Garnier Says Satisfying Fraud Law Brings Tinge Of Frustration

11/29/23, 10:24 AM - Law360 UK

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By Christopher Crosby

Law360, London (November 28, 2023, 10:30 AM GMT) -- Edward Garnier KC, the Conservative peer, barrister, and one of the country's foremost experts on economic crime, is sitting at his desk on a bright and blustery November morning, frustrated.

More than a week has passed since he helped steer one of the most important pieces of economic crime legislation in a generation into being, but Garnier's satisfaction at having reformed corporate accountability is tinged with disappointment.

In an interview with Law360 at his 4 Pump Court chambers, desk strewn with red binders containing case briefs, Garnier said the Economic Crime and Corporate Transparency Act will make Britain a fairer place to do business.

But it could have accomplished more. Despite introducing a new failure to prevent fraud corporate criminal offense, and reforming the law around attributing liability to companies for the actions of senior management, Garnier said that the reticence by some in government to close loopholes is a missed opportunity.

"There's a degree of satisfaction with the Act as a whole because there are some very welcome provisions included in it, but also a great deal of frustration that the government has allowed itself to be frightened by a couple of lobbyists on behalf of the banking interests, or whoever they may be, into thinking that extending failure to prevent will create a massive burden on business," Garnier said.

There comes a stage when, no matter how right I think I am, I have to constitutionally allow the elected house, no matter how unwise I think it is, on this particular question, to win.

The legislation has developed a long way since it was first read in the Commons in September 2022. The act introduces a failure to prevent fraud offenses, creating criminal liability for companies if their employees commit fraud for the benefit of the business. Companies that have put 'reasonable' policies in place to stop and counter fraud will have a defense to liability, but those that don't risk conviction and fines.

Unlike similar failure to prevent laws covering bribery and facilitation of tax evasion, the rules won't apply to all businesses. That's because the government has exempted small and midsized businesses, citing concerns businesses would take a ￡300 million ($379 million) one-off hit for complying with the law, followed by ￡40 million in annual costs.

As a result, only those businesses that meet two of three criteria will be affected: if they have 250 employees, ￡36 million in sales or ￡18 million in assets. Critics have said that the threshold exempts 99.5% of all businesses, though supporters in the government say the bar captures 50% of all economic activity.

During debates, Garnier likened the exemption to prosecuting "every burglar over 6ft 6in" but allowing anyone shorter to "get off scot-free."

Garnier along with other Conservative peers and MPs fought over several months to remove the carve-outs — even dropping money laundering from the list of potential offenses in a bid to get the government to negotiate.

Each attempt failed, as the government in the House of Commons dug in, rejecting attempts to amend the SME threshold. Garnier said that he wasn't trying to take a political stand against his party, but put the failure to prevent offenses all on the same legal footing.

Compliance costs — estimated somewhere between ￡2,000 and ￡4,000 for a small business — pale in comparison and are "not as frightening a picture as they may think," he said.

"I suspect the government was spooked," Garnier said, leaning back in his chair. "And the Treasury was spooked by not wanting to be seen to be anti-business in the run-up to an election. It's probably as crude as that.

Garnier said he expects that the government wants to be seen to be pro business. Although he is keen to stress that he too is pro business. "I'm pro clean business. And clean business leads to more business, and better business, and foreign investment, and all of that. And if we run every time someone says, boo, why start?" Garnier said.

His thinking, he says, caught on. The first vote to close carve outs, in July, had a three-member majority. By October, on the third and final round of legislative ping-pong with the House of Commons, it was 41.

But, Garnier said, he had to eventually yield to the elected lawmakers.

"There comes a stage when, no matter how right I think I am, I have to constitutionally allow the elected house, no matter how unwise I think it is, on this particular question, to win," he said.

Not Expecting Miracles

Garnier's legal career stretches back to 1976 when he was first called to the bar. He started practicing libel law, and received a Queen's Counsel designation in 1995. When the Conservatives were in opposition, he served as the shadow minister for Home Affairs and Justice, and in 2007, the shadow Attorney General.

I'm pro clean business. And clean business leads to more business, and better business, and foreign investment, and all of that. And if we run every time someone says, boo, why start?

After being appointed solicitor general by Prime Minister David Cameron in 2010, Garnier studied American corporate criminal liability, where he got the inspiration to introduce deferred prosecution agreements into the U.K.

Since then, the SFO and companies have frequently tapped Garnier to navigate them through the process. He represented the agency in the first DPA with Standard Bank in 2014, and again in 2017 when he helped Rolls-Royce secure a ￡497 million settlement — then the largest — over bribery and corruption allegations in seven countries.

In 2021, he represented two British businesses in the 12th and most recent agreements in connection with bribery in the office fit-out market.

While there have been fewer agreements than he anticipated in the decade since they were introduced — and critics say the SFO has failed to successfully prosecute individuals — Garnier said they've helped drive corporate culture change.

"Nobody thinks it's strange to advocate the further extension of the failure to prevent a bribery regime, which has had a cultural effect, just as seatbelt laws have had a cultural effect, just as drink-driving laws have had a cultural effect," he said.

"Obviously, every now and then, people get done for drinking and driving and every now and then, people get done for not wearing their seatbelt," he noted.

The new economic crime law comes at a time when fraud has been calculated to account for 41% of all recorded crimes in the U.K., costing individuals and businesses billions annually. One of the hopes is that the act will change corporate culture by putting fraud on par with bribery.

"I'm not so naive as to think that by passing a law, you immediately abolish the temptation to commit crime," Garnier said. "But it must have some salutary and beneficial effect which can mean that Britain is seen as a better place for all his business to take place. I'm not expecting miracles."

A Different Discipline

Despite the law's shortcomings, an under-the-radar provision introduced over the summer overhauls the so-called identification principle, which prosecutors use to attribute liability to companies for the actions of their employees.

I'm not so naive as to think that by passing a law, you immediately abolish the temptation to commit crime. But it must have some salutary and beneficial effect.

Before the reform, the standard required prosecutors to prove that individuals who constitute the "directing mind and will" of the company knew about the wrongdoing. The legal test, derived from Victorian times and set in precedent five decades ago, was seen as overly narrow and unable to bend to modern corporate structures.

The success of the measures could be tied up with the future SFO, which needs funding and resourcing to put the legal tools to use. Garnier said that the agency shouldn't be merged with the NCA and CPS due to the specialist work it carries out. Instead, more attention should be paid to staff salaries, which, despite rising, are a major reason investigators leave for higher pay in the private sector.

"It may well be that the new director, who's a police officer, is able to bring a different discipline into play," Garnier said.

This isn't the end of the road for reforms, either. Russia's invasion of Ukraine has shone a light on London's role in facilitating dirty money, he said. During committee hearings on overseas corporate entities, lawmakers heard how swathes of residential buildings in the center of the capital are dark year-round, not residences but assets where elites have parked their wealth.

"London is a great financial center, and that is a good thing. But people use it for bad purposes. And we're slowly waking up to the fact that some people are using the financial system to assist terrorism, drug trafficking and people trafficking," Garnier said. "And some of the money flowing through the system was stolen assets from poor, benighted populations dotted around the world."

--Editing by Joe Millis. All Content ? 2003-2023, Portfolio Media, Inc.