Lord Sharpe of Epsom:

Moved by Lord Sharpe of Epsom

That this House do agree with the Commons in their Amendment 151A.

151A: In subsection (1), after first “body” insert “which is a large organisation (see sections ((Failure to prevent fraud): large organisations) and (Large organisations: parent undertakings))”

My Lords, I will speak also to Motions F, G, H and H1. We cannot agree to the proposed amendments for practical reasons, not least that the burdens they would place on business would not just be justified. It is for this reason, and not because of any intransigence or party-political reason, that we are unable to agree with the proposed Lords amendments. I will now talk specifically to the Motions in this group.

Motion E would reinsert the SME exemption for the failure to prevent fraud offence. I have of course noted Motion E1, tabled by my noble and learned friend Lord Garnier. I appreciate that he has moved closer to the Government’s position on this issue, creating his own threshold that would exclude microentities from the failure to prevent fraud offence. However, the Government remain extremely mindful of the pressures on companies of all sizes, including small and medium-sized enterprises, and therefore do not feel it is appropriate to place this new, unnecessary burden on more than 450,000 of them.

The analysis on this issue remains clear: even reducing the exemption threshold to only microentities would increase the one-off costs on businesses from around £500 million to £1.5 billion. Further, the annually recurrent costs would increase from £60 million to more than £192 million. Those costs would still be disproportionately shared by small business owners.

I know some noble Lords have expressed scepticism about the burdens, but the fact is that when a small business person hears that they may be liable to a new offence and significant fines if they are judged not to have taken action on something, they will worry. They will take time out of their business to scrutinise the guidance and, whatever it may say, there could be widespread overcompliance. Furthermore, they may well have to pay their accountant or lawyer to do it for them. While this burden is eye-watering in its own right, the issue cannot be taken in isolation. We must be aware of the cumulative compliance costs for SMEs across multiple government requirements or regulations. Furthermore, I can assure noble Lords that 50% of economic activity would be covered by the organisations in scope of this new offence with the Government’s threshold in place. It is of course already easier for law enforcement to attribute and prosecute fraud more easily in the smaller organisations that fall below the threshold.

I hope that noble Lords who feel strongly on this issue will be reassured that this is not the end of the debate. The Government have future-proofed the legislation by including a delegated power to allow them to raise, lower or remove the threshold altogether. Of course, as with all legislation, the Government will keep the threshold under review and will make changes if there is evidence to suggest that they are required. I therefore urge noble Lords to support government Motion E, rather than Motion E1.

I now turn to government Motion G, which disagrees with Lords Amendment 158. This was also tabled by my noble and learned friend Lord Garnier and seeks to introduce a failure to prevent money laundering offence. I am pleased that no amending Motions have been tabled for today, as I fear this amendment is entirely duplicative of existing regulations. Much like my noble and learned friend’s other amendment, it would therefore impose yet further unnecessary burdens on UK businesses. The UK already has a strong anti-money laundering regime in the form of the money laundering regulations, which require regulated sectors to implement a comprehensive set of measures to prevent money laundering. Corporations and individuals can face serious penalties, ranging from fines to cancellation of registration and criminal prosecution, if they fail to take those measures. What is more, those penalties will apply even if no actual money laundering has occurred. No knowledge of or intention to commit an offence has to be proved.

The money laundering regulations and the money laundering offences in the Proceeds of Crime Act are directly linked and can be seen as part of the same regime. A failure to prevent money laundering offence would therefore be highly duplicative of the existing regime. This is not just the view of the Government: in our conversations with industry, it has been very clear that duplication would create a serious level of confusion and unnecessary burdens on businesses. We should support legitimate businesses, rather than hamper them with overlapping regimes. I therefore hope that noble Lords will agree with the government Motion to disagree with the amendment from Report.

I turn finally to the Government’s Motion H, with which I will address Motion H1, tabled by the noble Lord, Lord Faulks. As I have discussed with the noble Lord, the Government’s position on this issue is that his amendments would be a significant departure from the loser pays principle, and therefore not something that should be rushed into without careful consideration. The effect that I believe he intends them to have would mean that the state could come after someone’s assets and lose the case, and then the individual—who will not necessarily be a Russian oligarch—would be left with a potentially ruinous legal bill. That would be the case even where the court decides that the property is not derived from unlawful conduct, although, as drafted, the noble Lord’s amendment would, in effect, achieve the opposite.

Furthermore, there is not the evidence that such changes would help achieve their intended aim of protecting enforcement budgets and increasing the number of civil recovery cost orders. There have been no adverse cost rulings against an enforcement authority carrying out this type of civil recovery in the past six years. Costs are just one of the many factors that determine whether law enforcement will take on a case. For example, the evidence available to pursue a case, particularly where evidence is required from overseas, often proves more vital to an operational decision.

I appreciate the noble Lord’s intentions behind Motion H1, which I think is intended to address some of these concerns, but I am far from convinced that it does. This amendment is not only a significant departure from the loser pays principle without clear benefits but it appears to make the starting point that the enforcement agency normally pays the costs to the respondent, regardless of the outcome of the case, unless the court decides that it is not in the interests of justice. Introducing legislation on costs that starts with the enforcement agency paying the respondent’s costs would swing the balance in favour of the respondent. This would expose the law enforcement agency to liability for costs even where it has won its case. It is not clear to me whether this was intended by the noble Lord, which in itself shows just how complex this area of law is.

Additionally, this would be a limited reform to economic crime offences, whereas the civil recovery regime applies to all kinds of unlawful conduct. Distinguishing which aspect of the underlying unlawful conduct was economic crime—for example, money laundering—and which was some other type of offence will be unworkable for law enforcement and the courts. In fact, the drafting of the amendment assumes that the property is recoverable, because it requires that the property has been obtained through economic crime. That suggests that a law enforcement agency must have satisfied a court that it derives from unlawful conduct, so it may well have won its case and recovered that property. However, the default would be that the agency pays the respondent’s costs. I do not think that was the intention behind the amendment.

I am keen to reiterate that civil recovery is a powerful tool that can result in the permanent depravation of someone’s home. The law in this area is well developed but relies on the discretion of the court to award costs, rather than the Intervention of government to entirely remove the liability for costs of just one party except in certain circumstances. There are already a number of ways in which an enforcement agency’s liability to legal costs can be protected under the Civil Procedure Rules in England and Wales. For instance, Rule 44.2 gives the court discretion as to the payment of costs by either party, including whether they are payable to another party, the amount and when they are payable. In addition, a cost-capping order can be applied for under Rule 3.19 that limits any future costs that a party may recover under a later costs order. If we are to introduce further legislation, we must consider what gap this is trying to fill.

However, the Government recognise the strength of feeling on this issue and the potential merits in bolstering the system for all of civil recovery, not only economic crime offences. The Government would like the time, and more input from those affected, to be able to consider this issue further. That is why Motion H imposes a statutory commitment on the Government to review the payment of costs in civil recovery cases in England and Wales by enforcement authorities and to publish a report on their findings before Parliament within 12 months. This review will look in detail across all the available evidence, take account of key stakeholder views, analyse any potential legal issues and provide a view on whether and how any cost protection should be implemented. Given the need to ensure that any changes in this area are evidenced and workable, and the evident complications that can arise from rushed legislative changes, I urge noble Lords to therefore support government Motion E. I beg to move.