Motion E1 (as an amendment to Motion E)

Economic Crime and Corporate Transparency Bill - Commons Amendments and Reasons – in the House of Lords at 4:15 pm on 11 September 2023.

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Lord Garnier:

Moved by Lord Garnier

Leave out from leave out from “House” to end and insert “do disagree with the Commons in their Amendment 151A and do propose Amendments 151B and 151C in lieu—

151B: As an amendment to Lords Amendment 151, in subsection (1), after first “body” insert “which is a non-micro organisation or which is a large organisation (see sections (Section (Failure to prevent fraud): non-micro organisations), (Section (Failure to prevent fraud): large organisations) and (Large organisations: parent undertakings))”

151C: After Clause 180, insert the following new Clause—“Section (Failure to prevent fraud): non-micro organisationsFor the purposes of section (Failure to prevent fraud)(1) a relevant body is a “non-micro organisation” only if the body satisfied two or more of the following conditions in the financial year of the body (“year P”) that precedes the year of the fraud offence—Turnover More than £632,000 and less than £36 millionBalance sheet totalMore than £316,000 and less than £18 millionNumber of employeesMore than 10 and less than 250.(2) For a period that is a relevant body’s financial year but not in fact a year, the figure for turnover must be proportionately adjusted.(3) In subsection (1) the “number of employees” means the average number of persons employed by the relevant body in year P, determined as follows—(a) find for each month in year P the number of persons employed under contracts of service by the relevant body in that month(whether throughout the month or not),(b) add together the monthly totals, and (c) divide by the number of months in year P.(4) In this section—“balance sheet total”, in relation to a relevant body and a financial year—(a) means the aggregate of the amounts shown as assets in its balance sheet at the end of the financial year, or(b) where the body has no balance sheet for the financial year, has a corresponding meaning;“turnover”—(a) in relation to a UK company, has the same meaning as in Part 15 of the Companies Act 2006 (see section 474 of that Act);(b) in relation to any other relevant body, has a corresponding meaning; “year of the fraud offence” is to be interpreted in accordance with section (Failure to prevent fraud)(1).(5) The Secretary of State may by regulations modify this section (other than this subsection and subsections (6) and (8)) for the purpose of altering the meaning of “non-micro organisation” in section (Failure to prevent fraud)(1).(6) The Secretary of State may (whether or not the power in subsection (5) has been exercised) by regulations—(a) omit the words “which is a non-micro organisation or” in section (Failure to prevent fraud)(1), and(b) make any modifications of this section (other than this subsection) that the Secretary of State thinks appropriate in consequence of provision made under quotegraph (a). (7) Before making regulations under subsection (5) or (6) the Secretary of State must consult—(a) the Scottish Ministers, and(b) the Department of Justice in Northern Ireland.(8) Regulations under subsection (5) or (6) may make consequential amendments of section (Failure to prevent fraud: minor definitions).””

Photo of Lord Garnier Lord Garnier Conservative

My Lords, I begin by referring to my interest as a barrister in private practice and informing the House that that practice includes economic and corporate crime.

I wish to acknowledge the genuine attempts of my noble friends on the Front Bench to understand my concerns, expressed over a good many years and, more particularly, during the passage of this Bill, not only in this Chamber and in Grand Committee but in meetings with them and their officials, most recently on Friday. My noble friend Lord Sharpe has had to bear the brunt of my concerns, but he has never dissembled nor lost his sense of humour, even when listening to my jokes. It is regrettable that he has not been permitted any discretion by Ministers in the other place and has had to stick to his instructions on a matter that has nothing to do with party politics or manifesto commitments.

I know that your Lordships are interested only in creating good, coherent and comprehensible criminal law that meets the needs of the modern economy and is in line with public opinion and morality. Thanks to the support of your Lordships’ House—I am grateful to noble Lords of all parties and none—the Bill we are dealing with was altered on Report to delete the SME exemption from the failure to prevent fraud offences regime, while money laundering was added to the failure to prevent regime introduced by the Government; by that, I mean the substantive money laundering offences under Part 7 of the Proceeds of Crime Act 2002, not to be confused with the due diligence requirements under the more recent money laundering regulations.

Last Monday, despite the powerful arguments of my right honourable and learned friends Sir Jeremy Wright and Sir Robert Buckland, the other place refused to extend the proposed new offence of failure to prevent fraud to 99.5% of the corporate economy and deleted money laundering from the failure to prevent regime. Having won the Division in the other place last week, the Government now seek to sustain that position in your Lordships’ House today. I accept that democratic politics is as much about arithmetic as it is about sound arguments; if a majority prefers to do something unsatisfactory, whether or not it has listened to the arguments and the evidence in support of them, that is what will happen. Even as they stand, these limited proposals are well overdue and have been in the making since 2010.

In the spirit of compromise, those of us who voted for the extension of failure to prevent to money laundering on Report have agreed not to press the money laundering extension today. We happen to think that it should be extended to money laundering—I happen to think also that there are other substantive offences, such as those listed in the deferred prosecution agreements schedule to the Crime and Courts Act 2013, that could be included—but, on the basis that the best is often the enemy of the good, and in an attempt to meet the Government a lot more than half way down the road, we will not take that matter further on this occasion. However, I invite the Government and the other place to reconsider the SME exemption, subject to a further concession to exempt micro-businesses; I hope that this will allay the fear, albeit unfounded, that extending the failure to prevent regime further than the Bill currently permits will stifle small businesses. Absent any agreement from my noble friend the Minister, I will seek leave to test the opinion of the House at the appropriate time.

On Report, I spoke in support of a number of amendments or proposed new clauses to the Bill—a Bill which has much to recommend it, even if it has been slow to arrive. The defects that I intended to correct related to the failure to prevent regime. No one needs reminding of this but that regime is not a new provision stealthily added to the criminal law in the past few months by an eccentric Back-Bench Peer. It was first introduced into our criminal law with cross-party support—indeed, without a vote—via the Bribery Act 2010, which began its passage through Parliament under Gordon Brown’s Labour Government and was enacted under David Cameron’s coalition Government. Failure to prevent bribery under Section 7 of the 2010 Act, supported by all three major parties, as well as the Cross Benches and others, is now a tried and tested criminal offence, with an easily understood and practical defence for companies and partnerships that I and many other practitioners have not found difficult to advise on or to apply in particular cases, whether we have been acting for the Serious Fraud Office or for defendant companies.

The objective of the 2010 Act was and is not to bring the full force of the criminal law to bear on well-run commercial organisations that experience an isolated incident of bribery on their behalf. Therefore, to achieve an appropriate balance, Section 7 provides a full defence. This is in recognition of the fact that no bribery prevention scheme will be capable of always preventing bribery. However, the defence was also included to encourage commercial organisations to put procedures in place to prevent bribery by persons associated with them. The failure to prevent bribery offence is in addition to, and does not displace, liability that might arise under Sections 1 and 6 of the Act for direct bribery here or of a foreign public official where the commercial organisation itself commits an offence.

That was well understood as the Act progressed through Parliament and I hope it is well understood now. So too are the special nature and parameters of the statutory defence of “adequate procedures”. Note that the defence requires “adequate procedures”, not perfect procedures. There is no practical difference between “adequate procedures” in the 2010 Act and “reasonable procedures” in the Criminal Finances Act 2017 and in this Bill. The law requires no more than a proportionate approach to the facts relevant to the company or partnership in question.

The alarmist suggestion that a failure to prevent fraud offences regime that does not include SMEs—that is, it does not exempt 99.5% of companies and partnerships—will impose unbearable cost burdens running into multiple billions of pounds on those organisations is absurd. There will be some cost but since the guidance under the 2010 Act has been available since 2011, it is well understood and can easily be adapted to the failure to prevent offences under this Bill. The Bribery Act guidance will easily translate to fraud offences and the sooner it is published, the better. The best estimates are that SME companies will need to spend between £2,000 and £4,000 to prepare themselves and some will need to spend nothing because of their low risk profile. These costs are a legitimate business expense but, to put this in proportion, Lesley O’Brien, a director of Freightlink Europe, said in June 2022 that it costs £20,000 per year to run one heavy-goods vehicle. No sensibly run business should be trading abroad without taking proportionate precautionary steps to avoid the risk of bribery or fraud committed by its associates.

In the guidance to the 2010 Act, published in 2011 by my noble friend Lord Clarke of Nottingham, the then Justice Secretary, he explained that “procedures” is used to embrace bribery prevention policies and the procedures that implement them. Policies articulate a commercial organisation’s anti-bribery stance, show how it will be maintained and help create an anti-bribery culture. They are therefore a necessary measure in the prevention of bribery but they will not achieve that objective unless they are properly implemented. Adequate bribery prevention procedures, I repeat, ought to be proportionate to the bribery risks that the organisation faces. The same applies to the prevention of fraud offences and, where the guidance refers to “bribery”, one could in the context of this Bill substitute “fraud”.

The guidance says:

“To a certain extent the level of risk will be linked to the size of the organisation and the nature and complexity of its business, but size will not be the only determining factor. Some small organisations can face quite significant risks, and will need more extensive procedures than their counterparts facing limited risks. However, small organisations are unlikely to need procedures that are as extensive as those of a large multi-national organisation. For example, a very small business may be able to rely heavily on periodic oral briefings to communicate its policies while a large one may need to rely on extensive written communication … The level of risk that organisations face will also vary with the type and nature of the persons associated with it. For example, a commercial organisation that properly assesses that there is no risk of bribery”— substitute “fraud”—

“on the part of one of its associated persons will, accordingly, require nothing in the way of procedures to prevent bribery”— substitute “fraud”—

“in the context of that relationship. By the same token the bribery”— substitute “fraud”—

“risks associated with reliance on a third party agent representing a commercial organisation in negotiations with foreign public officials may be assessed as significant and accordingly require much more in the way of procedures to mitigate those risks. Organisations are likely to need to select procedures to cover a broad range of risks but any consideration by a court in an individual case of the adequacy or reasonableness of procedures is necessarily likely to focus on those procedures designed to prevent bribery or fraud on the part of the associated person committing the offence in question”.

It was not suggested by the Government then that the Section 7 offence or the failure to prevent facilitation of tax offences would not apply to SMEs or small partnerships. It is frankly laughable that we are, on the Bill’s current wording, about to exempt 99.5% of the corporate economy.

As I have indicated, Parliament criminalised the failure to prevent the facilitation of tax evasion via the Criminal Finances Act 2017. It was the next logical step in the extension of the failure to prevent regime and Parliament passed the relevant provisions without opposition. Of course, a number of professional lobbying organisations—paid for by those who thought that amending the law would be commercially inconvenient—approached the Government and parliamentarians, as they had in 2010, but their submissions did not attract support because most right-thinking people, in and out of government, recognised that things needed to change and that there was no good reason to accede to these narrow commercial interests. Similar attempts were made to prevent the corporate manslaughter and health and safety legislation in the early years of this century, on the basis, as now, that it would create unacceptable burdens on business. No one now sensibly countenances unsafe systems of work.

There have, within living memory, been those who thought it appropriate to prevent health and safety at work laws because they would create an unacceptable business cost. It was suggested that the deaths or injuries of scaffolders, ferry crews or steelworkers were rare and that, in any event, the proposed laws would be an unnecessary burden on business. The Government, it seems, have been persuaded by a couple of lobbying organisations—no doubt legitimately earning their fees by making the same arguments rejected in 2010 and 2017—that the laws we have unanimously passed in the past 13 years were wrongly enacted and should not be replicated in this Bill.

Let us be clear: there is no SME exemption in the Bribery Act or in the Criminal Finances Act, and Parliament did not think there should be. The criminal law applies to all and if the defence of adequate or reasonable procedures is available, there is no conviction—and often no prosecution. What other criminal offence defines liability based on the size of the defendant? A small thief is every bit as much a thief as a tall one, and as liable under the law if the evidence and the public interest in their prosecution are made out. The public interest in requiring a company with a small turnover and only a few employees to prevent its associates committing fraud for its benefit is no lesser than in a far larger company. To limit the failure to prevent fraud offence to corporates that have at least £36 million in turnover, £18 million in assets and more than 250 employees is both absurd and incoherent. The Government have been persuaded by these lobbyists that my amendment to make all companies and partnerships equal before the law would create an unacceptable burden on business—it will not. When I last looked, we make laws through Parliament, not by taking dictation from lobbyists.

Let me help my noble friend the Minister. Under the law of England and Wales, and Northern Ireland, we exempt children under the age of 10 from criminal responsibility; in Scotland I believe it is children under the age of 12. The child could have committed an offence in London for which, had they been aged over 10, they could have received a lengthy period in secure accommodation. For entirely civilised and sensible public policy reasons we do not prosecute children under the age of 10. On that basis, and by that stretched analogy, I propose that we should exempt only the very smallest and newest commercial organisations—micro-businesses—from the failure to prevent regime. You will find the definition of a micro-business by looking at page 18 of the Marshalled List and Amendment 151C, which gives the figures for non-micro-organisations. If you imagine a company that has smaller figures for turnover, balance sheet total or number of employees, you will work out what a micro-business is.

As Barry Vitou, a highly respected white-collar crime solicitor at London solicitors Holman Fenwick Willan, pointed out in an article in City A.M. last Friday, 8 September, by exempting SMEs from the failure-to-prevent regime, we will, ironically, be creating an unintended but foreseeable consequence that could lead to unfairness. Criminal liability, under the identification principle, is much easier to establish in small companies than in large conglomerates. If they are exempted from the failure-to-prevent regime, prosecutors will be tempted to prosecute them for a direct fraud. So we are robbing them of their defence of having put in place reasonable anti-fraud procedures.

I gently submit that the argument I make is not anti-Conservative. Indeed, this whole discussion is not a party-political argument, but one about making good, coherent and sustainable criminal law in a pragmatic way. After all, it was a Conservative-led Government who enacted Section 7 of the Bribery Act and a Conservative Government who enacted the 2017 Act. Surprising as it may seem to my noble friends, I am not a socialist dedicated to the downfall of capitalism, but a Tory interested in the growth of good and honest business. I therefore urge my noble friends on my own government Front Bench to recognise the compromises that I have spoken to and to accept them with the willingness with which they are offered. I beg to move.

Photo of Lord Faulks Lord Faulks Non-affiliated 4:30, 11 September 2023

My Lords, I will take this opportunity to speak to my Motion H1 in the same group, which proposes, as an amendment to Motion H, to

“leave out from ‘161’ to end and insert ‘, do disagree with the Commons in their Amendment 161A in lieu, and do propose” the amendment listed at page 24 of the Marshalled List.

However, I should explain that there is a mistake in this amendment, which is no doubt my fault. There were various communications between me and the Public Bill Office on Friday afternoon, in order to get the amendment in the appropriate shape, and a “not” features in the wrong place. I will explain where the omission is and why I submit that it does not ultimately matter.

The intention behind this amendment, under “Civil recovery: costs of proceedings”, was to try to give some protection to the agencies in the case of adverse costs orders made against them. This amendment was passed by your Lordships’ House; it went back to the House of Commons last Monday and was rejected.

My amendment is a softening of the original amendment put down by the noble Lord, Lord Agnew, and me—softening because it had to be softened somewhat to comply with the rules. Proposed new subsection (2) should read:

“The court should not normally make an order that any costs of proceedings relating to a case to which this section applies … are payable by an enforcement authority to a respondent or a specified responsible officer in respect of the involvement of the respondent or the officer in those proceedings, unless it would be in the interests of justice”.

So the “not” should be inserted earlier and removed later on.

The amendment that was drawn to my attention today did not entirely reflect my intention. I have been in communication with the Public Bill Office as to whether it was possible to amend it. Although it is possible to table a manuscript amendment—see paragraph 8.172 of the Companion—it is inelegant and I am told that the better course is to explain the purpose of the amendment. Were the House to be in favour of the amendment, the matter can be amended at the House of Commons stage. That appears to be the position.

Now perhaps I can come on to the merits, as I see them, of the amendment. The Minister says that my amendment—which is really not much more than a nudge; it does not compel the court to do anything in relation to costs—is intended to prevent any disincentive being provided to the agencies, who may seek to recover the proceeds of crime, often against very well-resourced defendants. Unexplained wealth orders, brought in by the Criminal Finances Act, were to be a powerful weapon in seeking to obtain recovery, ultimately, from those whose wealth was not easily explicable. The agency tried on one occasion to do that and was unable to surmount the hurdle the court said was appropriate in these cases—and, indeed, which Parliament said was appropriate. The result was an order of £1.5 million-worth of costs against the agency.

Perhaps unsurprisingly, there has not been great enthusiasm to take up unexplained wealth orders on the part of the Serious Fraud Office. So your Lordships’ House, during the last economic crime Bill proceedings, very sensibly produced an amendment that, broadly speaking, reflected the amendment we are now discussing in relation to unexplained wealth orders, so as not to provide such a disincentive to the authorities seeking to obtain one of these orders. The rationale behind my amendment is precisely the same. The Minister says that this offends the “loser pays” principle. He is right that the starting point in most civil cases is that the loser pays—for very good reason. If A brings a claim against B that proves to be unjustified, and B has been put to expense thereby, why should B not recover his or her or its costs from A?

However, that rule is subject to many exceptions, as all those who are familiar with the law will know. For example, on some occasions the court orders each side to bear its own costs, having regard to the facts. Sometimes there will be no orders as to costs; sometimes there will be issue-based costs. There will be a variety of different orders to meet the justice of a particular case. Sometimes Parliament even specifically weights the cost in one particular direction. An egregious example is Section 40 of the Crime and Courts Act, which is a controversial issue but shows that Parliament is perfectly capable of deciding who should pay the costs in particular circumstances.

What will happen if this particular provision becomes part of our law? I suggest what will happen is that a judge looking at the end of a case will see that Parliament has decided that normally there should not be an order that the agency pays the costs. However, if the agency quite unreasonably, without proper evidence, seeks to pursue somebody for the proceeds of crime, there is of course the saving provision—“in the interests of justice”—which is part of our amendment. So a court is perfectly able, as it will always do, to look at the particular circumstances of the case and decide that, in this case, the agency has been inappropriately pursuing somebody, seeking a remedy when they should not have done. But this is a nudge towards the judge, and a very qualified exception to the “loser pays” principle.

It is, however, an important amendment. Those giving evidence towards the Bill Committee included Bill Browder, who may be well known to your Lordships for his particularly vigorous pursuit of justice in this particular area, and representatives of the Serious Fraud Office. I would be interested to know from the Minister what the approach of the agencies is to this. If he tells me firmly that they do not want this power, that is of course a powerful argument. It would be somewhat at odds with the evidence and the information I have, but I do not have a complete and total understanding of what their approach should be.

It seems to me that someone running the Serious Fraud Office or the NCA, when deciding whether or not to pursue somebody, would bear very much in mind their budget and the cost consequences of taking a particular course of action. If they knew that there was a degree of protection—and that is all this is, a degree of protection—provided in this, it would act as much less of a disincentive. If they thought that, should they fail to recover what they thought they were entitled to, there would be a very heavy hit on their budget, it might mean that they would not do so, which might be contrary to the interests of justice.

The Minister quite rightly says that it is complicated, but I suspect that we can trust our judges on this. With great respect to him, the Government’s response is that we should have a report. During the debate in the other place on Monday, when discussing the problem that I have outlined, the former Lord Chancellor, Sir Robert Buckland MP, said:

“We know that it is a problem. We know that it is a disincentive to the bringing of civil proceedings under the Proceeds of Crime Act 2002. We should just get on with it. The particular rules and proposals about costs are well reflected in other parts of legal procedure and other types of proceedings, so this is nothing new. I think that it is time that we grasped the nettle rather than having yet another report”.—[Official Report, Commons, 4/9/23; col. 108.]

Who—which stakeholders, as the Government are wont to call them—do we seek to involve? I dare say that those against whom these orders might be sought will be reluctant to have this amendment as part of the statute. Are they stakeholders? As to the agencies, I would need convincing that they would not be to some considerable extent assisted by this amendment. I am not sure that a report would help.

I respectfully submit to your Lordships’ House—and I will be testing the opinion of the House on this—that this amendment, once tidied up, would provide proper assistance to the agencies as well as proper protection, and would none the less provide an appropriate safety valve in case of circumstances where justice needs to be done.

Photo of Lord Agnew of Oulton Lord Agnew of Oulton Conservative 4:45, 11 September 2023

My Lords, I rise briefly in support of my noble friend Lord Faulks on this amendment. I am particularly grateful to him; I was involved in the earlier amendments, but I realised that it needed a premier division lawyer rather than a second division entrepreneur to get this through.

In our discussion with Ministers, we were often told that the enforcement agencies did not want this; that seemed disingenuous to me. I now have some information. For example, law enforcement agents have shown a strong appetite for cost protection and civil recovery. The chief capability officer of the Serious Fraud Office told the economic crime Bill committee that the SFO would like to see this, while the head of the National Economic Crime Centre told the same committee that they found cost protection “an attractive proposal”. I do not think that is a searing insight. Spotlight on Corruption has identified 60 high-risk cases, with the potential of £1 billion of frozen assets, and the chilling effect is palpable among them.

I respectfully disagree with the Government on this. I am grateful to my noble friends the Ministers who have spoken several times to all of us, but I think they are on the wrong side of logic.

Photo of Baroness Noakes Baroness Noakes Conservative

My Lords, I have some very real concerns about the impacts of the new failure to prevent offence on small and medium-sized entities. If my noble and learned friend Lord Garnier’s Motion E1 is agreed to, I think it could be very significant. I believe that the other place was wise to restrict the offence to larger companies only. Setting the threshold at the micro-entity level would still leave very many small and medium-sized entities within the scope of the offence.

I did try to find out how many companies would be affected. My noble friend the Minister said 450,000 companies would be brought within the net of the offence. According to Companies House statistics, around 3.1 million active companies filed accounts last year. Of those, 1.6 million were for micro-entities, and would therefore be excluded, but 1.4 million were for small companies that took advantage of the audit exemption. That, very broadly, is the group of companies that would benefit from the changes made by the other place; it is obviously rather more than 450,000. Whatever the number, there will certainly be regulatory costs for those companies, whether 450,000 or 1.4 million. My noble friend the Minister has given his estimate of what those costs will be. I have never placed much faith in estimates made by Governments of the direct costs of regulatory burdens that Governments try to impose. I generally put a multiplier against them to arrive at a more realistic figure.

However, I believe the most important cost is the opportunity cost that is imposed by regulation. Every time a new regulation is imposed, the people who run small businesses have to spend time away from thinking about their core activities, which should be wealth-generating. Every moment spent thinking about whether they have reasonable prevention procedures in place, or implementing those procedures, is a moment spent not thinking about how to grow the business or how to make it more profitable. Large companies have specialists to cope with all this. Small businesses often have no one beyond the proprietor of the business itself, but they are the very people who are supposed to be spending their time growing their businesses, thereby helping the UK economy to grow—and my goodness me, do not we need growth in our economy?

The cumulative effect of incremental regulation on individual businesses is huge, as any small businessman will tell you, but the cumulative opportunity cost for those businesses of missing out on that growth, and the impact that will have on UK plc, simply cannot be ignored when we are looking at any form of legislation that imposes burdens on businesses. I urge noble Lords to accept the pragmatic solution that the other place has put forward.

Photo of Lord Hope of Craighead Lord Hope of Craighead Judge

My Lords, I am greatly assisted by the correction made by the noble Lord, Lord Faulks; I had great difficulty in understanding the amendment on first reading. Now that he has corrected it, I would like to say from the point of view of a Scots lawyer that there is nothing startling in the proposition that is made. We in Scotland are quite used to the normal routine that law enforcement agencies are not liable in costs for the proceedings that have been taken, probably for the reasons that the noble Lord has clearly expressed.

Photo of Lord Fox Lord Fox Liberal Democrat Lords Spokesperson (Business)

My Lords, we have benefited from two extremely detailed and learned speeches proposing Motions E1 and H1. On Motion E1, I am exercised by the idea that there is an opportunity cost in checking whether you are preventing or causing fraud. That seems to be a strange discussion. The analogy made by the noble and learned Lord, Lord Garnier, with HSE and health and safety, is a good one: yes, it is a cost to make sure that you are doing something safely but it is a much wider benefit. The notion that 95% to 98% of the business community should be allowed not to consider their impact on fraud because that would get in the way of their growth is strange, because that growth would then be predicated on very shaky circumstances. I am not persuaded by the counterarguments, but I have been persuaded strongly by the noble and learned Lord.

Similarly, on the Motion from the noble Lord, Lord Faulks, causing agencies to be too tentative and restricted in how they go about prosecuting people is an important issue. It is clear from what we have heard from the outside world that this gets in the way of prosecutions. It also causes the prosecuting authorities to go for low-hanging fruit—that is, easier propositions—and avoid harder and often more severe prosecutions. That is a chilling effect which we should be worrying about when we look at this issue.

These two important amendments have been trimmed in the light of the rejection of the last set by the House of Commons. Noble Lords and Baronesses on these Benches will be happy to support them, if and when they are moved to a vote.

Photo of Lord Coaker Lord Coaker Shadow Spokesperson (Defence), Shadow Spokesperson (Home Affairs), Opposition Whip (Lords)

My Lords, we have been pleased to support the legislation, which overall we think is very good, and we have said that to the noble Lord, Lord Sharpe. Indeed, the Government have listened, as have all the Ministers on the Bill, and made significant changes. Now we are left with just two amendments, put forward by the noble and learned Lord, Lord Garnier, and the noble Lord, Lord Faulks, which deal with two issues that remain outstanding but are of significant importance and deserve our support and consideration.

I want to reference one or two points made by the noble and learned Lord, Lord Garnier, because he made them particularly well. It is a proportionate and reasonable amendment to ask of the Government. There are all sorts of regulations and legislation—the noble and learned Lord referenced them—to which we say small businesses should be subject to, because we believe that it is the right thing to do and the right climate in which those businesses should operate. When it comes to the failure to prevent, the Government point out that 50% are covered by their legislation, which of course leaves 50% that are not.

Throughout the passage of the Bill, many of us have sought to ensure that the failure to prevent—which is a good step forward—applies, as far as possible, to as many businesses as it possibly can. The noble and learned Lord, Lord Garnier, asked why we would exclude many small businesses when they are not excluded from other legislation that may be seen as a burden. The argument is hollow and does not cut through. For that reason, and because the noble and learned Lord has put forward an amendment that takes into account what was said in the Commons, it deserves our support. Should he put it to a vote, as I think he suggested he would, we will support him.

Similarly, the noble Lord, Lord Faulks, notwithstanding the correction he made to the amendment, brings forward a very important point indeed. One of the great criticisms that is often made about dealing with fraud is that somehow law enforcement agencies are frightened of taking on the people who are committing fraud. I always thought it should be the other way around; the fraudster should be frightened of the law enforcement agency. Yet, for some bizarre reason, it is that way around—that cannot be right. It is not something that any of us want to be the case. Through his amendment, the noble Lord, Lord Faulks, has tried yet again to push the Government to do better and to do more than what is currently in the Bill. His amendment says to the Government, “Surely we should do better”. Indeed, the Treasury itself should be confident in the work of the law enforcement agencies. Some have suggested that those agencies should be indemnified against any costs they may incur.

I go back to two simple points. First is the point in the amendment from the noble and learned Lord, Lord Garnier: why should small businesses be excluded from this legislation, other than the micro-businesses to which he referred, when we do not exclude them from other legislation that we think is important? Small businesses adhere to that legislation in the same way as other businesses. Secondly, the amendment from the noble Lord, Lord Faulks, gives us an opportunity to turn the tables and ensure that, rather than the law enforcement agencies being frightened of costs they may incur in ensuring that fraudsters are brought to book, the fraudsters are frightened. That is why, if the noble and learned Lord, Lord Garnier, and the noble Lord, Lord Faulks, put their amendments to a vote, we will certainly support them.

Photo of Lord Sharpe of Epsom Lord Sharpe of Epsom The Parliamentary Under-Secretary of State for the Home Department

My Lords, I thank all noble Lords who have spoken in this debate. I will respond relatively briefly; I think I have rehearsed the majority of the arguments widely and frequently, and there is not much point in saying more to some of them. However, the precise point I was trying to make in my opening remarks is, in essence, about proportionality. My noble friend Lady Noakes referred to that extremely eloquently.

My noble and learned friend Lord Garnier oftens points out that 99.5% of business is exempted, but I repeat that this is very much a judgment call because 50% of economic activity is captured. My noble friend Lady Noakes referred to the opportunity cost and the noble Lord, Lord Faulks, suggested that perhaps this is about businesses not checking whether they in some way have the right procedures in place to prevent fraud, but it is not about that. It is about many other factors that do not involve the business at hand, as my noble friend Lady Noakes referred to. Those other burdens are obviously partially financial, but not fully.

My noble and learned friend Lord Garnier referenced the fact that there are different thresholds for this offence in the failure to prevent bribery or the criminal evasion of tax, to give two examples. The noble Lord, Lord Coaker, also referred to that. We considered the threshold in the light of the nature of fraud and the need to support struggling small businesses. The Law Commission identified a disparity, as it is easier to prosecute smaller organisations under the current law, which this failure to prevent offence will address. The new offence is less necessary for smaller firms. It is easier to prosecute individuals and businesses for the substantive fraud offence; it would therefore be disproportionate to impose the same burdens on them. As I pointed out in my opening remarks, the Bill also includes a power to amend the threshold via secondary legislation in future if evidence suggests that such a change would be appropriate.

I go back to the financial burdens. As I say, the Government recognise the need to consider the cumulative compliance costs for small and medium entities across multiple government regulations, rather than seeing these fraud measures in isolation. The cost of extending the measures to cover SMEs is significant: up to £4 billion from £487 million. The cost of reducing the threshold to cover only micro-entities, I repeat, would also be vast. It would increase the one-off cost on businesses from around £500 million to £1.5 billion. The annual recurrent costs would increase from £60 million to more than £192 million. I am afraid that the Government’s position has not changed; we regard this as disproportionate.

I thank the noble Lord, Lord Faulks, for his clarification on his amendment. He has partially provided an answer as to why we need a review, because it is a complex area of law. Looking at these things and amending them at speed can obviously have unintended consequences. We do not believe that there has been a chilling effect. No agency has told us that this is the case and, as I explained, it is the evidential burden that proves more of a barrier to prosecuting some of these cases, which are, by their very nature, exceptionally complex.

We worked with law enforcement in putting together the Bill, and the content included many of its key requests such as powers on crypto assets, changes to corporate criminal liability, more accurate Companies House data and greater pre-investigation powers for the SFO. All those agencies will have significantly more tools in their armoury to go after the people who are committing economic crime and, as I say, no agency has told us that this particular lack has a chilling effect.

The noble Lord, Lord Faulks, asked about unexplained wealth orders. They are an investigatory tool for law enforcement, so do not directly result in individuals being permanently deprived of their assets. UWOs are exceptional investigations that can be used only against PEPs or those reasonably suspected to be involved in serious crime, where there are reasonable grounds to suspect that they have assets that are disproportionate to their legally obtained income or have been obtained through unlawful conduct. UWOs can apply only to property that is more than £50,000 and are often used in complex, lengthy cases. Given this and the other factors that I have set out, it was deemed justified to introduce cost protection in UWO cases—but, as the noble Lord pointed out to me earlier today, they are used a lot less frequently than in other cases. Having said all that, I agree that it may well be in the interests of justice to look at this again, which is why we would like to do the review and report back to Parliament in 12 months. That is the right way to do it.

I urge all noble Lords to note the improvements that the Government have made to the Bill and I thank them for their extensive engagement on all these and other matters. We believe that these provisions strike the right balance between promoting economic growth and the all-important job of tackling economic crime, so I ask noble Lords to consider that when voting.

Photo of Lord Garnier Lord Garnier Conservative 5:00, 11 September 2023

My Lords, I wish to press my Motion E1 and test the opinion of the House.

Ayes 211, Noes 185.

Division number 1 Economic Crime and Corporate Transparency Bill - Commons Amendments and Reasons — Motion E1 (as an amendment to Motion E)

Aye: 209 Members of the House of Lords

No: 183 Members of the House of Lords

Aye: A-Z by last name


No: A-Z by last name


Motion E1 agreed.