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Criminal liability for businesses that fail to prevent fraud?

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United Kingdom

On 14 June the shadow attorney general Emily Thornberry unveiled Labour's plans to combat corporate fraud.

On 14 June the shadow attorney general Emily Thornberry unveiled Labour's plans to combat corporate fraud. This follows an earlier announcement by the shadow home secretary of a proposed Economic Crime Bill.

The plans include:

  • updating the UK's law on corporate criminal liability; and
  • considering whether more of the proceeds of crime can be ploughed back into law enforcement.

The aim is to transform the UK's enforcement record on economic crime, and to create a "profit centre for the criminal justice system", similar to the US.

Launching Labour's plan titled Tackling Serious Fraud and White Collar Crime, the shadow attorney general said "it seems to me there is a very good case for holding companies vicariously liable for their employees’ economic crimes, unless they can demonstrate that they had adequate compliance procedures in place".
 
This development echoes recent comments by the director of the UK Serious Fraud Office (SFO), David Green.  In a speech earlier this month he called for legislation to make companies criminally liable for failing to prevent fraud by their employees.  David Green considers that this change in the law is needed for his agency to be able to "properly" pursue businesses. In cases of fraud the SFO currently have to show that persons comprising the "directing mind and will" of a company committed the offence in order to establish corporate criminal liability, which means prosecution of companies is rare.

In corruption cases the "directing mind" test has already been bypassed by section 7 of the Bribery Act 2010, which controversially created a corporate offence of failing to prevent bribery. This has exposed companies to a greater risk of prosecution for corruption.

The new proposals would effectively amount to an extension of section 7 offence to all fraud cases. "Only then would (the SFO) be properly equipped to prosecute corporates rather than individuals," according  to David Green.

Commentary

These are concerning developments for companies as they mark an intention to expand the criminal law yet further into the business world. The Bribery Act controversially introduced the prospect of prosecuting companies for bribes that they were not aware of, paid by individuals they had little control over. The new plans threaten to expand that offence to all fraud related offences.

The Bribery Act incorporates a defence of "adequate procedures", and, based on Emily Thornberry's comments, it seems likely that any proposed extension of the law to fraud would adopt this defence. However the compliance burden for businesses, which is already significant for bribery purposes, would be increased enormously.

Deferred Prosecution Agreements (DPAs), which allow companies to confess wrongdoing in exchange for postponed criminal charges and immediate fines, are now on the UK statute book, and are expected to be in force in 2014. DPAs offer a potential non-criminal resolution in cases of financial crime. However, if the law is expanded as the SFO and the Labour party propose, it will be of little comfort for companies to know that a DPA might be available, not least because the issue will by then be public, and the business damage already inflicted. 

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