CORPORATE LIABILITY FOR ECONOMIC CRIME SUBMISSION FROM TRANSPARENCY INTERNATIONAL UK Introduction Transparency International UK (TI-UK) is the UK’s leading anti-corruption organisation. TI-UK challenges corruption, strengthens integrity, and fights for a fair society based on the rule of law.
In this submission, TI-UK makes the following recommendations:
The identification doctrine should be abandoned and replaced as the guiding principle of corporate liability. It is unnecessarily restrictive and makes it very difficult to prosecute a large corporation;
Offences founded on strict (vicarious) liability (option 2) and strict (direct) liability (option 3) should be open to a prosecuting authority;
The remit of the directors’ disqualification mechanism should be widened to cover economic crime.
TI-UK responses to the Call for Evidence questions Question 1: Do you consider the existing criminal and regulatory framework in the UK provides sufficient deterrent to corporate misconduct? It is very difficult to bring a prosecution against a corporation for financial and economic crime, due to the difficulties in establishing corporate liability. Prosecutions are rare and slow to progress. A change to legislation to more effectively deter corporate crime is long overdue. As long ago as 2010, the Law Commission called UK corporate liability laws “inappropriate and ineffective.”1 In 2012, the Government itself recognised in introducing Deferred Prosecution Agreements that “options for dealing with offending by commercial organisations are currently limited and the number of outcomes each year, through both criminal and civil proceedings, is relatively low.” Recently the Government stated in its July 2015 consultation on a new corporate offence of failure to prevent tax evasion that “under the existing law it can be extremely difficult to hold ... corporations to account for the criminal actions of their agents.” Improving corporate liability laws would help tackle high levels of fraud and money laundering 1. Fraud and corruption Not a single UK financial institution has faced criminal charges as a result of the 2008 financial crisis and several major recent scandals have resulted in no prosecutions against companies:
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The Serious Fraud Office (SFO) has not charged any of the organisations involved in the LIBOR/EURIBOR affair, despite prosecuted individuals arguing that their actions were condoned and encouraged by their employers. Only the US brought criminal charges against the corporations involved, based on a much lower threshold test for corporate liability.
The Law Commission, Consultation Paper No195, Criminal Liability in Regulatory Contexts, paragraph 5.84
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Following the FOREX scandal, the US imposed criminal penalties on companies (as well as regulatory fines) while in the UK only regulatory fines were imposed.
Generally the UK lags behind the US in bringing action against corporations in the field of white collar crime. This is in large part due to the much stronger corporate liability laws in the US (which are also more aggressively enforced). The lack of effective deterrent may be evidenced by the huge costs of economic crime to the UK economy. In May 2016, the Annual Fraud Indicator put the cost of fraud to the UK economy at £193 billion.2 The cost to the public sector is £37.5 billion, and it is estimated private sector fraud could cost the UK economy up to £143.6 billion. Procurement fraud alone is estimated to be £127 billion a year. It is likely that cracking down on economic crime would deliver huge potential savings to the UK taxpayer. A convicted corporation would be subject to the confiscation regime under the Proceeds of Crime Act 2002 (“POCA”) and is also more likely than an individual defendant to be able to pay for the costs of the prosecution. From an anti-corruption perspective, fraud and other economic crimes often go hand in hand with corruption. In some instances it might be considerably easier to prove a company has engaged in fraud than corruption. Extending clear corporate liability to cover fraud and other economic crime would significantly improve the prosecutor’s tool kit for fighting corruption. 2. Money laundering According to the Government’s own risk assessment, only a small proportion of the corrupt money entering the UK is being detected and investigated by the authorities. According to the NCA, billions of pounds of corrupt and illicit funds are laundered through the UK each year, fuelling global instability and threatening the reputation and success of the City of London and the wider UK economy. There are serious issues with fragmented supervision and ineffective enforcement which leads to a lack of effective regulatory and legislative deterrent. For complex money laundering schemes, individuals with criminal intent usually purchase fiduciary or intermediary services from a range of financial and non-financial companies and professionals who, wittingly or unwittingly, facilitate the scheme. These professionals can include bankers, wealth management agents and other financial service providers, trust and company service providers (TCSPs), property lawyers and accountants. As well as laundering money through a complex chain of transactions, money can enter countries via formal investment schemes. Research conducted by Transparency International UK found that the system that should prevent dirty money from entering the UK is failing. There are twenty seven supervisory bodies overseeing anti-money laundering compliance in sectors such as banking, property and luxury goods, leading to a fragmented system. Our research has identified severe failures in relevant sectors, such as a failure to identify risk, conflicts of interest, and an approach to enforcement which is inconsistent and neither transparent nor effective.
Ineffective sanctions. No sector supervisor is providing a proportionate and credible deterrent to those who engage in complicit or wilful money laundering. The average house price in central London is more than the total amount of fines dished out to those who laundered money through property in a recent 12 month period. Out of the 22 supervisory bodies covered in a recent TI report3, only the FCA has above a low or unreported level of enforcement of the rules. The level of enforcement and fines by AML
2
http://www.port.ac.uk/media/contacts-and-departments/icjs/ccfs/Annual-Fraud-Indicator-2016.pdf Don’t Look Won’t Find: Weaknesses in the Supervision of the UK’s Anti-Money Laundering Rules (November 2015) 3
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supervisors in the UK is generally low relative to the scale of money laundering passing through the UK, and is not likely to have a deterrent effect.
There is a failure to identify where the risks are and mitigate against those risks. The lack of a risk-based approach leads to poor oversight. TI-UK research discovered that the majority of sectors covered in this research are performing very badly in terms of identifying and reporting money laundering - over half of the supervisory bodies are failing to identify where the risks are. Major problems have been identified in the quality, as well as the quantity, of reports coming out of the legal, accountancy and estate agency sectors. One supervisor even admitted it carried out no targeted AML monitoring at all during 2013.
Independence questioned – Many of the supervisors have serious conflicts of interest, which we believe prohibits these bodies from doing a good job. Just 7/22 supervisors control for institutional conflicts of interest, whilst 15 are also lobby groups for the sectors they supervise.
Conflicts of interest. The Government identified that most of the private sector supervisors are lobby groups for the sectors that they supervise and are funded by firms that they are obliged to investigate. Only 6/22 met the Clementi Standard4.
These wide-spread failures in the system show that reform is needed so that regulation and legislation is a sufficient deterrent to complicit and/or wilful money laundering.
Question 2: Do you consider the identification doctrine inhibits holding companies to account for economic crimes committed in their name or on their behalf? The identification doctrine holds that for a company to be guilty of a criminal offence it must be established that someone who can be described as its “directing mind and will” was involved in committing the offence. The doctrine makes it very difficult to prosecute large companies, as it requires evidence that a very senior person was complicit in the illegal activity. The principle can incentivise senior members of a corporation to turn a blind eye to criminal acts committed by its representatives, insulating the company (and themselves) from liability. The result is an unfair situation in which the ‘low-hanging fruit’ of small companies, with simpler corporate structures, are more easily targeted. Problems with identification principle have been highlighted extensively by multiple authorities for several decades. The Law Commission, OECD, SFO, and the Government have all provided useful critiques, as shown below. Government consultation on failure to prevent tax evasion The recent Government consultation document clearly explains the core problems with the identification principle: Attributing criminal liability to a corporation normally requires prosecutors to show that the most senior members of the corporation were involved in
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The Clementi principle requires that the same organisation should not be both responsible for professional lobbying on behalf of their sector membership and provide supervision and enforcement actions over their sector.
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and aware of the illegal activity, typically those at the Board of Directors level. This has a number of impacts: In large multinational organisations decision making is often decentralised and may be taken at a level lower than that of the Board of Directors, with the effect that the corporation can be shielded from criminal liability. This also makes it harder to hold such organisations to account compared to a smaller organisation where decision making is centralised. The existing law can act as an incentive for the most senior members of a corporation to turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability. The existing law can act as a disincentive for internal reporting of suspected illegal activity to the most senior members of the corporation. The cumulative effect is an environment that does not foster corporate monitoring and self-reporting of criminal activity. The criminal law currently renders corporations that refrain from implementing good corporate governance and strong reporting procedures hard to prosecute, and offers no incentive to invest in such procedures. It is those corporations that deliberately turn a blind eye to wrongdoing and preserve their ignorance of criminality within their organisation that the current criminal law most advantages.5 Law commission As long ago as August 2010, the Law Commission described the identification doctrine as, “an inappropriate and ineffective method of establishing criminal liability of corporations.”6 SFO David Green recently made the following comments at the Cambridge Symposium 2016: “As things stand, before a company can be prosecuted in this country, the “identification principle” requires the prosecutor to identify the “controlling mind” of the company and prove that that person was complicit in the offence under investigation. In a world of increasingly complex corporate structures, the identification principle can hobble the prosecutor in those cases where it is right to prosecute the company. The principle is illogical in that at present it is the only route to liability for all major economic crime offences (fraud, false accounting, money laundering) except bribery and (soon) tax evasion.
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https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517020/Tackling_tax_evasio n-legislation_guidance_corporate_offence_of_failure_to_prevent_criminal_facilitation_tax_evasion.pdf 6 The Law Commission, Consultation Paper No195, Criminal Liability in Regulatory Contexts, paragraph 5.84
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The principle operates unfairly: it is always easier to identify the controlling mind in a small company than in the case of a large corporation. It is also creates unhelpful incentives for senior executives: on the one hand to distance themselves from knowledge of operations in fraud cases, on the other to preach compliance in bribery cases so as to demonstrate adequate procedures.” OECD The identification doctrine has been criticised by the OECD systematically across common law countries, including in the December 2016 stock taking report on the topic.7 The 2009 OECD AntiBribery Recommendation crystallised the OECD’s preferred approach in a standard that was agreed by the UK as part of the OECD Working Group on Bribery.8 This recommended that ‘the level of authority of the person whose conduct triggers the liability of the legal person [meaning corporation] is flexible and reflects the wide variety of decision-making systems in legal persons’ (or that a functionally equivalent approach is used). The identification doctrine does not allow for such flexibility, as it rigidly restricts corporate identity only to the most senior figures in the company. Summary The current identification principle for corporate liability is widely recognised to be unfit for the purpose of prosecuting large complex global corporations. It results in real unfairness to smaller companies who are at far greater risk of prosecution under this principle. Even in the rare cases where it is possible to prove the ‘directing mind and will’ of the company as involved in the criminal activity, this imposes an additional cost to enforcement authorities, who have to spend considerable extra resources and time to establish this. The identification principle provides a perverse incentive for companies to insulate their Board level Directors from knowledge of day to day workings of the company thus reducing accountability within corporations. Senior managers may then apply pressure on employees to meet unrealistic targets and knowing they are protected from liability for any resulting criminality. Ultimately the current liability laws in the UK penalise small and medium-sized enterprises, which bear the brunt of prosecution; give effective impunity to large companies; and create a perverse incentive for bad corporate governance.9
Question 3: Can you provide evidence or examples of the identification doctrine preventing a corporate prosecution? The Serious Fraud Office has repeatedly stated that the identification doctrine prevents it from achieving corporate prosecutions. These statements alone constitute strong evidence that reform is
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http://www.oecd.org/corruption/roundtable-on-corporate-liability-for-foreign-bribery.htm
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See annex 1 of http://www.oecd.org/daf/anti-bribery/44176910.pdf
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http://www.cw-uk.org/wp-content/uploads/2015/09/Corruption-Watch-Off-the-Hook-Report-September2015.pdf
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required, as the SFO is the main UK agency conducting criminal prosecutions of companies, with three decades of experience. If the US model of vicarious liability were adopted in the UK, then in all cases of serious fraud or corruption where it can be shown that an individual was acting in the course of his employment when he committed an offence, it would be open to the SFO to prosecute that corporation as well. There are many recent examples where such a prosecution could have followed, based on vicarious liability, but the identification doctrine appears to have prevented such a prosecution from taking place. It follows that there are some notable corporate scandals where the identification doctrine prevented, or is likely to have prevented, a corporate prosecution. Below we draw on research by Corruption Watch, compiled for this call for evidence, which highlights numerous instances of corporates not being fully held to account for criminal conduct. We focus on two key scandals: LIBOR and FOREX. LIBOR/EURIBOR The Serious Fraud Office (SFO) has not charged any of the organisations involved in the LIBOR/EURIBOR affair, despite prosecuted individuals arguing that their actions were condoned and encouraged by their employers. A good illustration of this issue is Tom Hayes, a former trader for UBS and Citigroup who was arrested, tried, sentenced to fourteen years in prison for his role in the LIBOR Scandal. During his trial Hayes asserted managers were aware of his actions, and even condoned them. In 2016 the SFO stated the identification principle hindered prosecution of the companies involved: “Tom Hayes was prosecuted in this country for his role in LIBOR manipulation. The operation of the identification principle meant that we could not touch the bank for which he worked whilst manipulating LIBOR. That bank was held to account for Hayes’ conduct in a New York courtroom, where vicarious liability made the prosecution a much simpler matter.”10 The Attorney General identified LIBOR as one of the cases which the UK was not able to prosecute because of the identification doctrine, noting the “clear implications for the reputation of our justice system”.11 LIBOR was also cited by leading legal analysts, such as Jonathan Fisher QC, as a key reason for the need for a failure to prevent offence in relation to financial fraud.12 The Telegraph Chief Business Correspondent meanwhile in September 2016 described the LIBOR and FOREX (see below) cases as examples of the UK “outsourc[ing] corporate accountability for criminality in the City to US prosecutors.”13
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https://www.sfo.gov.uk/2016/09/05/cambridge-symposium-2016/ https://www.gov.uk/government/speeches/attorney-general-jeremy-wright-speech-to-the-cambridgesymposium-on-economic-crime 12 https://www.brightlinelaw.co.uk/images/Laws_on_corporate_criminal_liability_for_economic_crime__woef ully_inadequate___The_Times.pdf 13 http://www.telegraph.co.uk/business/2016/09/12/a-crack-down-on-corporate-liability-is-long-overdue1/ 11
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FOREX14 FOREX is another example where the US imposed criminal penalties on companies as well as regulatory fines while in the UK only regulatory fines were imposed. In the Forex cases where the US levied criminal as well as regulatory fines, the US imposed penalties were 84% higher than those imposed by the UK regulatory authorities. The SFO15 opened a criminal investigation into FOREX wrongdoing, but closed it in March 2016 saying there was not enough evidence to continue with a prosecution despite there being reasonable grounds to suspect the commission of offences involving serious and complex fraud.16 It is not clear whether the identification principle was a factor in the SFO’s decision though it appears from public explanations from the SFO that it was evidentiary issues rather than the corporate liability regime. Legal commentators however suggested it was an issue. Alison McHaffie of CMS law firm was quoted in papers saying that the case showed: “The difficult job SFO has in demonstrating criminal activity by individuals for this type of type of market misconduct and without a change in the law on corporate criminal responsibility. This means it is always easier to impose regulatory fines against the firms themselves rather than criminal prosecutions.”17 LIBOR and FOREX illustrate the general trend of the US being more easily able to prosecute large companies than the UK, which is due in large part to its more effective corporate liability laws. While the UK Financial Conduct Authority tends to levy only regulatory fines, in the US a significant portion of the fines are criminal fines levied by the Department of Justice. Because of this, the US is able to impose higher penalties than those imposed in the UK, creating a greater deterrent effect.
Financial crisis Not a single UK financial institution has faced criminal charges as a result of the 2008 financial crisis despite economic crime being a key contributing factor.18 Economic crimes included mortgage fraud, predatory lending, Ponzi fraud schemes, market misconduct and market manipulation, crimes which have ultimately lead to far-reaching harm and significantly held back global development. Money laundering Despite recent money laundering activities, HSBC has not faced any criminal charges in the UK. As pointed out by Corruption Watch, academics and legal experts have noted that HSBC is unlikely to face criminal ramifications in the UK due to the limitations of the identification principle.
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https://www.ft.com/content/23fa681c-fe73-11e4-be9f-00144feabdc0 http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11619188/Barclays-handed-biggestbank-fine-in-UK-history-over-brazen-currency-rigging.html http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11619188/Barclays-handed-biggestbank-fine-in-UK-history-over-brazen-currency-rigging.html 15 It is not clear why while the US took criminal action against the relevant banks for breaches of anti-trust law, the UK was taking a fraud approach to the wrongdoing. 16 http://www.telegraph.co.uk/business/2016/03/15/serious-fraud-office-ends-foreign-exchange-probe-butadmits-wron/ 17 http://www.telegraph.co.uk/business/2016/03/15/serious-fraud-office-ends-foreign-exchange-probe-butadmits-wron/ 18 See The Financial Crisis and White Collar Crime: The Perfect Storm, 2014, Ryder, N. Elgar Publishing, Chapters 4 and 5.
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There are additional cases where financial institutions have faced regulatory action for money laundering failures, but no criminal action. Barclays, Deutsche Bank and Coutts fall into this category. Question 4: Do you consider that any deficiencies in the identification doctrine can be remedied effectively by legislative or non-legislative means other than the creation of a new offence? The fact that the SFO has publically campaigned for a change in the law over and above other systemic changes should be taken as evidence that a legislative solution would be the most effective approach. In terms of existing legislation, ‘Encouraging or assisting serious crime’, including fraud, money laundering and bribery, has been in force since 2008 under the Serious Crime Act 2007. It aimed to widen the scope for prosecution to encompass the kind of arms-length board-level participation that is hard to prosecute under the identification doctrine. In practice, however, the legislation is ‘notoriously convoluted’ and ultimately requires the prosecution to prove much the same intention as the original offences of fraud etc. As it still effectively requires showing the guilt of the directing mind, it requires an evidence trail that is still likely to dry up long before getting near to the board. Accordingly, it does not serve to address the problems with the identification principle.19 Question 5: If you consider that the deficiencies in the identification doctrine dictate the creation of a new corporate liability offence which of options 2, 3, 4 or 5 do you believe provides the best solution? We argue that the identification doctrine should be abandoned, and that the best solution is a combination of the following options:
Option 2: Strict (vicarious) liability offence
Option 3: Strict (direct) liability offence
A widening of the remit of the directors’ disqualification mechanism to cover economic crime
Abandoning the identification doctrine We argue that for the reasons outlined in our answer to question 2, the identification doctrine should be abandoned as the guiding principle of corporate liability as it is unnecessarily restrictive and makes it very difficult to prosecute a large corporation. In our view, this difficulty would not be remedied simply by broadening the scope of those regarded as a directing mind of a company, as it would be likely to encourage evasive internal structures and would not promote good governance.
Option 2: vicarious liability In our view, the UK ought to follow the US approach to corporate liability, in which a corporation is liable for the acts or omissions of an employee which take place in the course of that employee’s employment (vicarious liability). The seminal case on this form of corporate liability was New York Central & Hudson River Railroad Co. v. United States (212 U.S. 481 (1909), in which the Supreme Court unanimously rejected New York Central’s claim that the imposition of criminal liability was 19
https://www.archbolde-update.co.uk/PDF/2016/Archbold%209-16%20v%204.pdf
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unconstitutional because it punished innocent shareholders without due process, and its opinion endorsed corporate criminal liability and provided a standard for the imposition of such liability. The Court commented that “modern authority” accepted corporate criminal liability, and it quoted with approval the following passage from an American criminal law treatise (490-491): “Since a corporation acts by its officers and agents, their purposes, motives, and intent are just as much those of the corporation as are the things done. If, for example, the invisible, intangible essence or air which we term a corporation can level mountains, fill up valleys, lay down iron tracks, and run railroad cars on them, it can intend to do it, and can act therein as well viciously as virtuously.” In our view, the creation of a new statutory form of vicarious liability should be subject to a due diligence type defence in order to incentivise economic crime prevention as part of corporate good governance.20
The function of vicarious liability Our primary concern relating to the identification principle is that it should be replaced with a principle which overcomes the weaknesses we have highlighted. Vicarious liability does just this, and moreover has been proven to work very well in the US. It is the most viable, straightforward, evidence-based change in approach. We acknowledge that there could be alternative replacement principles or other constructions or approaches that the Government would want to put forward in a forthcoming consultation. We do not, however, know of any approach as well-evidenced and as successful as vicarious liability.
Option 3: Strict (direct) liability offence We recommend that it should also be an offence for a company to fail to prevent economic crime committed in its name or on its behalf, as in Section 7 of the UKBA. As with the UKBA, we agree that it should be a defence for a company to prove that it had in place adequate procedures designed to prevent persons associated with it from undertaking such conduct. Like the UKBA, the law should cover all ‘associated persons’ and should have extra-territorial scope to avoid the ‘outsourcing’ of criminal conduct to outside the UK. We believe this approach is proportionate and balances improved accountability, improved governance, and limited cost for business. There is also minimal duplication with the regulatory regime, as the ‘failure to prevent’ model focuses on proven cases of predicate offending, so is clearly distinguished from general regulatory requirements. Option 3 is, we argue, superior to option 4, as it does not require the prosecutor to prove that the company did not have adequate procedures. The burden of proof to establish the defence should fall on the company, which has ready access to, and understanding of, its own procedures. In our view, this approach is proportionate to the mischief of failing to take adequate steps to prevent such conduct and is compatible with Article 6 of the European Convention on Human Rights (the right to a fair trial). 20
This is in response to a specific question posed under Option 2 in the Call for Evidence (page 17).
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Overlap with Option 2 We recognise that there is an overlap between Option 2 (vicarious liability) and Option 3 (failing to prevent economic crime) and that a company would not be charged both as a principal offender under option 2 and with failing to prevent that conduct under option 3. However, there may be circumstances in which bringing proceedings for the lesser offence of failing to prevent economic crime is more appropriate (for example, if the employee who committed the predicate offence was relatively junior) and so in our view both options should be open to a prosecuting authority.
Benefit test With regards to fraud it would be sensible to introduce a benefit test: that the associated person committed the crime with the intention of "obtaining or retaining business, or an advantage in the conduct of business" for the company. This would avoid situations where a company is punished twice: once by being defrauded itself, then by being prosecuted for allowing this to have happened. With regards to money laundering, there should not be a benefit test. The mere fact that a corporation gains no benefit should not prevent the corporation being found guilty of the new offence. This is because in the case of money laundering there is not the equivalent risk of punishing the company twice, as with fraud. This is also the approach taken with the recent failure to prevent tax evasion offence21, and is justified on the fundamental grounds that the question of the agent’s motivation is not related to the social ill the offence intends to correct. Likewise the nature of the harm of money laundering is not affected by whether it was done with knowing intent or with negligent disregard. Not having such a test would also increase corporate accountability and encourage procedures to be put in place to prevent the offence from occurring at the outset.
Director disqualification Where it is not possible to prosecute individuals for crimes committed, or for failures of oversight, appropriate use should be made the disqualification procedure under the Company Directors Disqualification Act 1986 (“CDDA”), to ensure that individuals can instead be sanctioned using disqualification. See Question 7 for more detail.
Summary Effective enforcement of a new failure to prevent model, and the removal of the identification doctrine, may well suffice to improve the UK’s very poor record in bringing criminal charges against companies. Ultimately it is important to be able to effectively hold companies to account for both the commission of the act, that is, the substantive offence, and also the omission – failing to prevent
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https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483367/A_new_corporate_ criminal_offence_of_failure_to_prevent_the_facilitation_of_tax_evasion__summary_of_responses__7011_.pdf
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it. Option 2, as described above, would capture the former scenario and option 3 would capture the latter scenario.
Question 6: Do you have views on the costs or benefits of introducing any of the options, including possible impacts on competitiveness and growth? We argue that the introduction of our suggested approach will introduce wide-ranging benefits, with minimal costs for companies that are already addressing their risks. Our proposed legislation will target companies which are engaged in risky practices but which have not put in place procedures to ensure that they are not facilitating economic crime. A risk-based approach We argue for a proportionate, risk-based approach, which will serve to motivate, and ultimately hold to account, companies which are not already taking steps to mitigate their risks of being involved in economic crime. The idea behind this legislation is to first capture those bad actors who are not fulfilling their regulatory requirements under the Financial Conduct Authority handbook to have procedures in place to ensure that they are not used to further financial crime. Even those companies not regulated by the FCA should however have measures in place to mitigate risk of involvement in crime. Accordingly there should be no onerous regulatory burden for companies that are already doing ethical business. Benefits The benefits of improving corporate accountability are considerable:
Reduction in economic crime, resulting in fewer scandals and increased trust in business; Level playing field for those already taking steps to mitigate risks, and who are not profiting from economic crime; UK will benefit from reputation for good corporate governance, encouraging inward investment ; Increased state revenue from fines levied for corporate crime; Liability to the confiscation regime under POCA; Reduced cost of bringing criminal proceedings, as companies are likely to plead guilty or admit wrongdoing at an early stage.
It should also be remembered that there are a wide range of stakeholders with an interest in deterring economic crime, including disadvantaged competitors, consumers, vulnerable small investors, and so on. Furthermore, improving corporate liability law is also likely to improve the chances and scope of compensation for these groups, including via civil litigation or as part of a DPA. Impacts on competitiveness Criticisms of a ‘red tape nightmare’ impacting on competitiveness of all UK companies are not realistic. As with the UKBA, companies should only be required to invest in compliance where their risks justify it. If these changes are introduced it will be important for the Government and regulators to provide maximum clarity and certainty to companies – at least in the form of official guidance, as was provided for the UKBA – to help guide the implementation of effective procedures. These 11
extensions, if appropriately targeted and rigorous, will help level the playing field among corruptionrelated offences and will help to ensure that all such offences are tackled effectively. We would argue that any reasonable, risk-based, increase on the legal and regulatory obligations carried by UK businesses is outweighed by the fact that the UK’s reputation for financial integrity encourages inward investment. Business views TI-UK consults widely in order to inform our advocacy positions. On the issue of improving corporate liability we have conducted two roundtables with representatives from the business and legal communities. We accordingly recognise that any new offences should be broad enough to capture the behaviour it is seeking to prevent, but not so wide as to unduly burden corporations who are within the scope of the offence, and our submission has aimed to reflect this. In our discussions we found some support for the extending the ‘failure to prevent’ model in particular from heads of compliance and general counsel at multi-national UK companies. Some quotes from participants are below: Failure to prevent model “The failure to prevent model helps smaller companies as long as it is workable and it doesn’t mean companies incur disproportionate costs. Generally I can see it being good for companies as it could lead to improvements in their anti-fraud systems. It’s also important that any remediation should include appropriate measures not just against the company, but against the individuals who committed the crime.” “The UKBA has worked well; it has encouraged companies to review their systems and make sure staff aren’t paying bribes. It has had the benefit that companies have really raised their game to combat bribery.” Red tape “Larger companies recognise that compliance requirements will not go backwards or be reduced. On the point about whether introducing these changes would make companies less competitive, the same arguments were brought out about the UK Bribery Act, and the FCPA. But it’s a very poor argument to say ‘if we weren’t allowed to commit these crimes, we’d have to limit ourselves.’” An ethical approach “Most ethical companies would either welcome or at least not oppose [extending the failure to prevent model] since it should ultimately improve the general public's opinion of business - which is something it could do with! Reputable companies wouldn’t want to argue against this kind of law; we should be acting responsibly.”
Question 7: Do you consider that introduction of a new corporate offence could have an impact on individual accountability? We believe that introducing a new offence of failure to prevent economic crime is likely to lead to improvements in individual accountability. This is because, if compliance systems within companies are improved to address economic crime risks, this should help identify and investigate individual involvement in economic crime. This will be done by a combination of internal controls, systematic monitoring and improved escalation of issues to management. 12
Senior accountability The proposed change in legislation aims to ensure that not just the company, but also the senior executives, are held to account. It aims to avoid cases in which it is merely lower level employees the 'fall guys' - who are punished, when often their act have been encouraged or tolerated by senior figures in the company. An article in the Economist captures the unfairness of such an arrangement, in this case in banking: One reason so few bankers have been jailed is that it has proved difficult for prosecutors to connect wrongdoing low down in a large financial organisation—submitting false LIBOR estimates, say—to senior executives running the bank. Although the bosses may create or perpetuate a culture in which those lower down the ranks feel entitled or expected to abandon morality, there is seldom a chain of e-mails or other direct instructions that actually advocates wrongdoing.22 If a company is held liable for a committing economic crime or for failing to prevent it, this will accordingly reflect on senior management, and they will inevitably be held publically accountable for the company’s failures. This also has a preventative benefit: the greater the reputational risk to senior individuals the more proactive they will be countering economic crime risks, as has been seen with the UKBA. Director’s disqualification under the CDDA It is also crucial for public confidence and for deterrence that the individuals at a senior level, and ultimately the board of directors who are responsible for the organisation’s failure and hence its criminal culpability are themselves legally held to account for failures to prevent economic crime. Current economic crime legislation provides insufficiently strong grounds upon which directors can be legally held to account, regardless of how seriously they may have failed in their duties. In the UK, serious consideration should be given to holding directors to account for corporate convictions for failing to prevent economic crime by making them liable to disqualification. This would require an amendment to the CDDA, which already provides for Director’s disqualification for certain criminal offences or as a civil sanction upon application to the High Court. If Directors proven to have behaved in such a way that led to the company’s failure to prevent an offence were disqualified this could create a further incentive for board members to ensure that companies are fully compliant with the new legislation. Question 8: Do you believe new regulatory approaches could offer an alternative approach, in particular can recent reforms in the financial sector provide lessons for regulation in other sectors? TI-UK’s expertise is centred on corruption and so cannot comment in detail. In general terms, our view is that criminal sanctions are necessary in this field and that a purely regulatory disposal is an insufficient deterrent.
22
http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-why-few-bankersgone-to-jail
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Question 9: Are there examples of corporate criminal conduct where a purely regulatory response would not be appropriate? There are moral and practical considerations to determining whether a purely regulatory response would be appropriate in cases of corporate criminal conduct. The question of what course of action would be in the public interest is also paramount. As a rule, we would argue that any conduct which constitutes a serious moral breach should not be receive merely a regulatory response, but rather should receive the full weight of society’s disapproval in the form of a criminal conviction. A criminal conviction against a company is also likely to have a greater and more wide ranging effect on the company’s future conduct than a fine for a regulatory breach. A primary consideration is that upon conviction for an offence other than a ‘failure to prevent’ wrongdoing, a company becomes at increased risk of debarment from public contracts, which, depending upon the company, can have a very significant impact on future business. The risk of debarment combined with the reputational impact of a criminal sanction, will serve to create a stronger deterrent effect than a civil sanction alone, which can simply be absorbed as ‘a cost of doing business.’ The improved deterrent effect of a criminal sanction will accordingly provide a greater motivation for senior management to address the risks of economic crime occurring within the business. The SFO likewise has tended to opt for a course of criminal prosecution (or a DPA), rather than civil settlements, where a prosecution or a DPA would be in the public interest, and we would agree with this approach. It is also vital that within this, careful analysis is given to the harm caused to the victims of economic crime – an element which can sometimes be overlooked. Public Opinion on corporate misconduct There has been wave after wave of corporate scandals in the last two decades, often involving apparent criminal impunity for the corporations and individuals involved. We are now facing a situation in which public trust in the business is at an historic all-time low.23 A 2016 report by the Centre for Crime & Justice Studies at the University of Liverpool studied public attitudes towards corporate misconduct.24 Of the British residents surveyed, 95% reported that they viewed a bank knowingly overcharging as being on a par with, or more serious than, the crime of handling stolen goods. 90% reported that an investment firm manipulating a stock price was again on a par with or more serious than handling stolen goods. The report also reveals public concern of a bias in the criminal justice system against relatively low-status offenders in favour of, for instance, banks and investment firms. The proposed legislation has the potential to redress the balance, increasing the accountability of corporate entities whilst encouraging responsible governance and behaviour.
23
International Business Times, 16th January 2017, http://www.ibtimes.co.uk/uks-trust-politicians-mediabusiness-plummets-historic-low-1601276 24
https://www.crimeandjustice.org.uk/sites/crimeandjustice.org.uk/files/Redefining%20criminality%2C%206%2 0July.pdf?_ga=1.12196274.783196979.1489579193. See also article ICT article by Tim Tyler: http://www.intcomp.com/ict-views/posts/2017/01/23/enforcing-corporate-liability-for-economic-crime-is-it-all-worthwhile/
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Acting on Government commitments Improving corporate liability for economic crime was a key manifesto commitment of the Conservative Party in the May 2015 elections: ‘We are also making it a crime if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations and making sure that the penalties are large enough to punish and deter.’25 Reform would also form an important element of the Prime Minister’s commitment to “get tough on irresponsible behaviour in big business” and deal with problems of corporate impunity. It is only right that these public commitments are now acted upon fully.
Question 10: Should you consider reform of the law necessary do you believe that there is a case for introducing a corporate failure to prevent economic crime offence based on the section 7 of the Bribery Act model? The UKBA is a well-designed piece of legislation which has been effective in improving corporate behaviour. The introduction of the Section 7 ‘failure to prevent’ offence has been invaluable as a tool to both incentivise improvements in corporate governance and for prosecutors to hold companies to account within a criminal law framework. We welcome an extension of the Section 7 model to cover economic crime, and below we illustrate how effective this has been in the case of bribery. The successes of the UK Bribery Act - Improved corporate behaviour Holding the company liable for failure to prevent bribery means the board gives the issue considerable focus. This results in an emphasis on training, systems, and a focus on culture-change designed to avoid employees committing bribery. In this way, the anti-bribery message is clearly conveyed to staff, and bribery risks are reduced. Where a company has equivalent risks of involvement in wider economic crime, the same emphasis on training, systems and culture change is only appropriate. With the Bribery Act we have seen industry standards will develop, the sharing of best practice, and ultimately collective action, whereby companies work together to minimise their exposure to bribery. Criticism has been levelled at the UKBA that there have been relatively few prosecutions/DPAs brought under it, therefore it is not effective, therefore the model should not be extended. This criticism, however, fails to take into account the impressive deterrent effect of the UKBA. The threat of prosecution has brought about important and wide-ranging changes in behaviour, without the need for extensive prosecutions of UK businesses. A failure to prevent economic crime offence would likely have an analogous positive effect. Further, such cases are complex and have a long investigation lead time and so it is reasonable to expect that many of the cases currently under investigation will in fact result in criminal proceedings being brought under the UKBA.
25
https://www.conservatives.com/manifesto
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Studies illustrating of the effectiveness of the UKBA:
Documents obtained via FOIA request show that the majority of businesses approached by civil servants in a 2015 “informal consultation” did not have any concerns about the Bribery Act. They include supportive statements from major UK companies including Thales, Johnson Matthey and also the Professional and Business Services Association.26
The trends in PwC’s Global Economic Crime Survey show that the overall level of bribery and corruption reported by UK companies had fallen over time, with companies reporting more concern about other forms of economic crime.
The 2016 PwC survey presents a positive view of how UK companies are approaching bribery and corruption risk, with 98% of respondents stating their company’s management were clear in their condemnation of bribery, and 94% stating that management at their company would rather a business transaction fail than resort to bribery to secure it.
Third party statements on the positive impacts of the Bribery Act: FTI Consulting: “The hype surrounding the introduction of the UK Bribery Act has had a tangible effect – many companies have thought long and hard about compliance – and perhaps to a lesser extent business ethics generally – and our figures show that many believe that they have implemented the necessary compliance measures.”27 Deloitte: “Companies have generally accepted that they need to take positive and tangible action to assure themselves of their ability to comply with the Act. Typically, organisations have embraced the requirement to conduct a bribery and corruption risk assessment.”28 Professor Dan Hough, director of the Sussex Centre for the Study of Corruption (SCSC): “The UK Bribery Act might sound like a relatively obscure piece of legislation, but in many ways it is groundbreaking, placing Britain in the vanguard of states that are trying to stamp out bribery as a way of doing business… The Act has made business leaders think and quite possibly change at least some aspects of business practice in ways that aren’t immediately quantifiable.”29 Peter Lloyd, CEO Mabey Group: “I do not believe that the new Bribery Act will prevent anyone from entering new markets and I also do not believe that the Bribery Act is draconian. Bribery has been illegal for many years in almost all countries worldwide and whilst I am advised that UK law was poorly defined, it was still illegal to bribe people in the UK and overseas. The Bribery Act does introduce new challenges, especially the need to have and enforce adequate procedures, but I would have advised any Board to implement such controls anyhow.”30 As the quotes above suggest, UKBA has already laid a foundation for companies to put in place compliance controls, many of which will already be serving a dual purpose of capturing forms of economic crime other than bribery. This again weakens the argument that a change in law will necessarily lead to a hike in compliance costs.
26
http://www.cw-uk.org/wp-content/uploads/2015/11/CWUK-Business-Response-to-Consultation-on-theBribery-Act.pdf 27 http://www.fticonsulting.com/~/media/Files/us-files/insights/featured-perspectives/the-realities-of-the-ukbribery-act.pdf 28 http://uk.practicallaw.com/2-520-4185?q=&qp=&qo=&qe=# 29 http://www.sussex.ac.uk/broadcast/read/19639 30 http://thebriberyact.com/2012/02/01/will-the-bribery-act-prevent-us-from-entering-new-markets-yourquestions-answered-by-peter-lloyd-ceo-mabey-group/
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Question 11: If your answer to question 10 is in the affirmative, would the list of offences listed on page 22, coupled with a facility to add to the list by secondary legislation, be appropriate for an initial scope of the new offence? Are there any other offences that you think should be included within the scope of any new offence? In our view, the list is sufficient at present, coupled with a facility to add to it by secondary legislation. Liability for the ‘failure to prevent’ offence should accrue from secondary participation (aiding & abetting etc.) in the predicate offending and inchoate conduct (statutory conspiracy, attempt and assisting and encouraging.
Question 12: Do you consider that the adoption of the failure to prevent model for economic crimes would require businesses to put in place additional measures to adjust for the existence of a new criminal offence? We argue for a risk-based approach, which, like the UKBA, requires companies put in place procedures proportionate to the risks that they face. Please see our answer to Question 6 for more detail.
Question 13: Do you consider that the adoption of these measures would result in improved corporate conduct? The introduction of the Section 7 ‘failure to prevent’ offence for bribery has been invaluable as a tool to incentivise improvements in corporate governance, risk-management, culture and ultimately behaviour. We believe that using this model to address wider economic crime would provide the same benefits. Please see our answer to Question 10 for more detail.
Question 14: Do you consider that it would be appropriate for any new form of corporate liability to have extraterritorial reach? Do you have views on the practical implications of such an approach for businesses? Section 7 of the UKBA is innovative and far-reaching in part because it addresses many of the historical corporate attempts to evade liability through evasive structures. This can happen through the use of overseas non-UK third parties, the use of agents, and various other mechanisms. The result is of this wide reach is that the UKBA has served to raise standards of business behaviour globally, and, like the FCPA, it has been an approach which is being emulated around the world. Any extension of the Section 7 model to cover economic crime will likewise need to have extra-territorial reach if it is to be effective in raising standards within the UK and beyond. In particular we would argue for extra-territoriality whereby corporate liability can be triggered by acts of any associated person regardless of their location or nationality, and that applies to any corporation conducting at least part of its business in the UK.
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Question 15: Is a new form of corporate liability justified alongside the financial services regulatory regime. If so, how could the risk of friction between the operation of the two regimes be mitigated? TI-UK’s expertise is centred on corruption and so cannot comment in detail. As a matter of general principle, the risk of friction can be minimised by dialogue and co-operation between the two regimes (SFO and FCA), as appears to happen at present.
Question 16: What do you think is the correct relationship between existing compliance requirements in the financial services sector and the assessment of prevention procedures for the purposes of a defence to a criminal charge? This will vary, depending on the economic crime offence, and warrants detailed exploration in the subsequent consultation.
About Transparency International UK Transparency International (TI) is the world’s leading non-governmental anti-corruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption. Transparency International UK (TI-UK) is the UK chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at national and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anti-corruption expertise in the UK. We work in the UK and overseas, challenging corruption within politics, public institutions, and the private sector, and campaign to prevent the UK acting as a safe haven for corrupt capital. On behalf of the global Transparency International movement, we work to reduce corruption in the high risk areas of Defence & Security and Pharmaceuticals & Healthcare. We are independent, non-political, and base our advocacy on robust research. transparency.org.uk
Contact Rachel Davies Teka | Senior Advocacy Manager, TI-UK rachel.davies@transparency.org.uk Rory Donaldson | Programme Manager, TI-UK rory.donaldson@transparency.org.uk
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