Over the last year Parliament has focussed on economic crime and recent discussions in the House of Lords have demonstrated the Government's continued commitment in this area through the introduction of corporate liability for "failure to prevent economic crime" in some guise, similar to the "failure to prevent bribery" offence under section 7 of the Bribery Act 2010. This was initially explored by the Law Commission last year in its proposals on reforming corporate criminal liability in England & Wales (a summary of which can be found here) and was discussed at the second reading of the Economic Crime and Corporate Transparency Bill ("the Bill") in the House of Lords last week.
Amendments to the Bill that were discussed include corporate criminal liability for a commercial organisation when a person "associated" with it commits fraud, false accounting or money laundering. A defence should, and is likely to be, implemented which enables a corporate to show that it has policies and procedures that are "reasonable in all the circumstances" to prevent the commission of the offence.
It looks unlikely that there will be a wider reform of the identification principle in the next 12 months, which makes the ability to successfully prosecute a corporate entity dependent on proving that individuals determined to be the "directing mind and will" of a company performed the necessary criminal act and had the requisite intent.
The details of the proposed offence have yet to be finalised, but are expected at the Committee stage of introducing the Bill, in the next few weeks. The offence could be targeted relating to activity in the regulated sector, or could be a broader general "failure to prevent" economic crime offence.
Whatever the proposal, those operating in the Financial Services sector will be affected.
How can those corporates be protected?
These proposed legislative changes will therefore require careful monitoring and consideration by those in the FS Sector, once the details are known. FS institutions will need to ensure that they have the requisite procedures in place to prevent economic crime (to the proposed standard, currently expected to be "reasonable procedures") in addition to those to counter bribery and tax evasion, the two current failure to prevent offences.
What are the implications for the sector?
Those operating in the sector are already likely to have some form of measures in place to prevent economic crime and fraud, a resilience piece if you like. Such measures should ensure that the risk of an economic crime investigation is mitigated. This is important as investigations are often complex, costly, and long running, requiring a multi-disciplinary approach and involving external input, guidance, and advice. The threat of regulatory sanction or prosecution carries with it significant reputational risk which needs to be countered.
We say this as there is likely to be an increase in investigations with a change in the "failing to prevent" landscape. Some investigations will be internal, others led by regulators and enforcement agencies who will in time threaten more prosecutions, leading to the prospect of corporates being more inclined to enter into deferred prosecution agreements to obtain certainty and mitigate adverse publicity, rather than face prosecution and the uncertainty of a criminal trial. In such circumstances, the prospect of individuals being prosecuted increases, leading to a conflict between the interests of the corporate and the individual.
Should the identification principle also be modified then there will be an increased likelihood of a corporate being prosecuted for primary economic crime offences such as fraud and money laundering.
What steps can be taken to help those in the sector counter this potential sea change?
A start would be to review and test policies and procedures to ensure they are robust and fit for purpose whilst also conducting appropriate due diligence to establish if those you do business with are also capable of preventing economic crime and fraud.
Corporates operating in the Financial Services sector will be doing this now but may need to be more flexible in how they do it until the details of any offence(s) are known. They may therefore need to broaden the scope of due diligence on themselves and those they do business with to ensure that an organisation's vulnerabilities to economic crime and fraud are assessed accurately so that they can mitigate the risk of investigation, regulatory intervention, and prosecution.
The economic climate is getting worse, putting pressure on businesses and it is leading to more economic crime, so the message is to act now to get ahead of the game.
If you would like to know more about economic crime typologies, prevention programmes, controls and investigation plans as well as our capabilities in defending such enforcement action then do not hesitate to contact our multi-disciplinary specialists who will be happy to help.