New Clause 73 - Offence of failure to prevent fraud, false accounting or money laundering

Economic Crime and Corporate Transparency Bill – in a Public Bill Committee at 10:00 am on 29th November 2022.

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“(1) A relevant commercial organisation (‘C’) is guilty of an offence under this section where—

(a) a person (‘A’) associated with C commits a fraud, false accounting or an act of money laundering, or aids and abets a fraud, false accounting or act of money laundering, intending—

(i) to confer a business advantage on C, or

(ii) to confer a benefit on a person to whom A provides services on behalf of C, and

(b) C fails to prevent the activity set out in paragraph (a).

(2) C does not commit an offence where C can prove that the conduct detailed in subsection (1)(a) was intended to cause harm to C.

(3) It is a defence for C to prove that, at the relevant time, C had in place procedures that were reasonable in all the circumstances and which were designed to prevent persons associated with C from undertaking the conduct detailed in subsection (1)(a).

(4) For the purposes of this section ‘relevant commercial organisation’ means—

(a) For the offence as it relates to false accounting and fraud, ‘relevant commercial organisations’ are defined as—

(i) a body which is incorporated under the law of any part of the United Kingdom and which carries on a business (whether there or elsewhere),

(ii) any other body corporate (wherever incorporated) which carries on a business, or part of a business, in any part of the United Kingdom,

(iii) a partnership which is formed under the law of any part of the United Kingdom and which carries on a business (whether there or elsewhere), or

(iv) any other partnership (wherever formed) which carries on a business, or part of a business, in any part of the United Kingdom, and

(v) for the purposes of this section, a trade or profession is a business.

(b) For the offence as it relates to money laundering, ‘relevant commercial organisations’ is defined as—

(i) credit institutions;

(ii) financial institutions;

(iii) auditors, insolvency practitioners, external accountants and tax advisers;

(iv) independent legal professionals;

(v) trust or company service providers;

(vi) estate agents and letting agents;

(vii) high value dealers;

(viii) casinos;

(ix) art market participants;

(x) cryptoasset exchange providers;

(xi) custodian wallet providers.”—(Dame Margaret Hodge.)

Brought up, and read the First time.

Photo of Margaret Hodge Margaret Hodge Labour, Barking

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

The Chair::

With this it will be convenient to discuss new clause 74—Failure to prevent fraud, false accounting or money laundering: director liability—

“(1) If an offence under section [

(a) has been committed with the consent or connivance of an officer of the body corporate, or

(b) is attributable to any neglect on the part of an officer of the body corporate, the officer (as well as the body corporate) commits the offence.

(2) For the purposes of this section, ‘officer’ means—

(a) a director, manager, associate, secretary or other similar officer, or

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

Photo of Margaret Hodge Margaret Hodge Labour, Barking

I will speak for a little longer on new clause 73, but hopefully we will get through the others more quickly. It is probably one of the most important new clauses that we have tabled. It sits with new clause 79, which we will come to a little later. If we can make progress on this issue, we will be putting some better meat on the bones of what is still quite timid legislation.

We all want to do all we can to prevent economic crime from occurring in the first place. Prevention and early intervention is obviously the best, cheapest and most effective way of tackling the problem of dirty money. We want to stop it happening in the first place. We also all know that much economic crime takes place because lawyers, company service providers, accountants, bankers or estate agents either enable or collude with bad actors, helping them or turning a blind eye to the things that they do, thus enabling money to be laundered, crime to be committed, and our systems to be used to commit financial crimes.

There is currently too little in our laws and regulations that will stop the enablers—accountants and all the others—supporting and enabling economic crime. Companies and individuals are not held to account for what they do. The new clause aims to put a halt to that. We need to reform our outdated corporate liability laws so that not only companies but senior managers can be prosecuted if they fail to prevent fraud, false accounting and money laundering. It is not because we want to have endless prosecutions, or to fill prisons with these enablers, but because the threat of criminal prosecution will act as the best and most vital deterrent in preventing professionals from helping criminals to launder and manage their dirty money.

As we have said time and again in Committee, most professionals act with integrity. Those professionals with integrity have absolutely nothing to fear from the new clause. Indeed, the majority, who act responsibly, should welcome the change, because it will help us to clean up their profession, get rid of the bad apples and restore our reputation as a trusted jurisdiction. The Minister knows very well—I am trying to find the right Minister—

Photo of Margaret Hodge Margaret Hodge Labour, Barking

Both Ministers know that reform has been promised, and delayed, for a long time. The 2015 Conservative manifesto committed to making it illegal for companies to fail to put in place measures to prevent economic crime. The 2017 Ministry of Justice consultation on corporate liability reform sat for three and a half years. Inexplicably, it found that there was not enough evidence to pursue reform. I can only imagine that the Ministry was strongly lobbied. It said there was not enough evidence despite the fact that 76%, or three out of four respondents, said that the identification doctrine, which we will come to, inhibits the holding of companies to account for economic crime, and that two out of three respondents thought that corporate liability reform would result in improved corporate conduct. Despite all that, the Ministry chose not to pursue reform.

We then got the Law Commission’s review in 2022. It found that the current situation was “highly unsatisfactory” and that, on the status quo on corporate liability, “the identification doctrine”—for fraud and money laundering, the way in which we determine whether the people involved represent the “directing mind and will” of the company and can therefore be held responsible—

“is an obstacle to holding large companies criminally responsible for offences committed in their interests by their employees.”

The commission said that the status quo is “unfair” and that if the law remains unchanged it

“will continue to enable large companies to be acquitted for conduct which would see small businesses convicted.”

It also stated that that

“could diminish confidence in the criminal law” and, finally, that the status quo incentivises poor corporate governance and

“rewards companies whose boards do not pay close attention.”

Given all that, I cannot think of a stronger indictment of the status quo.

There are endless examples of where our failure to modernise our criminal liability law has led to failure in the courts. The Barclays bank action is probably the most infamous, or famous, of them all. In 2008, during the financial crisis, Barclays wanted to avoid nationalisation and entered into a deal with Qatar, from which it received more than £11 billion and a loan of £3 billion. The bank, however, also set up what was called an advisory service agreement—in a sense, as I can say under parliamentary privilege, it was a bribe—and, under it, £322 million was given to those who facilitated the deal between Qatar and Barclays bank.

The Serious Fraud Office tried to prosecute the bank and its chief operating officer with charges of conspiracy to commit fraud and charges involving “disguised commissions”—in my interpretation, bribes. The court threw out all the charges, saying that the alleged criminal dishonesty of senior officers “could not be attributed” to Barclays. So the chief executive could not be held responsible for what the bank did, because the chief executive was not the bank, but reported to the bank. It was a crazy judgment. The court also dismissed cases against other individuals, as they could not be defined as the “directing mind and will” of Barclays.

There was, then, a Barclays fiasco, but there were other examples, such as the LIBOR rate-rigging scandal. No criminal prosecutions were brought, although the individuals prosecuted gave evidence that their managers knew what they were doing, so the company itself was liable. If the Minister for Security will allow this comparison, the US brought criminal enforcement action against 12 of the banks in the LIBOR scandal—British banks—and extracted $3.4 billion in criminal fines. Other examples include HBOS—to which the Under-Secretary often refers—Serco and the tagging contract, London Capital & Finance, and so on and so forth.

In 2022, four parliamentary Committees called for the reform of corporate criminal liability legislation. In February 2022, the Treasury Committee urged the Government to

“act quickly in bringing forward any legislation flowing from the Law Commission’s review. In the meantime, corporate criminals will continue to be able to escape prosecution for economic crimes.”

I probably do not have to quote this one, as the Minister might remember it, but the Foreign Affairs Committee called for

“reform of outdated and ineffective corporate criminal liability laws which mean that it is difficult to hold large companies to account for economic crimes.”

In October 2022, the Justice Committee recommended that

“A failure to prevent fraud offence should be introduced to hold companies to account for fraud occurring on their systems and encourage better corporate behaviours.”

In November 2022, the House of Lords Fraud Act 2006 and Digital Fraud Committee found that the reform

“of corporate criminal liability will be essential in order to maximise the impact of the Fraud Act and other legal tools going forward”, and in order to

“hold corporates across all sectors to account and to inspire behaviour change.”

Finally, let me quote the Under-Secretary. On Second Reading of the Bill, he said:

“I have said many times that the No. 1 measure we need is an extension of the failure to prevent provisions on bribery and tax evasion, which have been so effective. People say that we talk a lot and never get anything done”— hear, hear!—

“but the bribery provisions have been massive in holding corrupt companies to account. The Serious Fraud Office has deferred prosecution agreements for Rolls-Royce for Airbus, with almost £1 billion in fines going to the Treasury. The SFO also prosecuted the GPT Special Project Management Ltd case. The SFO does not get many successful convictions but GPT Special Project Management Ltd pleaded guilty in Southwark Crown court in 2020, and paid £28 million in financial forfeitures as a result, on the back of the Bribery Act 2010.”—[Official Report, 13 October 2022; Vol. 720, c. 308-309.]

On another occasion, the Under-Secretary said:

“Criminal fraud at Lloyds HBOS was proven in 2017, and the cover-up associated with that is an utter disgrace. We are yet to see the Dobbs review, which later this year should identify the scale of the cover-up by Lloyds of what went on at HBOS. We have also seen the problems with Royal Bank of Scotland’s Global Restructuring Group”—[Official Report, 7 July 2022; Vol. 717, c. 1043.]

I could go on; does he want to hear all of his speech?

Photo of Margaret Hodge Margaret Hodge Labour, Barking

Anyway, I thought it was a speech in favour of the intent of this new clause.

Failure to prevent offences have proved effective elsewhere, as the Minister himself has said. We use them to tackle bribery and tax evasion, and the Minister always raises the best example when he refers to what used to go on in the construction industry. In my youth, people would regularly have terrible accidents on construction sites, some of which were fatal. It was only when a duty was introduced for those who ran construction companies to ensure the health and safety of their workers in the workplace, meaning it would be a criminal offence if they failed to do so, that miraculously, overnight, deaths on building sites came almost to a 100% halt. We have lots of examples of where a failure to prevent does not end up with people being locked up but does change behaviour. That is what we are trying to do.

I have lots of examples of areas where the Bribery Act 2010 has been successful and this is not one. This is the last legislative opportunity we will have in this Parliament to put into effect something that Members across the House think is important. There is so much evidence from so many bodies emphasising the importance of this bit of legislation. I cannot see any argument for delay. Before they reached their great, really important roles on the Front Bench, both Ministers argued passionately, frequently and loudly for this reform. I hope they will accept the new clauses, together with new clause 79, on the identification principle. With the inclusion of those three new clauses, we can hold our heads up high and say that we have done good work in Parliament.

Photo of Stephen Kinnock Stephen Kinnock Shadow Minister (Home Office) (Immigration)

It is a pleasure to serve under your chairship, Mr Robertson. I pay tribute to my right hon. Friend the Member for Barking. The passion and eloquence with which she spoke was exemplary in terms of reminding us about what is at the heart of the Bill and one of the top priorities that we want to achieve. I do not want to say much more; how can I follow that?

New clause 73 would introduce a new offence of failing to prevent fraud, false accounting or money laundering, and new clause 74 would extend that offence, so I shall take them together. In effect, the new clauses would extend current failure to prevent offences beyond bribery and tax evasion to other economic crimes, money laundering and fraud. The offences would be applicable both to companies themselves and to senior managers or directors.

The Labour Front Bench team welcomes the new clauses tabled by my right hon. Friend the Member for Barking as vital to help to drive cultural change and corporate governance standards for the prevention of economic crime in the UK. They would also standardise criminal rules for holding companies to account across different economic crimes.

The call for this change is supported by a number of stakeholders, including Spotlight on Corruption, which made the following argument in written evidence to the Committee:

“Most urgently, a new failure to prevent fraud offence would help address the UK’s serious fraud epidemic. Fraud accounts for 40% of all recorded crime, but fraud prosecutions have fallen from 42,000 in 2011, to 13,500 in 2021 in the last decade, a 67% decrease. According to the Crown Prosecution Service (CPS): ‘an extension of the “failure to prevent” model to fraud, false accounting and money laundering would be unlikely to require companies to do more than what they would already be expected to do under the current law (which relies on the identification doctrine) but it would enable prosecutors to hold them to account more effectively where they fail to do so’. The heads of the Serious Fraud Office (SFO) and the CPS have both recently called for new failure to prevent offences.”

I refer the Minister, in addition to the stakeholders that support the call for change, to his own words on Second Reading. I will not replay his greatest hits—that my right hon. Friend the Member for Barking has already done so—but he has stated clearly that he sees this offence as “the No. 1 measure” that we need. The Opposition fervently hope that both Ministers will agree with their former selves that this is the No. 1 measure we need in the prevention and detection of economic crime. We urge the Conservative Front-Bench team to accept the new clause as a necessary and urgent provision to tackle economic crime that would have support across the board.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I, too, rise to support the new clauses, which are incredibly important.

“Of all the measures we have talked about today, this would have the biggest effect in terms of cutting down on economic crime, because lots of our financial organisations are complicit when it suits their interests to be so.”—[Official Report, 13 October 2022; Vol. 720, c. 309.]

If the Under-Secretary recognises those words, it is because they are his own from just a few weeks ago, on 13 October 2022. What a long time it has been; here we are today at the end of November.

It is important that we use the new clauses as an opportunity. As the right hon. Member for Barking said, this is an opportunity to make this change now and get it right. It cannot be said that the Ministers present do not agree with the measures. The Under-Secretary argued for a failure to prevent economic crime offence not just on 13 October 2022 but on 7 July 2022 and 1, 22 and 28 February 2022, on 2 December 2021, on 9 November 2021, on 22 September 2021, on 18 May 2021, on 9 November 2020, on 25 February 2020, on 19 July 2019, on 23 April 2019, on 18 December 2018 and on 9 October 2018. Why have we got to the point today where he is arguing against something that he has argued for so consistently and repeatedly in this House?

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I will if the Minister can give me an explanation as to why he is not going to back the new clause.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I suspect that if it goes to a vote, he will vote against the new clause, so he does not even need to argue against it. If it goes to a vote, he and his colleagues will vote against something that he has consistently and repeatedly supported in this House. He knows in his heart of hearts that this is the right thing to do. I am very interested to know whether, if the Government will not support the new clause—whether it goes to a vote or not—they will introduce something similar on Report. Both Ministers know that this is the right thing to do. The opportunity is here in the Bill. If the opportunity is there and the will is not, that leaves huge questions for the credibility of the entire Bill.

Photo of Thomas Tugendhat Thomas Tugendhat Minister of State (Home Office) (Security)

I am delighted to speak on the new clause. As the right hon. Member for Barking correctly identifies, it touches on many areas that my hon. Friend the Under-Secretary and I have spoken about on numerous occasions, and we are not alone in having done so. Section 172(1)(b) and (d) of the Companies Act 2006 speaks about the interests of employees and of the community being the responsibility of directors as well, so having an emphasis on directors’ responsibility in corporate legislation is not new. My hon. Friend the Under-Secretary has also spoken about it in building safety legislation, which the right hon. Lady cited.

There are many different examples of our recognition that the interests of the whole of society and of the whole United Kingdom are better protected when directors understand that they are there not simply to advance shareholder value, but to further the interests of the whole community of their employees and wider society in actions and responsibilities they undertake. Although I see all of the responsibility laid out and I take very seriously the point the right hon. Lady made, we still need to do a little bit of work on how this can be made to work. There are arguments, some of which hold water, about whether the 2017 money laundering regulations include elements that already cover some of these areas, and there are arguments about whether the Law Commission will want to look at different bits of this. I can assure the right hon. Lady that I will look at this extremely seriously, because she is absolutely right that the Bill offers an opportunity to introduce different reforms. I will look to make sure that any opportunity is fulfilled as quickly as possible.

Photo of Margaret Hodge Margaret Hodge Labour, Barking

I am grateful for that. The hon. Gentleman referred to the Companies Act 2006—I cannot remember which section. In the days when Tony Blair changed our jobs every year, I was lumbered with taking through the biggest Act in Parliament. We deliberately put that section in, in the face of massive opposition. At the time there was a front page story in the FT that said, “How dare you talk about any interest but shareholder interest?” But the provision has stood the test of time, I am pleased to say, and I am glad to hear him cite it.

I do not want to embarrass Ministers today by putting the issue to a vote. I know that they feel strongly about this, but so do we—really strongly. The Bill will not pass any litmus test of its potency if the new clause is not included. I know there will be resistance because the professions that would be subject to the new potential criminal liability are very strong in lobbying. They are probably strongly lobbying the Department for Business, Energy and Industrial Strategy, as well as the Treasury and other Government Departments. I say to Ministers that they have to resist that lobbying with every bone in their bodies, because this is not an attack on any profession. There ought to be a new offence that cleans up the profession, and we will pursue this issue right through every phase and stage of the Bill’s passage.

I want to say one final thing to the Minister. Of course we need to make the new clause work, but for goodness’ sake, we have the same offence in the Bribery Act and the tax evasion legislation, and it works perfectly well.

Photo of Kevin Hollinrake Kevin Hollinrake Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy) 10:30 am, 29th November 2022

The right hon. Lady makes a very important point about vested interests. We have previously discussed the influence of people who may not be keen on these kinds of clauses. I would say to anybody in the financial services sector who is making these claims that there are potentially huge benefits from preventing fraud across the board, because 70% of online fraud, which costs banks a lot of money, comes from platforms, and this kind of legislation could make the platforms responsible for removing content. So the sector could see benefits as well as potential new obligations.

Photo of Margaret Hodge Margaret Hodge Labour, Barking

I am grateful to the Minister for reinforcing my argument. I would add simply that the same is true of the online harms Bill. If we had director liability there, I think we would see a lot of the online harms disappearing, but that is for next week.

On how the new clause would work, we can mirror processes that take place in other bits of legislation. To say that it is already covered is a nonsense, because we would not have had the failure of the Barclays case and all the other cases that I cited to the Minister had we already put in place legislation that was appropriate for ensuring that companies and their directors are held to account. I will not put the matter to a vote, but this is a hugely important issue. I look forward to our debating it further at other stages during the course of the Bill. I wish Ministers well in their attempts to get it past the Government, but if they do not, Parliament will do so. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.