Pragmatism and principle in ‘failure to prevent’ fraud

The House of Lords defeated the government again recently in the debate about which companies should be liable for the new offence of failure to prevent fraud. Having seen one attempt at compromise (which would have exempted only ‘micro-entities’) rejected by the Commons, Lord Garnier offered another, while making plain that, in principle, the offence should apply to all companies equally. The issue threatens to derail the flagship Economic Crime and Corporate Transparency (ECCT) Bill, the second piece of flagship legislation on this topic in as many years.

The two sides of the debate

The new offence has had a long gestation period. Problems with the general principle, that corporates are liable only for the criminal intentions of their ‘guiding minds’, have prompted the creation of failure to prevent (FTP) offences in connection with bribery and the facilitation of tax evasion. The Law Commission proposed various options to tackle the problem for economic crime more broadly, including the expansion of the FTP model to other offences, including fraud, and the extension of the ‘guiding mind’ principle to a broader category of ‘senior managers’.

Broadly speaking, the FTP model attributes to corporates the offences of ‘associated persons’ (who may not be employees) unless they can show they had ‘adequate’ procedures to prevent them. For the tax version, this became ‘reasonable’ procedures, with an alternative that it was reasonable not to have any procedures at all. Importantly, the model also involves the publication of official guidance, to help corporates see what procedures would be considered ‘adequate’ or ‘reasonable’.

The government did not originally intend to fix this problem in the ECCT Bill, but was prompted to adopt amendments which both extend the ‘guiding mind’ principle for economic crime to senior managers, and create a new FTP fraud offence (with a ‘reasonable’ procedures defence, following the tax model). But its proposal to restrict the latter to the largest organisations has proven controversial.

Lord Garnier’s stance is that it is simply unprecedented and wrong to apply a criminal offence (as opposed to another requirement, like modern slavery statements, or occupational pensions) only to some companies and not others. His concessions (adopted by the Lords) to exempt smaller companies are offered purely in the spirit of pragmatism, and the thresholds now on the table – £10.2m turnover, £5.1m balance sheet, 50 employees – were proffered without much enthusiasm or debate.

The government’s position is more nuanced. Recognising that the new offence will mean new overheads, risks and uncertainties for UK companies, it is targeting it at those more capable of bearing that burden. Also, insofar as smaller companies are more likely to be caught by the existing ‘guiding mind’ principle (more so when extended to ‘senior managers’), there is less need for them to be covered by the new offence.

While Lord Garnier is right to point out that this is new territory, the government is also surely right that the cost/benefit question in introducing this important new offence varies with the size of the corporate. It seems both sides of this debate are now focused on where to draw the line, rather than whether there should be one.

Conclusion

Having had so many years to think about this serious issue, the fact that it has descended into such brinkmanship and blatant horse-trading is surely unfortunate, calling to mind the old adage about diminishing respect for laws, like sausages, as we see more of how they are made. But the blame for that surely lies with the government for letting years pass by without doing more in this area.

It is not yet clear what the government will do next, and whether therefore this is an offence that will affect a majority or a minority of companies. Whichever it is, attention will soon shift to that all-important official guidance, on what procedures are reasonable (and when it is reasonable not to have them).

This guidance is likely to look different to existing guidance on bribery and tax evasion, or to existing corporate controls and procedures to prevent fraud being committed against them. It will also, for the first time, have to take into account the fact that senior managers’ acts will be attributed to companies, regardless of such procedures. It will be a challenge to ensure the messy process of legislation does not create too much chaos and uncertainty for affected companies.

John Binns is a partner at BCL Solicitors LLP
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