UK a Step Closer to Criminalizing Failure to Prevent Fraud, Money Laundering

Since adding the “failure to prevent” concept as an offence in the United Kingdom Anti-Bribery Act of 2010, the country has been known for having arguably the toughest legislation against bribery. In a follow-up, the UK introduced failure to prevent offences in the Criminal Finances Act 2017 (CFA), targeting tax evasion. Now it seems that the country is one step closer to expanding its anti-fraud measures by criminalizing the failure to prevent fraud, sanction evasion, and money laundering in a legislative move that is likely to leave corporations scrambling to improve their due diligence and compliance protocols.?

Proposed amendments to the Economic Crime and Corporate Transparency Bill are currently making their way through the British Parliament and are likely to be introduced in the coming months, as confirmed by Security Minister Tom Tugendhat. While the final texts are still unclear, the amendments suggested on March 16, 2023 by Lord Garnier and Lord Wallace of Saltaire include criminalizing the failure to prevent certain economic crimes, financial offences, and “fraud (including false accounting), sanctions evasion, and money laundering.” The amendments also suggest that the “identification doctrine” is changed “so that a body corporate commits an economic crime offence where the offence is committed with the consent, connivance or neglect of a senior manager or senior managers.” In other words, if those amendments pass, a corporation could be liable for any offence committed by an employee, even if said employee is not in a managerial position, or even committed by a third-party supplier. The only defense a corporation would have would be the so-called “compliance-based defense,” where the business would need to prove that it had a sufficient compliance program in place to prevent potential fraud or money laundering.

Similar to the Anti-Bribery Act of 2010, this proposed legislation would apply not only to offences committed in the UK, but to those committed abroad by companies that have parent offices in the UK. “In particular, the potential statutory liability for failure to prevent subsidiaries’ fraudulent behaviour adds another layer of risk for parent companies who are already grappling with the implications of the UK Supreme Court’s findings that a UK-domiciled parent company may owe a duty of care toward claimants allegedly impacted by the actions of a foreign subsidiary,” an opinion by Allen & Overy LLP reads. With the UK already on the trails of hundreds of companies allegedly set up by Russians in the UK to launder war profits stolen from Ukraine, this new legislation will help strengthen the country’s powers to investigate and prosecute such crimes.

Apart from large corporations, law firms, accountants, and even casinos are expected to fall under the scope of the new amendments if they cannot show that they have done enough to prevent fraud, sanction evasion, or money laundering. And according to some analysts, the final wording of the new law may open up its scope to include anything from exaggerated tender submissions through misleading sales documents to greenwashing, which could expose a company to prosecution. This increases the need for companies to be prepared well in advance by setting up robust compliance measures, due diligence programs, and third-party audits.

One key difference from the Anti-Bribery Act of 2010 is that these amendments appear to hold liable only the corporate entity, but not the senior employees, who consented to, connived in, or neglected the issue. The UK Anti-Bribery Act of 2010 allowed for senior officials to be the targets of investigations and even resulted in jail sentences for executives. With the current proposed amendments, personal liability will be reduced, increasing the pressure on the corporation, which likely will result in shareholder and investor pressure to implement safeguarding measures.

The upcoming measures have a lot of supporters, in the face of the director of the UK’s Serious Fraud Office (SFO), Lisa Osofsky, who has pushed for these changes, and in other stakeholders, such as Dr Susan Hawley, executive director of Spotlight on Corruption, who said “it is highly welcome that the corporate liability reform will finally make it onto the statute books.” But they also have met certain criticism, as experts claim that putting the new compliance measures in would be too expensive for smaller corporations. On the other hand, UK fraud-prevention service Cifas expressed worries that excluding SMEs from the failure to prevent fraud offence would leave them more vulnerable to fraud. “I am concerned that the planned exclusion of SMEs in the ‘failure to prevent’ fraud offence may inadvertently put them at greater risk of fraud,” Mike Haley, CEO of Cifas said, adding: “SMEs represent over 99% of UK businesses, often holding sensitive personal and financial data as well as tens of millions of pounds of funds, and so it is crucial that the plan looks to include these businesses to help better protect both them and the wider UK economy from fraud attacks.”

Despite the ongoing debates and uncertainty around the new amendments, they appear to be advancing through Parliament rather speedily and have already passed their second reading in the House of Lords, after passing through the House of Commons in four months. Some experts expect that even if passed soon, they won’t be put into place until 2024, but that estimate doesn’t really leave companies with ample time to prepare. In any case, corporations that do business with, or are located in the UK will do well to pre-emptively evaluate their compliance policies and introduce new measures and programs with the coming changes in mind.?