Nigel's Eyes

20230911 The UK's Economic Crime etc Bill - a tale of two houses.

The UK's Economic Crime and Corporate Transparency Bill is having a torrid time. Intended to introduce, for example, the offence of failing to prevent fraud, it arrived in the House of Lords and got mauled. When it was remitted to the House of Commons for what is usually a rubber-stamping of the Amendments, the Commons rejected almost all of them. Some of that was the right thing to do and some of it wasn't, but not for the reasons given.

The Bill, as sent to the Lords, was typical of the poorly drafted, poorly thought out and generally muddled laws that have appeared in the UK since the mid 1980s. They are generally superficial in principles but detailed in micromanaging. Pages of explanatory notes are issued so as to effectively seek to oust the jurisdiction of the Courts.

The basic problem with this Bill is that it's a knee jerk reaction to media campaigns and there is little or no cohesion within the Act or with existing legislation.

The flagship measure is that of failing to prevent fraud. But it's not what the media or the hashtag-wielding social media keyboard warriors wanted it to cover.

What it doesn't cover is the currently fashionable topic of making companies liable for frauds committed against their customers. The UK's Financial Conduct Authority already has a policy in place to do that so this is not the place to discuss the rights, wrongs, benefits and injustices of such a policy.

What the Bill does do is to create an offence similar to that of failure to prevent bribery. In the case of fraud, the offence is committed where a company which meets certain criteria fails to prevent a fraud from which the company benefits.

The criteria are designed to ensure that Small and Medium Sized Enterprises, or SMEs, are not subject to excessive red tape and risk and compliance costs.

But cynics - count me in, of course - point out that if we look at the many reports of businesses connected to politicians which were engaged in suspicious activity arising from the demand for goods and services during the recent pandemic most of them would fall outside the scope of the Bill.

The offence applies to all sectors.

However, to ensure burdens on business are proportionate, only large organisations are in scope – defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three of the following criteria:

- more than 250 employees,
- more than £36 million turnover and
- more than £18 million in total assets.

The impact of the offence will be kept under review and the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.

UK Government policy paper June 2022

The House of Lords decided that this exemption should not stand and amended the Bill to delete it. The House of Commons has put it back in.

There is a fascinating philosophical point here: limited companies are designed to protect the owners of the company against civil liability and, because companies cannot think they cannot form intent which means that, in the absence of a specific measure, they cannot be liable for a criminal offence that requires intent.

In this way, the shareholders are insulated against penalties for wrongdoing even though the company and through it themselves have benefited. That's the rationale behind the creation of the offences of failure to prevent.

The offence, if it were to be used against small companies, would be in my view, primarily intended to create a step that can be used as evidence in a money laundering prosecution against the shareholders.

Against larger corporations, it appears to presume that whatever financial penalty is imposed will be one that the company can afford to pay from reserves, from raising capital or taking loans. It also appears to be an open door for the expansion of the process for settling criminal proceedings which, in the UK, does not mean that the company does not admit its offences.

It is the amendment to remove SMEs from the failure-to-prevent offence that I consider was an error.

But it is not the only error. The Failure to Prevent offence is going to be very complicated because the draftsmen and policy makers have made it so. Even when the Bill is passed, it will not come into force until a raft of explanatory notes, guidance and even Regulations are in place. It is these, which favour lawyers and accountants selling consultancy and whose opinions are given great weight during consultation and, even, before so that consultations are, largely, based on predetermined provisions and the questions asked do not go behind those provisions.

None of that should be necessary.


Quite simply, if the law said "

- if a company benefits from the fraudulent conduct of an officer, member of staff or agent, that company commits an offence.

- it shall be a defence to the offence for the company to demonstrate that it took reasonable steps to identify and prevent such fraudulent conduct

- the penalty for the offence shall be a fine levied on the company of an amount equal to or greater than 10 times the amount of the fraudulent gain.

- in addition to the penalty, the company shall be ordered to make restitution to the person or persons who were the victim of the fraud, plus statutory interest from the date of the fraud to the date of payment of such restitution

- where the victim has contributed to the fraud, no restitution shall be made but the equivalent amount shall be forfeit to HM Treasury.

It really is that simple.

That doesn't require the creation of complex risk and compliance systems which is exactly what the Bill requires and which will turn into a regulatory débacle as has happened in relation to money laundering.

Of course, it does require risk and compliance systems but they can be proportionate to the size of the business, whatever the size of the business. Also, they can be designed and implemented by the business and its advisers not defined by a government department or qango.

So what the House of Commons should have done was to delete all the complex parts and insert something simple. They can use my draft, if they like.

Where the House of Commons did get it right when rejecting the idea of "failure to prevent money laundering."

If we were starting with a clean sheet of paper, as we had in 1988, then I would applaud the simplicity of such an approach. But we aren't and there is no value in overlaying an additional risk and compliance regime over that already in place.

The only reason for adding it is to allow prosecution of companies in addition to the existing regulatory liabilities. The only reason for doing that is to divert (or make additional payments to) the Treasury where at present such orders result in payment of penalties to the Financial Conduct Authority which chooses not to live within its means as it is.

The fact that only financial penalties are possible against a company shows that it is only about the money.

If the proposal was to make main board directors personally liable, then yes, do that. Not that it will be easy - how often do main board directors go to jail over fraudulent accounts or lying to auditors?