With the parliamentary summer recess upon us, it is worth recapping where the Conservative government’s flagship Economic Crime and Transparency Bill got up to before taking a well-deserved holiday.

The reform proposals – which are now expected to become law sometime in the autumn legislative term – represent the most significant shift in white collar criminal legislation for over a decade, by altering the basis on which legal persons may be held accountable for certain crimes, introducing a raft of new corporate ‘failure to prevent’ offences and giving the UK’s premier law enforcement agency additional powers to gather evidence.

The Bill (latest and historic versions available here) has been through a lot of amendments and it is expected to potentially receive a further face-lift in the autumn. Until the school bells ring again, this is what you should know about what the Bill is currently expected to achieve.

Overview of the Bill

Two main areas for reform of corporate criminal liability

The two main areas of reform are: (a) introducing a new, free-standing criminal offence of failure to prevent fraud (along similar – albeit not identical – lines to the existing corporate offence under the Bribery Act 2010) and (b) revising the identification principle (the general doctrine for holding a company criminally liable when there is no specific corporate offence to refer to). The approaches to criminal liability under (a) and (b) could not be more different, although they will foreseeably sit side by side in the statue books.

Extended investigative powers

Less is talked about the third headline prong of the Bill, but it should certainly not be forgotten: it is proposed that the Serious Fraud Office’s power to compel the production of material, explanation and information at a much earlier, preliminary stage of its investigations be extended from its current narrow remit (only applicable to certain Bribery Act offences) to all its enquiries. This would be achieved by amending (and considerably simplifying) section 2A of the Criminal Justice Act 1987.

The expansion of these so-called section 2 powers could assist the agency with focusing its attention on the most relevant areas of its investigation. On the other hand, it may well result in more headache for businesses – who could be at the receiving end of more compelled requests for information, as well as in an increased volume of disclosure for trigger-happy investigators.

The first area: failure to prevent fraud

Shifting failure to prevent fraud offence

The scope and reach of the new failure to prevent fraud offence could yet shift. At one point it was envisaged that small- and medium-sized companies (with reference to turnover, balance sheet total and the number of employees) could be exempt. It now appears that the offence will cover all relevant bodies (i.e. corporates, unincorporated and limited liability partnerships, irrespective of size). However, in the case of large organisations only, parent undertakings will also be liable where the benefit is provided to a subsidiary (as opposed to the parent) – unlike SME parent companies.

Unlike earlier drafts that included a broader range of misconduct, it is currently envisaged that beyond the Fraud Act 2006, the new offence will extend only to false accounting and fraudulent trading offences. However, the Bill also contains an alternative formulation: ‘failure to prevent fraud and money laundering’. As it says on the tin, this iteration of the offence would extend to sections 327-329 of the Proceeds of Crime Act 2022 (POCA). Arguably, attempting to hold corporates liable for money laundering on a failure to prevent basis would be an easier target than under the identification principle, considering the relevant mens rea requirements in POCA. Notes from the latest debate of the Bill in the Lords Chamber reveal that not everyone is convinced that the UK needs yet another anti-money laundering measure.

When would a corporate be held liable?

One thing appears certain: businesses will be able to fend off the charge if they can show that the company was, or was intended to be, a victim of the fraud. This is a potentially higher threshold to pass than the originally intended formulation (‘did not, and was not intended to, benefit’) – it is unclear what a company would need to prove in order to be considered a potential or actual victim. Due to the very nature of the offending, it is relatively rare in fraud cases for the offender to act with a view of benefitting their employer (unlikely in the case of bribery). For the alternative offence that also includes money laundering, the victim test would be replaced with one that focuses the intention to ‘cause harm’ to the business.

Preventive procedures defence

In any event, the new offence will be accompanied by detailed guidance on preventive procedures that, as expected, will serve as an absolute defence. For the defence to apply, such preventive procedures would need to be reasonable in all the circumstances or alternatively, it would need to be reasonable for the organisation to have no such procedures in place. Plainly, this will be a question of fact and degree. As expected, the language of the defence is in line with that introduced for the existing failure to prevent the facilitation of tax evasion offence under the Criminal Finances Act 2017. The introduction of guidance – to follow the enactment of the Bill in due course – will make compliance more straightforward but also potentially more expensive. As many will remember, the introduction of this guidance-based approach into UK law, under the Bribery Act 2010, resulted in a whole new industry developing to provide related training and audit services.

More corporate fraud prosecutions?

Given that it is not currently envisaged that the offence would require ministerial consent to charge, it will be interesting to see whether the Crown Prosecution Service takes the opportunity to branch into more corporate fraud prosecutions, especially considering the widespread alleged fraudulent abuse of Covid loans and grants.

The second area: the general basis for holding corporates criminally liable

Identification principle

The identification principle, also known as the directing mind and will doctrine, has arguably been long overdue for reform so that it is brought into the 21st century. It is envisaged that it will be given a new lease of life some five years after its most famous recent outing in the unsuccessful prosecution of Barclays by the Serious Fraud Office, through amending the basis for attributing criminal liability for economic crimes to corporates and partnerships. Indeed, looking at the wording of the proposed amendment in the Bill, we could make an educated guess as to what judgment the draughtman had in mind…

Senior managers

The reforms intend to reflect the reality of how large, modern, multinational businesses are structured and run, by focussing on those with actual or apparent authority to act on the organisation’s behalf (and the scope of that authority). At one point, the amendment was due to explicitly include the actions of chairmen, chief executive officers and chief financial officers. Sensibly enough, the Bill now adopts a less prescriptive approach, by homing in on the actions of senior managers i.e. those who play a significant role in how the whole or a substantial part of the activities of the organisation are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities.

Broader responsibility

The proposal is anticipated to considerably broaden the scope of corporate criminal responsibility. This aim is furthered by the revised principle also extending to inchoate offences (such as aiding, abetting, counselling and procuring, as well as attempting and conspiracy) and offences under Part 2 of the Serious Crime Act 2007 (i.e. encouraging or assisting a crime). Notably, the Bill envisages a degree of extra-territoriality to the reshaped identification doctrine.

Wider context

Last but not least, while the revised identification principle will be first introduced in an economic crime context (due to the very nature of the Bill), it is anticipated that with time, it will also be extended to other, non-financial offending, such as phone tapping. ‘Economic crime’ is broadly defined for the purpose of this amendment to include less obvious areas such as terrorism-related fundraising, as well as causes célèbres such as misleading the Financial Conduct Authority or the Prudential Regulation Authority and – notably – any regulations made under the Sanctions and Anti-Money Laundering Act 2018. The latter includes the financial and trade sanction prohibitions under the UK’s autonomous Russia sanctions regime.