Failing to prevent economic crime – a new offence?

The Attorney General Jeremy Wright QC MP recently told an audience at the Cambridge International Symposium on Economic Crime that “officials are considering proposals for the creation of an offence of a corporate failure to report economic crime, modelled on the section 7 Bribery Act offence”.

To date, the general approach in the UK to prosecuting economic crime has been to prosecute individuals and impose regulatory fines on corporates. However, a series of high profile investigations in the past few years, such as LIBOR and Forex, and the need to meet the UK’s international obligations to combat bribery in business transactions has led to this approach being called into question by those that believe that the only way to prevent economic crime is to take a tougher stance with corporate offenders. The CPS itself states in its own guidance on corporate prosecutions that “a thorough enforcement of the criminal law against corporate offenders, where appropriate, will have a deterrent effect, protect the public and support ethical business practices. Prosecuting corporations, where appropriate, will capture the full range of criminality involved and thus lead to increased public confidence in the criminal justice system.”  However, the approach to date has been to impose large fines on corporates, rather than pursue prosecutions. We have, for example, witnessed financial institutions, such as Barclays and RBS, fined heavily following investigations such as LIBOR. In 2012 we also observed the FSA (as it was then) fining UBS £29.7m for systems and controls failings following the case of the “rogue trader” Kweku Adoboli. However, whilst UBS paid a fine, Mr Adoboli himself was sentenced to seven years in prison.

Historically, prosecuting corporates in the UK has been deemed to be very difficult. In order to successfully prosecute a corporate, it is necessary to be able to link the offending conduct to a “directing mind” of the company. This is known in the UK as the identification principle. The task of establishing this is often very difficult, complains the SFO, as it is not uncommon for communication chains to stop beyond a certain level of seniority which makes it difficult to obtain the necessary evidence to support a prosecution.

The proposal referred to by the Attorney General is to create an offence parallel to that of Section 7 of the Bribery Act 2010. Section 7 of the Bribery Act 2010 makes it a criminal offence for a commercial organisation to fail to prevent bribery by its associated persons, which include its employees. The Bribery Act does, however, afford corporates a defence of having adequate procedures in place to prevent bribery. The inclusion of the adequate procedures defence arguably encourages good corporate governance as, it is hoped, companies will work towards ensuring that effective systems and controls are put in place. However, whilst Government guidance has been provided in relation to what may constitute adequate procedures, the concept is yet to be tested in the UK courts. To date, there has been no corporate prosecution under the Bribery Act 2010 and so the effects of the Section 7 offence have not yet been observed.  In order for any new economic crime offence to be effective, the SFO will undoubtedly need to show corporates that it does have the appetite to prosecute these types of cases.

The proposal to introduce a similar offence for failing to prevent economic crime would create a very wide-reaching offence. Whilst tackling economic crime continues to be a priority for UK regulators, criminalising corporates for failing to prevent a wide range of offending may prove disproportionately burdensome for some companies. For example, small/medium sized companies, without the resources to implement all encompassing compliance programmes, may find themselves pursued for failing to prevent a wide spectrum of behaviour, ranging from employee fraud to cyber crime to money laundering. Whilst prosecuting corporates is considered an effective way to tackle economic crime, corporate prosecutions do need to be considered carefully against the alternatives which now include deferred prosecution agreements. In circumstances where a corporate prosecution may lead to a company’s bankruptcy, and in turn damage innocent shareholders and employees, a prosecution might not be considered to be in the public interest.

Other jurisdictions approach economic crime in a variety of ways. In the US, corporates are vicariously liable for the actions of their employees. There is, as a result, a vast amount of litigation and usually the organisation pleads guilty and settles. In Australia, a corporate will be guilty of an offence if it fails to create and maintain a corporate culture requiring compliance with the contravened law. This is similar to the proposal highlighted by the Attorney General.

Following the recent financial scandals, it is apparent that corporate accountability, beyond merely paying regulatory fines, needs to be looked at when dealing with economic crime. Arguably just fining large organisations is not a sufficient deterrent against future misconduct. One thing that remains clear is that if the offence of failing to prevent economic crime is introduced, corporates would need to ensure that their compliance regimes were robust in addressing a wide range of potential offending. Effective and clear guidance will be vital so that corporates can approach their compliance needs proportionately. The experience of the guidance issued in relation to the Bribery Act suggests that compiling such guidance will be no easy task.