted in a growth industry of enablers—individuals and organisations who manage and lobby for the Russian elite in the UK. Lawyers, accountants, estate agents and PR professionals have played a role, wittingly or unwittingly, in the extension of Russian influence, which is often linked to promoting the nefarious interests of the Russian state.”
Large sums of dirty money cannot be moved or concealed without the active involvement of accountants, lawyers, and financial experts. These enablers must be tackled, and without effective regulation that is not possible.
However, the UK’s fragmented regulatory system for dealing with money laundering is highly deficient. There are 25 anti-money-laundering supervisors. These include the Financial Conduct Authority, HMRC, the Gambling Commission and 22 other bodies, mainly trade associations connected with accountancy, audit, bookkeeping and legal and notarial services. The list of 22 includes bodies such as the Association of Accounting Technicians, the Association of International Accountants, the Institute of Certified Bookkeepers, the Institute of Chartered Accountants in England and Wales, the Law Society and sundry other trade associations. Having twenty-five supervisors results in duplication, waste, inefficiency, poor co-ordination, inconsistency and obfuscation.
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The multiplicity of regulators is wasteful, as it results in duplication and does not lead to a common application of standards. If OPBAS is considered necessary to oversee the regulatory practices of 22 trade associations, what makes the Government think that the practices of the other three AML supervisors—HMRC, the FCA and the Gambling Commission—are aligned? Is there any consistency among the regulators? In the interest of consistency, will the Government bring the other three AML supervisors under OPBAS’s jurisdiction as well? Perhaps the Minister could inform us.
I am sure that the Minister will defend the current state of affairs and tell us that the trade associations have somehow turned a new leaf and are now different from what they used to be. But the fact remains that the professional bodies have no independence from their members and cannot deliver robust and effective regulation. Just how many more supervisors of the supervisors will the Government create? Even if they do, they still cannot change the Nelsonian organisational culture of the accountancy and trade associations. The best way to move forward is to reduce drastically the number of AML supervisors, which is what Amendment 51A invites the Government to do.
My Lords, I am grateful to my noble friends and other noble Lords who signed Amendments 81, 82 and 83, which, with Amendment 84, take our debate in a slightly different direction from the other amendments in this group. I also thank my noble friend Lady Penn and the Economic Secretary, John Glen, for meeting me last week to discuss my amendments and for his letter received at 11 am. As can be seen from the names of those noble Lords who signed these amendments, they are driven not by party-political motives but by a desire to make the law of corporate criminal responsibility fit for the modern age.
Reform of this aspect of the criminal law is overdue. The Government accept that. I will raise the salience of this question and remind this Government, as I reminded their predecessors, that the current state of the law does not take account of modern company practice. The difference between us in substance is not that there should be reform but what sort of reform and when. I am glad to have this opportunity to explain my concerns and I apologise in advance to noble Lords if, in speaking for too long, I try the patience of the Grand Committee.
This is not the first time that I have tried to encourage reform of corporate criminal liability. I was persuaded more than 10 years ago when studying American law that the way we deal with corporate criminal liability is outdated. I was then trying to work out how best to introduce deferred prosecution agreements, or DPAs, into this jurisdiction—they were enacted via the Crime and Courts Act 2013—and I became convinced that, in an era of large, international companies with hundreds of thousands of employees, with main, local and regional boards in many different geographical locations and with turnovers sometimes larger than the GDPs of some small countries, what had worked in the 19th century was no longer suitable in the 21st.
A company, although a separate legal personality, is an artificial construct and can commit a criminal offence that requires, for example, proof of dishonesty only through the agency of a human. In 1915, the then Lord Chancellor, Viscount Haldane, giving judgment in the case of Lennard’s Carrying Co., said that a corporation is
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When someone steals, cheats or commits bribery in the United Kingdom, there is no problem, assuming a sufficiency of evidence, in prosecuting them for that crime. When a company commissions or benefits from a crime committed by an employee, subcontractor or third party, our law is weak. These gaps in corporate criminal law have long yawned before us and urgently need to be addressed, so that companies can be encouraged to improve their behaviour or be prosecuted effectively. The burden is surely now on the Government to show why these amendments should not be made through this Bill.
My Lords, I remind the Committee of my interests as in the register. I have two amendments in this group, one on facilitation of financial crime, which is also signed by the noble Lords, Lord Hodgson of Astley Abbotts and Lord Rooker, and my noble friend Lord Thomas of Gresford, and a second amendment relating to whistleblowers.
There is much else of merit in this group. In particular I support the comments of the noble Lord, Lord Eatwell, concerning catching, and willing the means and money to catch, perpetrators of financial crime. While I have hounded the noble Lord, Lord Callanan, on this issue, I do see the point of pressing the Treasury on funding.
My amendment on the facilitation of financial crime is also about the Treasury willing the means. It is similar to the amendment tabled by the noble and learned Lord, Lord Garnier. We are not in competition; there are more noble Lords wishing to show interest in this topic than can fit on a single amendment. Unfortunately, we did not get to this amendment on Monday and my noble friend Lord Thomas of Gresford is unable to speak today. He was deeply engaged in the Bribery Act provisions, so his contribution will be missed.
In addition to the measures outlined by the noble and learned Lord, Lord Garnier, my amendment, Amendment 84, has a final paragraph that deals expressly with the conviction of a director or other manager who is proved to be responsible for the systems failure of the corporate body. A facilitation or failure to prevent amendment has a particular resonance in this Bill for two reasons: first, because the FCA has a specific remit to prevent the use of the financial system in financial crime; and secondly, because the Treasury, the sponsor of this Bill, has already availed itself of the mechanism with regard to tax evasion. As a believer in the mechanism, it seems appropriate for Treasury to avail itself of it again in relation to the financial system.
My Lords, I shall speak to Amendment 136, which is in my name. I tabled the amendment because of concerns about the lower levels of responsibility placed on appointed representatives and the increased risk of poor financial advice that this poses.
The objective of the senior managers and certification regime to influence an individual’s behaviour by making them personally accountable to the regulator is one that I agree with and it was the correct response to the culture that had arisen in the City of London prior to the financial crash in 2008. I know that some Members of this House have criticised the application of the senior managers and certification regime, or lack of it, by the FCA, and I agree that it is worrying. However, I do not want to comment on the effectiveness of the SMCR but to remedy an anomaly that exists within the current framework.
The SMCR currently applies to directly regulated financial advisers, yet it does not extend to those who are appointed representatives. This anomaly means that, while a directly regulated adviser carries a personal responsibility for the quality of the advice they provide to their customer, no such responsibility is incumbent upon the adviser who is an appointed representative. This is despite the reality that a customer seeking financial advice is unlikely to know the difference between the two types of adviser and the possible effects that this might have on the quality of the advice they receive.
The requirements of the SMCR mean that a directly regulated adviser faces higher costs and carries greater personal responsibility for their actions than they would if they were an appointed representative, despite doing the same job. I want to be clear that this is not to say that those advisers who are appointed fail to provide sound advice. As with most instances of malpractice within the financial advisory sector, the activity of a minority will, by virtue of their actions, tarnish the reputations of the majority of diligent advisers—whether directly regulated or appointed representatives. However, it is self-evident that lower levels of regulatory responsibility increase the risk of poor advice.
My Lords, I apologise for the inadvertent interruption to the Committee’s proceedings on Monday. I declare my interests, as shown in the register.
I have sympathy with the intentions of all the amendments in this group. I have added my name to Amendment 51, in the name of my noble friend Lord Holmes. I also support Amendment 84, in the name of the noble Baroness, Lady Bowles. I have added my name to Amendments 82 and 83 in the name of my noble and learned friend Lord Garnier. All these amendments relate to confidence in our financial system, whether of customers using financial services or of corporates—both domestic and overseas—engaging with British firms in our financial services sector. Both of these are important.
In his introduction to Amendment 51, my noble friend Lord Holmes clearly explained the need for a review of the “know your customer” regulations, and I agree with him. That, hopefully, could help to improve customers’ confidence in the suitability of products sold to them. One example would be the sale of annuities by firms without having previously asked what state of health the customer was in and whether the annuity they were being quoted was at all suitable for them. Another would be credit companies extending credit without necessarily knowing the credit position of the customer. I do hope that the Government may agree to a review, whether in the context of the Bill or not.
Amendments 82 and 83, so comprehensively and expertly spoken to by my noble and learned friend Lord Garner, would strengthen corporate criminal law to ensure that companies do not profit from criminal acts committed by their employees. These companies need to have much stronger reasons and incentives to ensure that crimes are avoided, rather than blind eyes being turned, so that we have a zero-tolerance approach for corporates. These amendments, in the name of the noble and learned Lord, supported by the noble Lords, Lord Rooker and Lord Faulks, demonstrate this. A change to corporate practice is long overdue, so that senior managers in financial services firms will themselves change their procedures to try to prevent employees committing financial crimes and will install adequate processes to demonstrate that they have taken this issue seriously. I am grateful to my noble and learned friend Lord Garnier for raising this issue.
My Lords, this has been a fascinating debate on a fascinating part of the Bill. I know that progress has been slow in Committee and I certainly do not intend to speak for too long. In fact, most of what I was going to say has been covered. I will make a few comments in support of Amendment 84, but first, I point out that I certainly support the speeches of my noble friends Lord Eatwell and Lord Sikka. My noble friend Lord Eatwell made the point about the history of dealing with this in Companies House. I remember reading about Kevin Brewer.
I also remember the remarkable speech in, I think, September 2015 in Singapore by David Cameron when he was Prime Minister; it foreshadowed a lot of change in this area regarding access to beneficial ownership, which seems to have been buried. It was absolutely solid, but obviously it was not supported by those who followed him. It is certainly worth looking back on.
The other issue is the reluctance regarding the financial intelligence unit. It is almost the same as the Home Office’s reluctance to institute an inquest when we had the murder by polonium in London. We had an inquest in that case only after the family had been to court. The Home Office’s defence for having no inquest was the effect on international relations. The reluctance to operate on money laundering is exactly the same. I am sure that the Minister will not admit that—he probably has not been given the evidence for it—but the suspicion has to be that the effect on international relations is slowing matters down.
My noble friend Lord Sikka made the point on his Amendment 51A, which I much support, about the trade bodies and the anti-money laundering organisations. It is exactly the same in property transactions. I remember a Bill from a couple of years ago, when a dozen or more organisations were involved in checking money laundering property transactions and they were all trade bodies. Trade bodies will not operate that way. They exist only because of income from their members. It is exactly the same situation. Now we have regulation in secret. That is the real danger: it is regulation in secret by bodies that cannot be checked on.
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Consider the case of Mr Kevin Brewer. A few years ago, he launched a campaign to expose how easy it is to fake British company records. He decided in 2013 to register government Ministers, including Vince Cable—the then Business Secretary—and the noble Baroness, Lady Neville-Rolfe, as the directors and shareholders of fictitious companies. The idea was to prove how anyone could form a company in the UK in any name or address that they wished. He used an online service offered by—you guessed it—Companies House. He then owned up. As a result, he was prosecuted by Companies House and fined £12,000. The Government issued a triumphant press release, which is still available on the government website, headlined:
“UK’s ‘first ever’ successful prosecution for false company information”.
It is the only prosecution in 150 years.
A study published by Transparency International in November reported that British shell companies were implicated in nearly £80 billion of money laundering scandals. On top of that, the anti-corruption group Global Witness reported in 2019 that more than 336,000 companies did not disclose their beneficial owner. It also found that more than 2,000 company owners were actually disqualified directors—people who had previously failed to meet their legal responsibilities and were banned from directorships in the future. A further study by, among others, my colleague, Professor Sharman of Cambridge University, found that it was impossible to establish a shell company in the Cayman Islands, the Bahamas or Jersey but it was easy to do it in London.
It should be clear that an open register, as we have in the UK, is no protection against financial crooks. Protection is provided only by verification and regular reverification of beneficial ownership by skilled forensic accountants. At last, in September of last year, under continuing pressure from the Financial Action Task Force, the Government published a document entitled Corporate Transparency and Register Reform.The Minister, the noble Lord, Lord Callanan, wrote in his foreword to the document that Companies House procedures, or lack of them, resulted in,
“Shell companies … set up for no other purpose than to launder the proceeds of crime – committed both here and overseas.”
The noble Lord, Lord Callanan, recommended verification of company data. However, the document contained an ominous sentence:
“This document sets out the actions the Government intends to take in response, subject to funding being agreed”.
Amendment 50 would simply require the Government to keep Parliament up to date with what is happening. After all, this is the biggest money laundering scandal to which the UK has been subject. When will this country acquire an honest register? How much funding has been agreed? Is it enough? When will the entire Companies House register—the whole register—be fully verified? I hope that the Minister will be able to tell the Grand Committee that initial funding has already been agreed, that future funding will be forthcoming and, to ensure that the momentum is sustained, that the Government will be happy to accept this amendment and report regularly to Parliament on the progress towards a fully verified register of beneficial ownership. The Government owe that to everyone who has been betrayed by the lax approach to money laundering.
I now turn to Amendment 49, which takes a wider perspective, seeking a thorough review of Her Majesty’s Government’s efforts to limit insider trading and market abuse, so providing a firm foundation for the measures outlined in Clauses 29 and 30 of the Bill. The rationale for such a review can be stated in brief as this: what is the point of Clause 30; what is the point of increasing the penalties if there are almost no convictions? Hundreds are prosecuted every year for fiddling a few quid from social security; you can count the annual number of prosecutions for crimes in high finance on the fingers of one hand. Consider this comment, published in the Financial Times on 3 November 2019:
“The FCA has previously been accused of taking a light touch approach to white collar crime. A freedom of information request showed the regulator prosecuted just eight cases of insider dealing, securing 12 convictions, between 2013 and 2018.”
There were 12 convictions in five years.
It is not as if there is no financial crime about. Consider this further story, published in the Financial Times on 10 September last year:
“Britain’s financial regulator”—
the FCA—
“is still working on a high volume of investigations into potential wrongdoing by firms and individuals, but delivering a relatively low proportion of clear outcomes at an increasing cost, according to new data.”
The Financial Times continues:
“the Financial Conduct Authority’s annual report provided details of its enforcement actions in the year to March 31 2020, and showed 185 cases were concluded in that period, leaving another 646 ongoing. In the previous year, 189 cases had been closed, leaving 647 open. However, despite this persistently high caseload, only 15 investigations resulted in financial penalties being handed down in the latest 2019-20 period — down on the 16 cases that led to fines in the two previous years.”
So what is going wrong? An important clue is to be found in the section of the 2018 report of the Financial Action Task Force dealing with the substance of UK measures to deal with money laundering and the financing of terrorism. The report states that, with respect to the UK Financial Intelligence Unit, which is the financial division of the National Crime Agency:
“The UK has pursued a deliberate policy decision to limit the role of the UKFIU in undertaking operational and strategic analysis. The UKFIU suffers from a lack of available resources (human and IT) and analytical capability which is a serious concern considering similar issues were raised over a decade ago in the UK’s previous FATF mutual evaluation. The limited role of the UKFIU calls into question the quality of financial intelligence available to investigators.”
Is it not the case that the surest way to deter criminal behaviour is to increase the likelihood that the criminal will be caught? I ask again: what is the point of increasing sentences while, at the same time, reducing the capacity to catch the criminals? When the Minister replies to this debate, will she explain why:
“The UK has pursued a deliberate … decision to limit the role of the UKFIU in undertaking operational and strategic analysis”?
Surely now is the time for a thorough investigation into the Government’s persistent failure to prosecute crime in our financial services industry. Accepting Amendment 49 will be a start. I beg to move.
If this amendment were to be seriously considered, if not adopted, we could look at different means of ensuring KYC. We could look at attributes and elements that would assist and give real-time assurance, giving elements to those who need them—things which operate absolutely in real time and are to be relied on, rather than bits of paper, bits of supposed identification, which hark not from a 20th-century but a 15th-century approach to identification. That brings me, finally, to the whole question of digital-distributed ID, which I will speak on later in Committee. That goes to the heart of so much of solving the KYC puzzle. If we could deliver an effective and efficient distributed ID system for individuals and corporate entities, we would transform the position regarding KYC.
I look forward to hearing the comments of my noble friend the Minister on Amendment 51.
In September 2016, the Committee on Standards in Public Life, in its report, Striking the Balance: Upholding the Seven Principles of Public Life in Regulation, stated that the seven principles of public life apply to all regulatory bodies, and the Government agreed. These include independence and public accountability, but for some reason the Government do not apply these principles to anti-money laundering supervisors. Accountancy and law trade associations have no independence from their members. In any regulatory system, there is a concern that regulators would be captured by those who are to be regulated, but that is the starting point in AML supervision by trade associations.
In October 2011, the Government announced that they would make quangos more democratically accountable, but they have failed on that front too. Of the 25 AML supervisors, 22 are not subject to the freedom of information law, even though they are an explicit arm of the state. Perhaps the Minister will be able to explain this anomaly. Their exclusion from FOI means that the public have no opportunity to scrutinise their practices.
The Government’s faith in regulation by trade associations is routinely punctured by the Government’s own reports. In October 2017, a joint report by the Treasury and the Home Office, entitled National Risk Assessment of Money Laundering and Terrorist Financing 2017, summed up key risks around the accountancy sector:
“complicit accountancy professionals facilitating money laundering; collusion with other parts of the regulated sector; coerced professionals targeted by criminals; creation of structures and vehicles that enable money laundering; provision of false accounts; failure to identify suspicion and submit SARs; and mixed standards of regulatory compliance with relatively low barriers to entry for some parts of the sector.”
The report went on:
“Accountancy services have also been exploited to provide a veneer of legitimacy to falsified accounts or documents used to conceal the source of funds. For example, law enforcement agencies have observed accountants reviewing and signing off accounts for businesses engaged in criminality, thereby facilitating the laundering of the proceeds. In many cases accounts have been falsified by criminals and unwittingly signed off by accountants, while in others accountants have been assessed to be complicit”.
That is the state of money laundering and the world of accounting.
However, rather than consolidating the number of regulators and thereby securing consistent application of standards and law, in January 2018 the Government created a new body called the Office for Professional Body Anti-Money Laundering Supervision, better known by the acronym OPBAS. At considerable cost, it became a “supervisor of the supervisors” and oversees the 22 trade associations. The formation of OPBAS is an acknowledgement that all was not well with the regulatory role of trade associations.
A year later, on 12 March 2019, the OPBAS director of specialist supervision said:
“the accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe – or don’t want to believe – that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny.”
The OPBAS Director went on:
“We found that some did not fully understand their role as an anti-money laundering supervisor. 23% had no form of supervision. 18% had not even identified who they needed to supervise. Over 90% hadn’t fully developed a risk based approach and had not collected all the data they needed to form a view about their riskiest members and their services. Supervision was often under resourced – and in some cases, there were no resources.
We found that for many supervision wasn’t important. It was only an add-on. This means it often wasn’t on the agenda and for around half, there was insufficient senior management focus. For 20%, it wasn’t overseen by the governing bodies. In some of the professional bodies, where supervision had been outsourced to another provider, there was minimal oversight of the work being done.”
The director also said:
“We also found that in all but 2 professional bodies, processes for handling whistleblowing were inadequate. We found that 56% of professional body supervisors had no whistleblowing policy in place at the time of our assessments.”
There you have it—a powerful indictment of the folly of relying upon trade associations for regulatory purposes. They do not want to be robust regulators because of the concern that “their memberships will walk”.
“an abstraction. It has no mind of its own any more than it has a body of its own”.
Our law required a human directing mind and will to fill that vacancy. Equally, whereas a human being convicted of bribery can be sent to prison, a company cannot.
At present our law requires prosecutors to satisfy the identification principle, which essentially asks whether a person can be identified as the directing mind and will of the company and is thus capable of fixing the company with criminal liability for the act or omission of that identified individual. The difficulty in satisfying the identification principle has led to cases where only individuals, but not their employers, have been charged. A recent example is the phone-hacking scandal. Another example of the difficulties caused by the identification principle were the cases involving Barclays Bank and some of its senior staff in 2018.
One hundred and fifty years ago, companies were mostly small concerns that traded locally. Of course, many businesses were not incorporated at all, but there were exceptions to that general rule. As British maritime power and commercial reach became increasingly global during the 18th century, and developed yet further through the 19th century, company structures became more sophisticated. Financial services, be it in banking, capital raising or insurance in the City of London, kept pace to enable these advances. That said, leaving aside mechanical advances, a milling business of 1900 was not all that different from a milling business of 1800; had the managing director of that milling company bribed someone in the late Victorian age, it would not have been difficult to determine whether he could be identified as the directing mind and will of the company so as to fix it with criminal liability for the corruption, in addition to any that attached to the director.
Although the identification principle received its then-highest judicial approval in the Lennard’s Carrying Co. case in 1915, that principle had been developed during the 19th century, when most English companies were run by fewer than half a dozen people. It is now plainly an inhibiting factor when prosecutors are considering cases involving large, complex companies with international and country boards, operating around the world. In 1912, the US courts recognised that the identification principle was not suitable in a modern industrial economy, whereas three years later our highest court affirmed it. It is time that we caught up.
Since 1912, an American company can be liable for a criminal offence committed by an employee in the course of his employment for the benefit of the company. The offence may also benefit the employee, but if it benefits the company it, too, is criminally liable. It is the criminal law equivalent of the concept of vicarious liability that we have in English civil law. It is not complicated but, plainly, each case of suspected corporate offending will be highly fact specific. I would like to have that system here, but it is not going to happen. I therefore look to the failure to prevent model, not least because it is now well established in our own criminal law.
In 2011, US federal prosecutors told me that they greatly admired the failure to prevent bribery offence in Section 7 of the Bribery Act 2010. They said that the United Kingdom led the world in countering corporate crime because of that new offence. More recently, the Criminal Finances Act 2017 introduced a corporate offence of failure to prevent facilitation of tax evasion. The noble Baroness, Lady Bowles, may talk about that in support of her Amendment 84.
In the case of Tesco Supermarkets Ltd v Nattrass in 1971, Lord Reid held that, in order for liability to attach to the actions of a person, it must be the case that
“the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company … If it is a guilty mind then that guilt is the guilt of the company.”
That case turned on whether a store manager who broke the Trade Descriptions Act was the directing mind and will of the company. He plainly was not, but Lord Reid’s words are relied on in pretty well every case where a company is charged with an offence because of what an employee is alleged to have done. As Lord Justice Davis said in the 2018 Barclays Bank case, large modern companies are complex organisations not so that they can avoid criminal responsibility but to facilitate their business operations. They cannot be expected to have a detailed knowledge of what every manager throughout the world is doing, or to be held criminally liable for everything that they do. I agree.
That will not happen under these amendments but, under the current directing mind and will test, corporations involved in wrongdoing face little prospect of prosecution. As a result, corporate compliance procedures in the UK could slip. One of the reasons why Section 7 was introduced into the Bribery Act was to improve corporate behaviour. It has had an important preventive effect. When companies face little consequence for failing to maintain procedures to prevent financial crime, the business case for putting resources into implementing these procedures becomes harder to make.
If the failure to prevent regime were to be introduced for other economic crimes, such as those in my amendments, the impact on corporate standards would be significant because it would focus companies’ attention on having the right measures in place to prevent the commission of these crimes. It would also help us to maintain our reputation for the highest standards of business integrity, as we refocus our attention on building trade links around the world and on a future outside the EU.
The failure to prevent offence carries strict liability for a commercial organisation: a bribe paid anywhere in the world by an “associated person” with the intention of benefiting the company will cause it to commit an offence, and the only defence is that it had in place “adequate procedures” to prevent bribery. An “associated person” is defined under the Bribery Act as a “person who performs services” for or on behalf of the organisation; this may include employees, subsidiaries and agents. This was intended to embrace the whole range of persons connected to an organisation that might be capable of committing bribery on its behalf. It may include joint venture partners or entities, depending on the circumstances.
Under the law as it is now, companies can be prosecuted for not having in place systems to prevent a predictable crime here or abroad. This approach has proved effective. There have been prosecutions under Sections 1 and 7 of the Bribery Act, but Section 7 has been used to greatest effect in deferred prosecution agreements. I declare my interest as a barrister in private practice who has acted for both the Serious Fraud Office and companies accused of offences under the Act, but my experience of cases where companies have failed to prevent bribery by their associates tells me that the Act is not just necessary but works both to catch and deter corporate criminal conduct. I suggest that it would work as well with the offences in these amendments.
On proper analysis, my amendments are not a radical departure from the current state of the law but a small extension of it. Government and Parliament created the failure to prevent regime a decade ago. I am doing no more than increasing its ambit beyond bribery and tax offences to a few more financial and economic crimes. My amendments are limited to the UK financial system.
Amendment 81 says that a “relevant body”—in essence, a commercial organisation—commits an offence if a person associated with it commits an “economic criminal offence” in the course of using or providing financial services
“that might affect the integrity of the UK financial system.”
The expressions “relevant body” and
“the integrity of the UK financial system”
have the same meanings as in the Criminal Finances Act 2017 and the Financial Services and Markets Act 2000. For the purposes of this amendment, an economic criminal offence is defined by a list in paragraphs (a) to (g) of subsection (2) and includes, for example, conspiracy to defraud, theft and false accounting. As in the Bribery Act, there is a reasonable prevention procedures defence. “Reasonable” does not mean “perfect” so it is not a meaningless defence.
Amendment 82, which also has the same reasonable prevention procedures defence, defines an economic criminal offence as any of the approximately 50 offences
“listed in Part 2 of Schedule 17 to the Crime and Courts Act 2013”.
Those are offences that can be the subject of a DPA. Again, there is nothing radical there. Amendment 83 is in similar terms to Amendments 81 and 82, save that it relates to the failure to prevent a “criminal financial offence”, which is defined by the same list in the Crime and Courts Act used in Amendment 82 and a similar, but not identical, list of offences to that in Amendment 81. There is, again, a reasonable prevention procedures defence.
Clearly, we need laws that will make a real difference and deter crime. The approach taken in the Bribery Act and the Criminal Finances Act has proved its worth. Surely, it is now time to extend the tried-and-tested failure to prevent regime to the offences referred to in these amendments. Of course, I expect that they will be met by departments from the “Ministry of Paperclips” through to the “Department of Circumlocution”, as non-government amendments often are, with much sucking of teeth and earnest furrowing of brows. We have all heard the reasons why an amendment cannot be accepted, be it its drafting, its being in the wrong Bill, its public expenditure implications or its timing—and anyway, the Law Commission is about to look at this aspect of the law. I promise noble Lords that I wrote those words before I received the Economic Secretary’s letter this morning.
All Governments suffer from an aversion to ideas that they did not invent. That is not a criticism directed at my noble friend the Minister, I assure her, but of course this is an idea invented not by me but by government. Gordon Brown’s Labour Government introduced the Bribery Act, and David Cameron’s coalition Government took it on and ensured that it received Royal Assent. It had all-party support. Theresa May’s Government brought in the Criminal Finances Act 2017, to widespread acclaim. These amendments obediently follow those statutes. If the Financial Services Bill is not the right Bill for these financial offences, what on earth is? Surely, the Treasury can make a good case for adding these provisions, on financial and economic crime connected to financial services, to the Financial Services Bill. They will not cost money but, like DPAs, enhance our national economic reputation and, in the right case, see large fines flow into the Treasury.
The tightening up of corporate systems against bribery following the Bribery Act is well documented, and what better way is there to enhance the reputation of the UK’s financial system at the point when it must protect and enhance its credibility than forcing similar tightening against financial crime? We already know well the reason for needing such offences. It is the old-fashioned way that criminal law works. Having to establish a directing mind is increasingly impossible given the complex board structures of large firms. Indeed, the principle of requiring a directing mind encourages what has been called “organised irresponsibility” by Pinto and Evans in Corporate Criminal Liability.
I know there is some reluctance in the Ministry of Justice, which sat on its hands for ages after its call for evidence on corporate liability, to which I made a submission, and then said there is no new evidence. That was really a bit rich, given that the call for evidence background document itself gave a good exposition of how bad matters are and of many of the reasons why evidence of failures in prosecutions is relatively scant. That is exactly why there is no new evidence—because prosecutors know they cannot succeed against large companies and give up.
Nevertheless, the issue has been sent off to the Law Commission, which has already said in its 2010 paper, Criminal Liability in Regulatory Contexts, that
“the identification doctrine can make it impossibly difficult for prosecutors to find companies guilty of some … crimes, especially large companies”.
In its 2019 paper on suspicious activity reports, it said:
“The identification doctrine can provide an incentive for companies to operate with devolved structures in order to protect directors and senior management from liability.”
The current common law “directing mind” principle is also unfairly discriminating to small businesses. The Crown Prosecution Service’s legal guidance, under “Further Evidential Considerations”, states:
“The smaller the corporation, the more likely it will be that guilty knowledge can be attributed to the controlling officer and therefore to the company itself.”
Given the general guidance for prosecution that there must be a “realistic prospect of conviction”, it is no wonder that prosecution evidence is scant and statistics show a preponderance of prosecutions against small companies. In its response to the MoJ call for evidence, the SFO said:
“In its current form, the law relating to corporate misconduct is both unjust and unfair and in need of urgent reform.”
Note the use of “urgent”, not “kick down the road”.
It is time for the Treasury to be less selfish and to help those other than the Revenue who are defrauded by expanding the use of this mechanism beyond tax collection, and to catch those threatening the integrity of the financial system by using it to commit financial crime.
My whilstleblower amendment suggests that regulators be obliged to give evidence when it is relevant to a whistleblower seeking redress in an employment tribunal. I have tabled it to probe the present state of play, which I understand is that they do not give evidence, indeed decline to do so, even when the whistleblowing has been important and valuable to them. This gives entirely the wrong message and looks like the regulators again being too cosy with the companies they regulate. If they are too frightened to be seen to disturb that cosiness, perhaps it should be made mandatory so that they cannot shy away.
The second part of the amendment suggests making it a behaviour that is not fit and proper for a person in authority to seek to identify, dismiss or penalise a whistleblower. We all know the case of Barclays CEO Jes Staley trying to identify a whistleblower and being let off with a fine that was insignificant for him, while the industry had thought it was an action bad enough to merit removal under the new senior managers regime. The net consequence is that the senior managers regime has been undermined and the regulator has again shown its fear of regulating behaviour in large banks. It would be interesting to know what special pleading went on to achieve that result. Was the PRA involved, rather like its special pleading to US regulators on HSBC? Was the Treasury involved? Whether it was or not, it was certainly a disaster. It is now time to make amends and show that the balance of protection lies with the whistleblower and not with bank executives.
This amendment corrects that anomaly by giving the FCA the power to extend the SMCR requirements and responsibilities to appointed representatives. Currently, an appointed representative is regulated through a principal firm which carries the relevant responsibilities and is directly regulated by the FCA. Transferring responsibility from the principal firm to the appointed representative extends the current framework to this overlooked anomaly and places responsibility on the appointed representative. Rather than adding an additional regulatory burden on to the principal firms, this change would be to their benefit. Extending the SMCR to appointed representatives and making them personally responsible for their actions will significantly reduce the principal firm’s own regulatory risk.
Furthermore, it will reduce the risk of poor or reckless advice being given to consumers within the appointed representative regime and level the playing field between directly regulated advisers and those who are operating as appointed representatives. This amendment would remove the distinction—largely invisible to customers—in the regulations that oversee directly regulated advisers and appointed representatives and increase regulatory confidence in the diligence of financial advice given by all advisers.
From my conversations with individuals within the financial services, it is understood that the current regulator—the FCA—would welcome the ability to extend the SMCR to appointed representatives but currently lacks the power to do so. Although I obviously cannot speak for the FCA on this matter, or on the validity of the conversations I have had, similarly I have no reason to doubt the sincerity of its comments or concerns about the increased risk that the current anomaly poses.
This amendment would be a small but positive change to the Financial Services Bill by ensuring that robust and responsible regulation applies to all those who provide consumers with financial advice. Extending the SMCR to appointed representatives would directly benefit customers, by ensuring that all advisers have a personal responsibility for the advice provided, level the playing field between all financial advisers and reduce the risk to the customers and the relevant principal firms.
Finally—I have to confess that I am not quite sure of the proper process here—I had hoped to explore the possibility of tabling an amendment for this stage that would mandate the providers of deposit or credit accounts to provide voluntary debit card and credit gambling blockers. Unfortunately, I have simply not been able to get it ready for Committee, and I apologise for that, but I would be glad to speak with the authorities and the Minister on this amendment that I hope to bring later on.
The pre-emptive nature of financial services processes that can avoid problems needs to be encouraged. These amendments could do this and would be a welcome addition to our financial landscape. All too often, firms and, indeed, regulators, seem to be taken by surprise when offences occur and then have to react to them, rather than doing more to prevent the wrongdoing occurring in the first place. I hope that my noble friend the Minister will consider these amendments sympathetically and that the Government will accept them or bring forward their own version. They would be a useful addition to this legislation. I will now mute myself.
Amendment 84 was admirably spoken to by the noble Baroness, Lady Bowles, so I do not intend to go over the detail, but I will add a few points based on the briefing I received before Second Reading from Spotlight on Corruption, which was incredibly helpful. As has been said, bribery and tax evasion are already on the statute book in terms of failing to prevent crime, so what is the difference in including false accounting, fraud and money laundering? By the way, I might say something about the Chancellor’s very last point in his Budget, about free ports. I read the report yesterday from UK in a Changing Europe. The scope for money laundering via free ports is enormous. That will certainly have to be added to the list.
The amendment would widen the scope of the existing statute book: this is not reinventing the wheel. It is supported by the Treasury Select Committee and the prosecutors. In the consultation that took place—I know that it was some ago—it was supported by more than 70% of those who responded. The list of examples given by Spotlight on Corruption of companies that could not be prosecuted or brought to book for corporate wrong- doing in recent times—whether it was Serco, Olympus or Barclays—is enormous. I do not see why they should be allowed to get away it, but there are gaps in the law.
I am not an avid reader, but it is always worthwhile reading the manifestos of the various parties. I do not read too many of my party, by the way, but the 2015 Tory manifesto made this commitment, which resulted in the consultation. But the consultation closed three and a half years ago. It has just been one delay after another. It shows a lack of commitment and a lack of drive from the top. If the drive from the top is there, things happen in government—that is the key that I picked up during my 12 years.
The key benefit of the amendment is greater fairness for how large and small companies are held to account. It is dead easy. The small companies are the ones that are gone after by the prosecutors: they are low-hanging fruit and it is easy. That can make the numbers look good, but it is not fair.
Of course, bringing the UK into line with international standards of corporate crime is where we come up against our friends in the European Union. This is a situation where UK companies operating in the European Union are going to operate to a higher standard than they do at home. It is preposterous. It is going to make the UK top of the list for those who want to engage in money laundering. It puts the UK’s reputation in tatters.
The charge that my noble friend Lord Eatwell made about London being the money-laundering capital is true. There are so many different allegations and they are tied up with the operation of many of our blue-chip accountancy firms and blue-chip corporate lawyers and legal firms, because these actions cannot take place without the acquiescence of these home-based enablers.
My final point is the obvious one. The amendment would bring these offences into line with bribery and tax evasion. Why leave a big gap? Bribery and tax evasion can and do involve money laundering and fraud on a grand scale. It is absolutely inconsistent to have different models operating for different economic crimes, where the crimes are linked. I look forward to listening to the Minister get out of this one.