U.S. companies with ties to Britain could face criminal charges in the United Kingdom if they fail to prevent a wide range of financial crimes—including fraud and money laundering—under new laws that the government is planning.
The idea is to model the new rules on existing provisions in the U.K. Bribery Act of 2010, which criminalizes companies that fail to prevent bribery and corruption and controversially extends U.K. jurisdiction in this matter to any company with business connections in the country.
“If the ‘failure to prevent’ offense was extended to all white-collar crime, then U.S. firms operating in the United Kingdom could be prosecuted irrespective of whether the financial crime had taken place in the U.K. or abroad, or whether the firm itself had known about it or not,” warns Catriona Munro, a partner at law firm Maclay Murray & Spens.
The Serious Fraud Office has been lobbying for the creation of the expansive law for over a year. U.K. Attorney General Jeremy Wright, the government’s senior legal officer, used a conference speech in September to confirm that it was now under consideration. Legislation won’t be passed before a general election due in May, but the idea has cross-party support, so it is likely to become law whoever forms the next government.
Reform is needed because criminal liability for white-collar crime is outdated and restrictive, say proponents of the failure-to-prevent law. Companies can generally only be found criminally liable in Britain for the acts of employees or agents if the offender was a “directing mind” and the act was the “will of the corporation.”
“If the ‘failure to prevent’ offense was extended to all white-collar crime, then U.S. firms operating in the United Kingdom could be prosecuted irrespective of whether the financial crime had taken place in the United Kingdom or abroad, or whether the firm itself had known about it or not.”
Catriona Munro, Partner, Maclay Murray & Spens
Proving that the most senior personnel were complicit in criminal acts is often impossible. “In practice, this means that criminal prosecution for economic crime in the United Kingdom is currently limited to the employees who directly carry out, or conspire to carry out, the illicit acts,” says David Lawler, a partner at consulting firm Forensic Risk Alliance. “Their employers—the corporations—merely face regulatory penalties.”
It’s difficult to assess the impact of the new law without knowing its exact scope, Lawler cautions. Unlike bribery and corruption, the vast majority of frauds are committed by employees against their employer, so it might seem unfair to then penalize the company that has itself been a victim of crime, he says. “Modernization of the corporate liability laws is required, but a blanket law making a corporation liable for all employee frauds is too broad,” Lawler believes.
Economic crimes that directly affect third parties and the public, such as money laundering, are bound to be included, he says. Most companies already have good controls to cover risks here, especially in the financial services sector, Lawler says. “But regardless of their existing controls, there will still be considerable work required to formalize and disseminate adequate procedures around them, including ‘tone at the top,’ formal risk analysis, messaging, training, and auditing.”
Just How Broad?
If the law is drafted more widely, and includes, for example, the receipt of kickbacks by employees, or securities manipulation, compliance executives will likely have much more work to do. “Few corporations have any meaningful procedures in place to prevent frauds like this,” says Lawler. “Putting procedures in place to deal with many diverse risks will require a truly massive compliance effort, and an across-the-board strengthening of the compliance, risk, and internal audit functions.”
Patrick Crumplin, director of forensic services at Kinetic Partners, a finance industry consultancy, says companies should be able to address the new law by extending their existing anti-bribery and corruption practices to other areas, assuming they are good enough to comply with the Bribery Act.
FAILURE TO PREVENT
Below is an excerpt from U.K. Attorney General Jeremy Wright’s keynote address to the 32nd Cambridge International Symposium on Economic Crime, in which Wright discusses the government’s plan to thwart economic crime in the financial services sector.
Over the past few years, allegations of misconduct in the financial services sector have become far too regular an occurrence.
Problems in the banking industry have been well documented. The most high profile case in the UK is the LIBOR scandal; allegations that bankers colluded to manipulate the LIBOR lending rate.
Manipulation of other bench mark rates, notably in foreign exchange markets, has been alleged in many jurisdictions. Regulators and law enforcement agencies in countries around the world are now investigating allegations of manipulation of Forex.
These scandals have undermined public confidence in the integrity of key institutions and markets. This has obliged Governments to act to address the failure of business to operate in a responsible and lawful fashion …
… Economic crime encompasses a wide range of unlawful activities, much of which is targeted directly at individuals. Organised crime groups increasingly make use of technology to defraud bank accounts and clone credit cards. The losses are smaller in relative terms, but are still devastating to individual victims concerned.
The United Kingdom is the home of a global financial and business centre and has a responsibility to play a leading role in efforts to tackle economic crime and corruption.
This Government has made it a priority to ensure we have the correct laws and structures in place tackle fraud and corruption, and to improve detection of money laundering.
We also need to have an accurate assessment of future risks that we face and ensure that we are using our resources as effectively as possible.
Since last year’s Symposium there have been a number of noteworthy developments in UK law enforcement’s response to economic crime;
Last year the Serious Fraud Office announced its first charges brought under the Bribery Act 2010. In October 2013 the National Crime Agency opened for business. The National Crime Agency hosts an intelligence hub, economic crime command and cyber-crime unit. The NCA will play a vital role in assessing the risks we face from economic crime and informing our response to it.
In February this year, Deferred Prosecution Agreements (or DPAs) came into force in England & Wales. DPAs give prosecutors flexibility to deal with corporate offending where prosecution and the associated consequences (for example, reputational damage and redundancies) are not in the public interest.
The Government is legislating to implement a central registry of company beneficial ownership, to identify and tackle misuse of companies to hide criminal assets. Enhanced transparency of company ownership will help us to tackle tax evasion, corruption and money laundering.
However the evolving nature of economic crime means we need to continue to find and develop new ways to expose and combat it.
Government officials are considering proposals for the creation of an offence of a corporate failure to prevent economic crime, modelled on the Bribery Act section 7 offence.
Shortly, the UK Government will publish the first ever national anti-corruption plan.
Source: U.K. Attorney General’s Office.
“Where firms have embraced the spirit of the Foreign Corrupt Practices Act, Bribery Act, and other legal and regulatory requirements by properly integrating them into their overall corporate culture and governance framework, they may find that only slight modifications are required,” he says.
“Where this is not the case, and where the firm’s internal culture and senior management’s ‘tone from the top’ has not historically emphasized the importance of compliance and ethical behavior, it may be more of a challenge,” Crumplin adds. “These firms will have a significant amount of work to do to ensure adequate systems and controls are in place.”
The proposed legal changes could be more of a revolution than an evolution, says Tony Woodcock, head of regulatory litigation at law firm Stephenson Harwood. The Bribery Act required firms to have “risk-based” procedures, reflecting factors like where it does business, what industry it’s in, and how reliant it in on third-party agents and middle-men. “Assessing ‘economic crime risk’ and implementing procedures to address that risk, could conceivably be a much bigger and more complex exercise,” he believes.
Jurisdiction Questions Remain
So just how concerned should U.S. compliance executives be about this proposed law? It’s not yet certain that U.S. companies will be affected at all, cautions Kevin Robinson, partner in the London litigation practice of global law firm Morgan Lewis.
It was easy for the U.K. government to give the Bribery Act international reach, because “that Act created the offense of bribery,” he explains. “Legislators had a completely blank canvas on which to sketch out its details and scope, so they could set rules about where it should apply. But crimes like fraud and money laundering already exist and have their own jurisprudence in relation to jurisdiction.”
And even if U.S. companies do come within the new law’s reach, it remains the case that the SFO has yet to bring a single corporate prosecution under the existing “failure to prevent” rules in the Bribery Act.
“The SFO is well known to be stretched with its current budget and case load, and I am concerned that any new legislation would not be actively prosecuted,” says Lawler. “I would prefer to see the SFO with a few successful prosecutions under its belt before asking for its remit to be widened.”
Then again, the relative ease with which the SFO could bring a prosecution for failing to prevent financial crime is one reason why the agency is so keen to see the offense introduced. “In investigating and prosecuting an offense there will not be hundreds of thousands of relevant documents to collect and review,” says Lawler. “The critical evidence will be the company’s economic crime policies and any material relating to the implementation and effectiveness of those policies.
“If an underlying offense of fraud is proven against an employee or agent, the proposed new law will allow the SFO to ask the company: ‘Why did your internal procedures not serve to prevent this?’” says Lawler. “The onus will then fall, de facto, on the company to answer that question.”
And it’s important to see the proposed law in the context of this year’s introduction of deferred-prosecution agreements and new sentencing guidelines. “U.S. executives should expect a gradual strengthening of enforcement culture in the United Kingdom,” says Crumplin. “The regulatory and legal risks will therefore increase. Executives will need to plan and be ready.
His advice? “Ensure you have done enough to reasonably assess and mitigate the risks of doing business around the world and be able to demonstrate that you have done so if, or when, something goes wrong.”