1 New Corporate Criminal Offences  - The Strategic View - Business Crime 2016

The Strategic View - Business Crime 2016

1 New Corporate Criminal Offences

        

Jonathan Cotton and Amy Russell discuss how new corporate criminal offences on the horizon would result in a significant strengthening of the SFO’s hand in combatting corporate crime

Contributing firm

Introduction

The idea of extending the corporate offence of “failing to prevent” bribery to other economic crimes was considered once before and rejected by the UK Government in October 2105.  So it was something of an about-turn when it was announced ahead of the Anti-Corruption Summit in London on 12 May 2016 that the UK Government will now consult on the possibility of introducing new corporate “failing to prevent” offences, with money laundering, fraud and false accounting potentially in the frame.  A consultation into the introduction of a corporate “failing to prevent” tax evasion offence is already at an advanced stage, with legislation set to come into force next year.  The combined effect of the various new proposed legislation, potentially covering a broad range of economic crimes, is a fundamental change in the UK’s approach to corporate criminal liability and a shift toward a more US-style model in which it is easier to secure corporate convictions.  The potential new offences represent a significant risk for corporates and are likely to result in an increased compliance burden. 

Rationale for the new offences

David Green CB QC, Director of the UK’s Serious Fraud Office (“SFO”), has long lamented the difficulty of convicting larger corporates.  Under existing laws it is necessary to establish that a “directing mind and will” of a company (effectively board level, close to board level or others who are delegated the power to act as the company) was involved in the underlying criminal conduct.  Speaking at a parliamentary briefing Green said that “Corporate liability as it is currently defined proves problematic for the SFO – proving a ‘controlling mind’ is exceptionally difficult, especially as it creates incentives for executives to build an ‘accountability firewall’ between them and decisions.  There is also an issue of fairness: it is much easier to go after small businesses where the ‘controlling mind’ is much easier to identify – there is therefore an illogicality inherent within the UK’s definition of corporate criminal liability.” While it is doubtful that large corporates will have proactively structured themselves with the aim of avoiding potential criminal liability, the fact remains that, historically, the SFO has found it hard to secure corporate convictions against large companies in particular.  By contrast, the US has adopted a more vicarious liability-type approach, with no requirement that the prosecution identify a “directing mind and will” who was involved in the wrongdoing in order to convict the corporate. The effect of the new proposed legislation will be to bring the UK more in line with the US, making it easier to secure corporate convictions, with the ultimate aim of engendering a zero tolerance approach to criminal wrongdoing throughout the business world. 

Bribery and tax evasion model

The primary reason why it is easier to convict a corporate for bribery under s.7 Bribery Act 2010 (“UKBA”) and for facilitation of tax evasion under the new proposed legislation is that both offences are effectively ones of strict liability.  Under s.7 of the UKBA, if an associated person of a corporate bribes another in order to win business or a business advantage for the corporate, the corporate automatically commits a criminal offence unless it can prove it had in place “adequate” prevention procedures.  Similarly, under the new proposed “failure to prevent facilitation of tax evasion” offence, a corporate will automatically be criminally liable if an associated person facilitates another person’s evasion of UK or foreign tax, unless the corporate had in place “reasonable” prevention procedures.  While a company’s associated person who commits an underlying offence must have the necessary criminal intent (and in the case of the corporate tax evasion offence it is also necessary to demonstrate the taxpayer intended to evade an obligation to pay tax), there is no requirement for the corporate itself to have had any knowledge of the wrongdoing. 

The wide scope of the concept of “associated person” is another reason why it is now easier for companies to be convicted for failing to prevent bribery and, in due course, tax evasion.  An associated person under each offence is simply someone who performs services for or on behalf of the corporate.  This will typically include employees, contractors and subsidiaries, but can be more widely applied to other types of third parties, provided there is some element of performance of services for or on behalf of the corporate.  For the corporate tax evasion offence there is not even any requirement for the facilitation of tax evasion (which may relate to UK or foreign tax) to be carried out for the benefit of the corporate, making facilitation of tax evasion particularly difficult for companies to spot and prevent.

Both the UKBA and the proposed new tax evasion offence are also widely drawn in terms of territorial scope.  Companies that are incorporated in the UK or carrying on a business, or part of a business, in the UK (a US bank with a UK branch for instance) can be caught regardless of where in the world the bribery or tax evasion takes place.  The proposed tax evasion offence goes further: companies operating anywhere in the world with no connection to the UK can be liable provided the tax evasion is of UK tax or if any aspect of the tax evasion offence takes place in the UK.  The UK nexus could hinge on something as tenuous as a single meeting or funds transfer which takes place in the UK.  The wide extraterritorial scope mirrors the US’s long-arm approach to combatting financial crime where there may be only tangential US nexus.

If bribery or tax evasion has actually occurred on behalf of an organisation, it may be an uphill battle to demonstrate that procedures were nonetheless “adequate” or “reasonable” (it remains to be seen whether the slightly lower threshold of “reasonable” for the tax evasion offence will have any real effect in practice), although clearly it is possible for bribery or tax evasion to have occurred despite robust procedures designed to prevent it.  With both offences, putting in place appropriate prevention procedures and controls will be key in terms of risk management; companies should consider doing what they can to ensure they can advance a good “adequate” or “reasonable” procedures defence if necessary.

New corporate offences

It is unclear whether and how the recent political shake-up will affect the Government’s proposals to extend corporate “failing to prevent” offences beyond bribery and tax evasion.  It may be that the timing of the consultation, previously proposed for this summer, will be affected.  Having set out its stall as being a leader in the global fight against corruption and having committed to the consultation, however, it seems unlikely that the Government will row back from the proposals.

Apart from suggesting that any new corporate criminal offences will follow the same “failing to prevent” model as the UKBA and that money laundering, fraud and false accounting offences could be covered, we have very little information to help predict what the new offences might look like.  What is certain is that, if the new corporate offences are modelled on the UKBA, the result will be a further, very significant strengthening of the SFO’s hand in dealing with corporate wrongdoing in the UK and an increased compliance burden on corporates.

Assuming that any new corporate offences are based on the UKBA s.7 offence model, some possible issues for consideration may include:

  • Scope of “associated person”: The lack of certainty in identifying who are “associated persons” will likely cause issues for corporates in knowing how far to extend their compliance programmes to cover these new offences.  While we might hope that any new offences would include a narrower definition of “associated person”, the Government has in previous consultations expressed a preference for a broad definition with the aim of catching a wide range of third parties.  As with the corporate tax evasion offence, the best we may be able to hope for is clearer guidance on who is and who is not an “associated person” to accompany any new legislation.
  • Benefit requirement: If a corporate can be convicted based on the actions of its “associated persons”, will it also be necessary for the associated person’s criminal wrongdoing to be carried out to win or retain business, or some other benefit, for the company (as in s.7 UKBA), or will the company still be exposed to a criminal offence if there is no intended or actual benefit through the wrongdoing (as in the tax evasion offence)?

 

For there to be an underlying fraud offence under the Fraud Act 2006 or for a false accounting offence under s.17 of the Theft Act 1968, there is a requirement for the conduct to be dishonest with a view to obtaining a gain for oneself or another, or with intent to cause loss to another.  If the criminal actions of a company’s associated person are not carried out for the benefit of the corporate (e.g. in an employee’s personal capacity), the corporate should not be held accountable.  For the purposes of a corporate “failing to prevent” offence for fraud or false accounting, therefore, a benefit requirement ought to be included.

The principal money laundering offences under sections 327, 328 and 329 of the Proceeds of Crime Act 2002, which include transferring, acquiring, using and possessing criminal property, can be committed regardless of who benefitted from the conduct.  This approach could carry through into any related corporate “failing to prevent” offence.  The Government’s primary targets for any new failing to prevent money laundering offence may be, like the new tax evasion offence, professional service firms and financial institutions.  The circumstances in which money laundering typically arises in such businesses would not usually result in an obvious additional benefit to the relevant company.  For these reasons, the Government’s preference may be not to include a benefit requirement as part of any new corporate “failing to prevent” money laundering offences specifically.  

  • Territorial scope: Will the new offences apply to companies incorporated or carrying on a business or part of a business in the UK, or will they extend further (like the corporate tax evasion offence), to companies operating anywhere in the world with no connection to the UK, provided some aspect of the underlying offence takes place in the UK?

 

The Government’s resolve to combat tax evasion is part of a global response in light of recent tax evasion scandals, such as the ‘Panama Papers’.  Because tax evasion is, by its nature, an inherently global problem, this goes some way toward understanding the Government’s desire to extend its territorial reach.  This might drive a similar approach to money laundering, which is often lumped in with tax evasion.  Quite whether the broader tax evasion model or slightly narrower UKBA model of extraterritorial jurisdiction will be adopted for each of the new corporate offences, or whether an alternative approach will be taken, remains to be seen.

  • Foreign law offences:  Will a company be exposed to a “failing to prevent” offence where its associated person commits a foreign law offence, but where there is no equivalent underlying offence in the UK (as in the new corporate failing to prevent tax evasion offence)?  This would create a further, significant layer of uncertainty for companies and we would hope the Government could be dissuaded from including any such provision.
  • Prevention procedures:  It has to be assumed that each new offence will include a defence.  A company’s ability to rely on such a defence may be key.  Putting in place adequate or reasonable prevention procedures can be expected to involve carrying out a risk assessment to understand the specific risks associated with a company’s operations, including jurisdictions in which the company operates, industry sector, types of third parties engaged and types of transactions undertaken.  Procedures will then need to be designed to address these risks also having regard to the size and complexity of the business.  Guidance published to accompany the UKBA and draft guidance issued in relation to the new corporate tax evasion offence emphasises the importance of top-level commitment, including designated responsibility for certifying risk assessments and developing, endorsing and communicating a company’s zero tolerance stance on bribery and tax evasion.  Even though it may be possible to supplement existing procedures (e.g. existing anti-bribery and corruption and anti-money laundering procedures) to cover any new offences, the introduction of the new offences can still be expected significantly to increase the compliance burden on companies and on senior management in particular.

 

Next steps

Until the Government publishes its consultation on the new corporate offences, we can only speculate on the scope of the offences and the difficulties that may arise.  The consultation process will provide an opportunity for businesses to comment on the draft legislation and guidance.  As part of the consultation process, the Government often welcomes real life examples which may be of particular concern to businesses.  These examples can potentially form part of the guidance to aid understanding of how the offences and defences are intended to work in practice.

In the meantime, corporates should work to understand how the new tax evasion offence, due to come into force next year, will affect their business.  Due to its wide scope, the offence is applicable to all corporates, not only those that provide financial advice.  While carrying out the exercise of putting in place prevention procedures to address facilitation of tax evasion by third parties, it may be worth considering how the procedures can be supplemented in due course to cover any new corporate offences for failing to prevent other types of economic crime.

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