The Financial Services Bill
On 21 October 2020, the Financial Services Bill (the “Bill”) was introduced in the House of Commons. Over one year later, the Bill continues to be debated, this time by the House of Lords Select Committee (the “Select Committee”). Before handing over to the House of Lords, on 13 January 2021, Parliament debated an amendment to the Bill for the introduction of an offence that would hold companies authorised by or registered with the FCA criminally liable for facilitating – or failing to prevent – economic crime, including fraud, false accounting or money laundering (the “Failure to Prevent offence”).
In a similar manner to Section 7 of the UK Bribery Act 2010 (failure to prevent bribery) (“UKBA 2010”) and Part 3 of the Criminal Finances Act 2017 (failure to prevent facilitation of tax evasion) (“CFA 2017”), the Failure to Prevent Offence proposed under the Bill would introduce a strict liability offence on companies for failing to prevent employees, agents and others from committing economic crimes, irrespective of the knowledge or fault of the company, or lack thereof, in the commission of the economic crime. This is in stark contrast to the current law: companies are only held liable if the acts and state of mind of employees (typically an individual of board-level seniority) who represent ‘the directing mind and will’ of the company can be attributed to the company (the “Identification Doctrine”).
Companies would, however, have available to them a defence similar to that of “adequate procedures” under the UKBA 2010 or that of “reasonable prevention procedures” under the CFA 2017; namely, that the company had in place reasonable and proportionate compliance procedures designed to prevent the commission of economic crimes.
The debate resulted in Parliament concluding that further information was required, and the Law Commission has been tasked with conducting a review of the current law of corporate criminal liability. Whilst the Law Commission is expected to publish its recommendations with options for any future changes in late 2021, the Select Committee had, in the meantime, an opportunity to review the Bill on 28 January 2021.
Stressing the urgency of the matter in light of the increase in fraud cases during the COVID-19 pandemic, the Select Committee drew attention to the Identification Doctrine and the difficulties of identifying the directing mind and will of large conglomerates, which they stated “…put large companies and financial institutions beyond the reach of criminal prosecutors for many economic crimes other than bribery and tax evasion.” The Select Committee expressed support for a US-style “…criminal offence to facilitate an economic crime or to fail to take reasonable, necessary steps to prevent an economic crime,” which would hold both individuals personally liable and companies strictly liable, and “…would bring the UK into line with equivalent laws which exist and are used, sometimes with spectacular results, in the United States and the EU.”[1]
Heed the SFO’s warning
The proposed Failure to Prevent offence stems from criticisms raised by UK regulators, including the SFO, regarding the law of corporate liability. Since becoming director of the SFO in August 2018, Lisa Osofsky has consistently expressed the difficulties associated with the Identification Doctrine, particularly in large companies with complex management structures who operate in several countries. Specifically, on 13 November 2018, both Sir Brian Leveson and Ms Osofsky advocated before the Select Committee for a reform of UK law in the form of an all-encompassing ‘failure to prevent’ act in line with the US principles of vicarious liability.[2]
More recently, in a speech at a Society of Corporate Compliance and Ethics conference, Ms Osofsky stressed that companies should invest in their compliance programmes. Highlighting the increasing focus of the SFO on the importance of effective compliance programmes, Ms Osofsky asked “…[a]re they part of the company’s DNA? Or do they just adorn a very nice couple of binders that are held on a bookshelf that don’t really do much more than provide window-dressing?”.[3] Ms Osofsky’s speech echoes the SFO guidance on Evaluating Compliance Programmes, published in January 2020. You can read more on the guidance here.
As outlined above, the introduction of s.7 of the UKBA 2010 and Part 3 of the CFA 2017 were the first steps towards holding companies strictly liable. This effort was bolstered in 2013 with the introduction of the DPA regime in UK law through Schedule 17 of the Crime and Courts Act 2013.
With the SFO having entered into a total of nine DPA’s since its introduction, Ms Osofsky further emphasised the importance on a company’s compliance programme in the eyes of the SFO when negotiating a DPA. Referring to the Serco DPA in July 2019 (in which Serco agreed to pay £19.2m following allegations of fraud relating to electronic-monitoring contracts with the UK’s Ministry of Justice), Ms Osofsky noted the lenient settlement on account of Serco’s compliance programme and its cooperation at an early stage with the SFO. To the contrary, Ms Osofsky also pointed towards the G4S DPA in July 2020, in which G4S agreed to pay £38.5m in relation to the same allegations, as an example of late cooperation and the fact that G4S “had not yet embedded and thought through its compliance obligations” as compared with Serco.[4]
Implications of the Failure to Prevent offence
No doubt, if passed, the proposed Failure to Prevent offence would impose an additional burden on FCA-regulated companies to amend their compliance procedures to reflect not just bribery and tax evasion, but also fraud, money laundering and false accounting. Indeed, as recognised before Parliament by John Glen, the Economic Secretary to the Treasury and Minister of State (City), “[a] new offence will… need to be designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business.”[5]
In conjunction with s.7 of the UKBA 2010 and Part 3 of the CFA 2017 however, the proposed Failure to Prevent offence will give “…law enforcement a powerful tool in fighting money laundering and fraud”.[6] This once again highlights the increasing importance of companies adopting and implementing suitable compliance policies and procedures as part of good corporate governance, both in the UK and worldwide.
In combination with the trend seen in the SFO’s stance on DPAs (i.e. a degree of leniency for companies with effective compliance programmes), companies have more incentive than ever to implement and update their compliance programmes routinely, and to ensure they place as much focus upon ensuring their compliance procedures evolve over time to stay relevant, as they do in relation to the rest of their business.
Are you overdue a review of your compliance policies? Get in touch to see how we could help.
[1] As per Lord Hendy, Lord Rooker, Lord Garnier and Lord Hodgson – https://hansard.parliament.uk/lords/2021-01-28/debates/077CE6F3-BD76-4D3D-8A47-3E1A38F985E6/FinancialServicesBill
[2] https://www.parliament.uk/business/committees/committees-a-z/lords-select/bribery-act-2010/news-parliament-2017/leveson-dpp-evidence-session-bribery/
[3] https://www.wsj.com/articles/u-k-s-financial-crimes-agency-wants-companies-to-invest-in-compliance-11614119241
[4] https://www.wsj.com/articles/u-k-s-financial-crimes-agency-wants-companies-to-invest-in-compliance-11614119241
[5] https://hansard.parliament.uk/commons/2021-01-13/debates/742D7439-7DA3-4816-8005-3582F3863BBE/FinancialServicesBill
[6] Per Dame Margaret Hodge: https://hansard.parliament.uk/commons/2021-01-13/debates/742D7439-7DA3-4816-8005-3582F3863BBE/FinancialServicesBill
