New Clause 24 - Facilitation of economic crime

Financial Services Bill – in a Public Bill Committee at 3:15 pm on 3 December 2020.

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“(1) A relevant body commits an offence if it—

(a) facilitates an economic crime; or

(b) fails to take the necessary steps to prevent an economic crime from being committed by a person acting in the capacity of the relevant body.

(2) In subsection (1), a ‘relevant body’ is any person, including a body of persons corporate or unincorporated, authorised by or registered with the Financial Conduct Authority.

(3) In subsection (1), an ‘economic crime’ means—

(a) fraud, as defined in the Fraud Act 2006;

(b) false accounting, as defined in the Theft Act 1968; or

(c) an offence under the following sections of the Proceeds of Crime Act 2002—

(i) section 327 (concealing, etc criminal property);

(ii) section 328 (arrangements, etc concerning the acquisition, retention, use or control of criminal property); and

(iii) section 329 (acquisition, use and possession of criminal property).

(4) In subsection (1), ‘facilitates an economic crime’ means—

(a) is knowingly concerned in or takes steps with a view to any of the offences in subsection (3); or

(b) aids, abets, counsels or procures the commission of an offence in subsection (3).

(5) In proceedings for an offence under subsection (1), it is a defence for the relevant body to show that—

(a) it had in place such prevention procedures as it was reasonable in all circumstances for it to have in place;

(b) it was not reasonable in the circumstances to expect it to have any prevention procedures in place.

(6) A relevant body guilty of an offence under this section shall be liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction in England and Wales, to a fine;

(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.

(7) If the offence is proved to have been committed with the consent or connivance of—

(a) a director, manager, secretary or other similar officer of the relevant body, or

(b) a person who was purporting to act in any such capacity,

this person (as well as the relevant body) is guilty of the offence and liable to be proceeded against and punished accordingly.”—

Brought up, and read the First time.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

I beg to move, That the clause be read a Second time.

Although it is late in our proceedings, this is the first chance I have had to say what a pleasure it is to serve under your chairmanship, Ms Huq. New clause 24 introduces an offence of failing to prevent economic crime. I should make it clear that it is a corporate offence for companies.

The Committee will know that we have received written evidence on this issue from Spotlight on Corruption. In previous debates, we have all agreed that money laundering and fraud are big problems for the UK, although they are difficult to quantify. As I have said, I appreciate that the Minister has very likely been advised not to accept any amendments to the Bill. When a party has been in power for 10 years, that tends to reinforce itself, because it can become more difficult to admit that things are wrong. I should say in all candour that I am not suggesting that fraud or money laundering only started in 2010.

These are big, difficult and long-term issues for all Governments, so this is not a game of gotcha. It has been a problem for a long time, and Governments and regulators have to adapt constantly to deal with it. As we have been discussing this afternoon, as the pattern of business, trade and company ownership changes, so must the law and the regulatory rulebook. There is no embarrassment in acknowledging that we have a problem with money laundering or fraud, or, indeed, in introducing changes. Doing so is a strength.

The problem that the new clause deals with is twofold. First, there is the straightforward issue of fraud or crime—positive acts of wrongdoing—being committed. Secondly, there is the situation where breaches of the law take place in a company and it is impossible to hold the company to account because there is no duty on the company to prevent such acts in the first place. We saw that kind of thing graphically during the LIBOR scandal, which we have discussed in our proceedings. One chief executive after another—some of the highest-paid people in the world, it should be said—professed their profound shock at what their traders were doing. They knew nothing about it until they read about it in the newspapers, and they were absolutely dumbfounded at what was going on several floors below them in the same company. It worked for them: there were no corporate prosecutions in the UK.

I have already spoken to the Committee about the incentive to look the other way that this situation entails. It is better for a senior director of a financial institution to appear to be a fool than a knave, because the defence that they did not know what was going on is usually better for them than saying that they did know what was going on, but they did nothing about it. Not only that, but further down the chain it creates a disincentive to report wrongdoing further up the hierarchy, because doing so may mean that the ignorance defence is not available to those at the top of the hierarchy. That creates a mismatch between how small companies and large companies are treated, because small companies are assumed to have a directing mind, so that, if wrongdoing is identified, professing ignorance is not a defence for senior managers.

What would creating an offence of failure to prevent economic crime do? It would create a level playing field between small and large companies; it would send out a strong signal about the kind of financial sector that we want as we come to the end of the transition period; and it would equalise how different kinds of economic crimes are treated, because such a liability—I stress that it would be a corporate liability—already exists when it comes to, for example, bribery or tax evasion. Why should the ignorance defence be available for some offences but not for bribery or tax evasion? The Treasury would never accept it if senior members of a company said, “Oh, we didn’t know we were supposed to pay those taxes.” That would not be a legitimate defence, and yet it can be used for some other kinds of wrongdoing.

Let me return to the point about the signal that we want to send. A lot of the Bill is about onshoring EU directives. The sixth anti-money laundering directive requires EU member states to have corporate criminal liability for money laundering. Under the directive, corporate liability must include an offence that occurs owing to a lack of supervision or control by a person in a leading position in a company. We do not have that at the moment. The Bill is an opportunity to correct that. Remember, we are waiting for an equivalence decision. Do we really want our first big signal on divergence to be a departure from the rules on money laundering? Is that really the message that we want to send?

However, we should not do this only because the EU is doing it. We should do it on its own merits. The Treasury Committee reported last year on how difficult it is to prosecute multinational companies, saying that

“multi-national firms appear beyond the scope of legislation designed to counter economic crime. That is wrong, potentially dangerous and weakens the deterrent effect a more stringent corporate liability regime may bring.”

I anticipate the Minister’s response—that he thinks there are a lot of strong points here, and that he is sympathetic to the argument, but that he wants to wait for the Law Commission consultation. I cannot remember which pot we would put that in. [Interruption.] If it is pot three, I will take his word for it.

The focus of the Law Commission’s consultation is what is known as the identification doctrine, or what we might call the question of a directing mind. However, nothing in that consultation should prevent the Government from introducing a “failure to prevent” offence that could apply to small and large companies alike. Indeed, it is already implicit in the way that small companies are treated. Why should larger companies continue to be able to wield an excuse that is not available to smaller firms? When it comes to the treatment of small firms, I suspect that the Minister will hear that argument in the Chamber, if not in the Committee, from Members on his side of the House as well as on ours.

Furthermore, the Law Commission may take some time. We heard oral evidence that the pace on this has been glacial. However, our transition period ends in less than a month. It is not as though we do not have an ongoing problem with money laundering and financial crime, so what are the advantages of waiting? Corporate liability is not a new or revolutionary idea; it already exists for bribery and tax evasion. HMRC has said that it

“does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law.”

The lack of such an offence was also pointed out in the Financial Action Task Force 2018 UK evaluation, which pointed out the difficulties in proving criminal intent.

There are a number of reasons to act: the size of the problem, the unfairness between small and large companies, consistency in the way we treat tax evasion, our desire for equivalence recognition, the signals that we want to send about the character of our post-Brexit financial regulatory system and, perhaps most of all, because it is a good thing to do. For those reasons, I hope the Minister will consider the proposals in the new clause.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 3:30, 3 December 2020

The new clause proposes to create a new criminal offence, for FCA-regulated persons only, of facilitating economic crime and of failing to prevent economic crime.

In recent years, the Government have taken significant action to improve corporate governance and culture in the financial services industry. Following the financial crisis we introduced the new senior managers and certification regime. The regime is now in place for all FCA-regulated firms, and it requires firms to allocate to a specific senior person a senior management function for overseeing the firm’s efforts to counter financial crime. If there is a failure in a firm’s financial crime systems and controls, the FCA can take action against the responsible senior manager where it is appropriate to do so. That enforcement action includes fines and prohibition from undertaking regulated activities.

As well as creating the senior managers regime, through the Money Laundering Regulations 2017 and subsequent amendments, the Government have recently strengthened the anti-money laundering requirements that financial services firms must adhere to. Failure to comply with these requirements can be sanctioned through either civil or criminal means. Recent FCA regulatory penalties related to firms’ anti-money laundering weaknesses include a £102 million fine for Standard Chartered in April 2019 and a £96.6 million fine for Goldman Sachs in October 2020.

I hope that recent action demonstrates to the Committee that the Government are committed to upholding a robust framework that deters and sanctions any corporate criminal activity in the financial services industry. It is only right that we challenge ourselves on whether we need to go further, and I listened very carefully to the right hon. Gentleman. Regardless of our tenure, the Government must always take that responsibility seriously.

In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. It is fair to say that the findings of the call for evidence were inconclusive. As such, the Government’s response to the call for evidence determined that a more comprehensive understanding of the potential options and implications of reform was needed. As the right hon. Gentleman acknowledged, the Government have therefore tasked the Law Commission to conduct an expert review on this issue.

Through the Bribery Act 2010 and the Criminal Finances Act 2017, the Government have demonstrated we are open to new “failure to prevent” offences. These offences, however, were legislated for because there was clear evidence of gaps in the relevant legal frameworks, which were limiting the bringing of effective and dissuasive enforcement proceedings.

Before any broader new “failure to prevent” offence for economic crime is introduced, there needs to be strong evidence to support it. It will also be important that any new offence is designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business. The scope of who a new offence applies to must also be holistically worked through.

The Law Commission’s work will take some time, but it is clear that we are zoning in on that aspect of the problem. In the light of that response, I ask the right hon. Gentleman to withdraw the new clause.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

I am happy to withdraw the new clause today, but I suspect the Minister might meet a very similar amendment later in proceedings on the Bill. I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.