Corporate wrong doing has been on and off the agenda over the past couple of years. While the City faces criticism for providing money laundering services, the Home Secretary Amber Rudd has announced a Cabinet Office review of the effectiveness of the current investigatory and prosecution authorities to tackle economic crime. This may not address the problem. The Law Commission has stated that the current corporate liability regime makes prosecuting large companies impossibly difficult.
The 2015 Conservative Party Manifesto promised to make it “a crime if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations” and intended to make sure the penalties are large enough to punish and deter.
At the UK Anti-Corruption Summit on 12th May 2016, the Government announced a consultation on extending “the criminal offence of a corporate ‘failing to prevent’ beyond bribery and tax evasion to other economic crimes,” which appeared to make good on that manifesto promise. However the Criminal Finances Bill, published as a response to this commitment, focuses on tax evasion rather than other corporate wrong doing. For more information see Legal update, Criminal Finances Bill in the making.
On 13th January 2017, the Government published a ‘Call for Evidence’ to examine whether reform is needed to combat corporate criminality, following fraudulent, dishonest activity by some banks and other commercial organisations.
The call for evidence is concerned with criminal offences designed to punish and prevent economic crimes such as fraud, false accounting and money laundering when committed by or on behalf of companies. In particular it seeks evidence on the extent to which the identification doctrine is deficient as a tool for effective enforcement of the criminal law against large modern companies, exploring other options beyond the failure to prevent model applied in section 7 of the Bribery Act 2010.
The identification principle (needing to prove the “directing mind and will” of a company) means that prosecution authorities can struggle to prosecute corporations for these economic crimes.
Specifically the call for evidence seeks views on whether the need to prove the involvement of a “directing mind” in corporate offending is hindering the prosecution of companies for wrongdoing, and alternatives to proving “directing mind” complicity in corporate criminal conduct, including:
- A US-style ‘vicarious’ liability offence, making companies guilty through the actions of their staff, without the need to prove complicit.
- The failure to prevent model, whereby a company is liable unless it shows it has taken steps to prevent offending.
- The benefits of strengthening regulatory regimes.
The Panama papers provided a huge wake- up call and following highly publicised disclosure, countries committed to more than 600 actions pursuing and punishing those who facilitate corruption at the 2016 UK Anti-Corruption Summit. The UK, Netherlands and Belgium created dedicated bodies to investigate the allegations.
In his statement to the House on 11 April 2016, the former Prime Minister David Cameron announced the creation of a cross-agency taskforce to analyse all the information that had been made available from the International Consortium of Investigative Journalists (ICIJ)’s Panama Papers data leak. For more see Legal update. Government launches cross-government taskforce on Panama papers.
Amber Rudd provided an update on progress of this task force in November 2016 and stated that it had provided new information on the contrived structures that are being developed to mask offshore tax evasion and economic crime. She stated that the task force had:
- Opened civil and criminal investigations into 22 individuals for suspected tax evasion.
- Led the international acquisition of high-quality, significant and credible data on offshore activity in Panama.
- Identified a number of leads relevant to a major insider-trading operation led by the Financial Conduct Authority and supported by the National Crime Agency.
- Identified nine potential professional enablers of economic crime all of whom have links with known criminals.
- Put 43 high net worth individuals under special review while their links to Panama are further investigated.
- Identified two new UK properties and a number of companies relevant to a National Crime Agency financial sanctions enquiry.
- Established links to eight active Serious Fraud Office investigations.
- Identified 26 offshore companies whose beneficial ownership of UK property was previously concealed, and whose financial activity has been identified to the National Crime Agency as potentially suspicious.
- Contacted 64 firms to determine their links with Mossack Fonseca to establish potential further avenues for investigation by the Taskforce.
- Seen individuals coming forward to settle their affairs in advance of Taskforce partners taking action.
The Government has also invested to develop its expertise in data and intelligence exploitation. The Joint Financial Analysis Centre has been established to develop software tools and techniques. Taskforce members have worked with international partners as part of the Joint International Tax Shelter Information Centre to exchange information and intelligence as part of the wider international effort. For more see Legal update, Update on Panama Papers Taskforce.
Governments are making some headway on beneficial ownership and tax evasion but little has been done to address inadequate compliance, fraud, loopholes in beneficial ownership rules and money laundering weaknesses in offshore jurisdictions. On the whole governments have made piecemeal attempts to address problems in their own jurisdictions rather adopting a coordinated international approach.
On March 13 2017 the government announced that it had signed an agreement with Panama for the 2 countries to work more closely than ever to combat the threat posed by serious and organised crime. For more see Legal update, UK signs agreement with Panama to tackle serious and organised crime.
Ben Wallace MP suggested that this was in addition to the substantive changes brought about in the Criminal Finances Bill to improve the UK’s ability to tackle money laundering and corruption, recover the proceeds of crime and counter terrorist financing. It is difficult to see how.
All of these efforts are focused on tax evasion rather than dealing with broader economic crime and most of those identified for further investigation by the task force are individuals. In the 2015 Budget, the Government gave HMRC an additional £800 million to invest in compliance and tax evasion work. The aim being to triple the number of criminal investigations that HMRC undertakes into serious and complex tax crime, focusing particularly on wealthy individuals and companies.
However, the cost of fraud and money laundering to the UK vastly exceeds the cost of tax evasion which is the focus of the Criminal Finances Bill. In 2016, HMRC estimated that the UK’s tax gap stood at £36 billion, of which tax evasion accounted for £5.2 billion. In May 2016, the Annual Fraud Indicator put the cost of fraud to the UK economy at £193 billion. The cost to the public sector is £37.5 billion with procurement fraud costing £127 billion a year.
Without the extension of a failure to prevent offence to all economic crime, the vast proportion of fraud and its consequential cost to the economy is not addressed. At the same time as the cabinet review is announced, once again threatening the livelihood of the SFO, ( For more see Blogpost, The Serious Fraud Office at 30: time to settle the debate on both its funding and future) the essential tools to tackle corporate fraud are being denied those same prosecutors.
One only has to compare the success of the HSE in prosecuting companies for health and safety offences every week because those offences are strict liability with the number of investigations that the SFO and CPS have been unable to pursue to prosecution because of the requirement to prove a controlling mind, including Libor/Euribor, Olympus, Newsgroup Newspapers. Introducing the failure to prevent offence in respect of all economic crime may be a step towards a more level playing field on which multi-national corporations would be as likely to be prosecuted as SMEs. For more see Corporate Convictions tracker.
If the government were to take these steps perhaps UK PLC could be rebranded as the cleanest hub for global business activity, rather than a money laundering hub, which could actually drive business to London. An essential part of the free market is trust, and this depends on an understanding that companies will behave honestly and those who don’t will be subject to punishment.