Written by Craig Hogg, Associate, and Caroline Timoney, Researcher Peters & Peters Solicitors
Earlier this month Max Hill QC, Director of Public Prosecutions for England and Wales, and Lisa Osofsky, director of the Serious Fraud Office (SFO), spoke at the 39th Cambridge International Symposium on Economic Crime where both expressed their support for expanding the corporate ‘failure to prevent’ (FTP) model to wider economic crime including fraud.
These comments were hardly ground-breaking: the possibility of expanding the FTP model beyond current bribery and tax offences has been under consideration in the UK for a number of years, and the Law Commission has complied an Options Paper into the subject which is now with the Government to review. But is making corporates potentially liable for failing to prevent fraud taking place within an organisation a viable option for legislators?
What is the existing FTP framework?
Currently, there are two FTP offences on the UK statute books which corporates need to be wary of: failure to prevent “associated persons” from committing bribery, and separately, failure to prevent the facilitation of tax evasion committed on a corporate’s behalf. Both offences have been around for some time now: the FTP bribery offence was first introduced in 2011 via the Bribery Act 2010 (UKBA). The FTP tax offence was introduced six years later, in 2017, via the Criminal Finances Act 2017 (CFA).
Together, these offences represented a radical shift away from the historic, restrictive common law principle that a company could only be found guilty of an economic crime if it was proven that the ‘controlling’ or ‘directing mind and will’ of the company knew about or played a part in the offence (the so-called ‘identification principle’).
Instead, the two FTP effectively shifted the burden onto to companies, who must show that they have “adequate procedures” to prevent bribery, under the UKBA, or “reasonable procedures” in place to prevent the facilitation of tax evasion, under the CFA, in order to successfully defend a prosecution: a pro-enforcement position that was meant to make bring corporate prosecutions easier (results, however, remain to be seen: in March 2020 the SFO reported that it had only taken five corporate FTP tax cases to court based on the UKBA).
Current Fraud Offences and Problems with Identification Principle
The impetus behind expanding the FTP model to fraud offences is clear: criminal fraud cases in the UK have boomed in recent years. It was reported last month that the value of frauds worth more than £100,000 reaching the UK’s Crown Courts increased 288%, from £137.4m in the first half of 2021 to £532.6m in H1 2022. This includes high-value frauds: seven of the 129 fraud cases to reach the UK’s Crown Courts in the first half of 2022 were valued at sums of between £10m and £50m, bolstered by a further case valued at £266m.
There is a suite of fraud offences currently at prosecutors disposal. In addition to common law (i.e. non-statutory fraud offences), the Fraud Act 2006 (Fraud Act) provides for a single general offence of fraud which can be committed in three different ways: fraud by (i) false representation, (ii) failing to disclose information; and (iii) abuse of position. Corporations can, as matters currently stand, commit all three Fraud Act offences where the identification principle is satisfied, for example. However, the threshold for successful corporate fraud prosecutions remains very high.
The difficulty in mounting fraud cases against corporates using the identification principle was underscored most acutely in the landmark case of Serious Fraud Office v Barclays plc and another [2018] EWHC 3055 (QB). In that case, the SFO charged Barclays with two counts of conspiracy to commit fraud (and a separate charge of financial assistance), alleging that the company had conspired with senior executives to pay “disguised commission” to certain investors in the course of two capital raisings during the 2008 financial crisis, which together were worth a total of £11.2bn.
The case brought by the SFO was unsuccessful, with Davis LJ on appeal confirming the narrow reading of the identification principle decided at first instance, finding that that the executives of Barclays could not be regarded as the ‘directing mind and will’ of the company for the purpose of performing the actions in question as they did not have the authority of the company to conclude the relevant agreements. The Barclays case demonstrated the profound difficulties the SFO face when prosecuting alleged fraud offences committed within a large organisation like an international bank, where devolved and delegated organisational structures are the norm.
Could FTP fraud become an offence? In June 2022, the Law Commission published its Options Paper for the Government on how it can improve the law to ensure that corporations are effectively held to account for committing serious economic crimes. This lengthy paper, which runs to 243 pages, represents the most significant examination of the existing identification principle and the viability of the extension of the TPF model to wider economic crime in recent times, and culminates in ten suggestions for reform, among which is the option to extend the FTP model to fraud committed by employees or agents of corporations.
Under the Law Commission’s proposals, the FTP fraud offence would cover a number of core fraud offences, including fraud by false representation under the Fraud Act, outlined above, in addition to obtaining services dishonestly, the common law offence of cheating the public revenue, false accounting, fraudulent trading, and fraudulent evasion of excise duty. Companies would have certain protections where, for example, an organisation can prove that it had in place such prevention procedures as was reasonable in the circumstances, or that it was reasonable not to have any such procedures in place.
Viability of FTP Fraud Offence
Is such an extension of the FTP model to fraud offences viable? One obvious problem area is the requirement on prosecutors to prove the underlying FTP offence in order for a
successful conviction. In the fraud context, this is a difficult factual and legal exercise for prosecutors to undertake, and is likely to be a resource and time intensive exercise requiring a close consideration of corporate conduct by employees/agents.
A shift towards a more ‘objective’ standard of dishonesty in fraud cases following the case of Barton & Booth v R [2020] EWCA Crim 575 may assist prosecutors in this regard. Now, it is no longer open to those accused of fraud to argue that they are not liable because they genuinely believed that they were not dishonest (the old ‘subjective’ standard). Now prosecutors must show (i) what the accused’s actual state of knowledge or belief was to the facts; and (ii) whether this conduct was dishonest by the standards of ordinary decent people.
Whilst arguably a more fact-sensitive exercise, the second part of this test may remove ‘industry practice’ type arguments being deployed by bad actors within organisations who commit fraud and rely on poor wider corporate conduct in an attempt to minimise personal responsibility.
There is also the obvious issue of compliance concerns for SME’s: monitoring the conduct of employees and agents is often an expensive and challenging exercise for small organisations without dedicated in-house compliance teams. SME’s will be pleased to see, therefore, that the Law Commission have proposed in the Options Paper that there be a requirement for the Government to publish guidance on what prevention procedures an organisation might put in place to prevent the offence, and the possibility of the Government publishing or approving sector-specific guidance.
What does the future hold for FTP?The precise legislative future for the proposed FTP fraud option advanced by the Law Commission in the Options paper is unclear: the Government has not laid down a timeframe for reviewing the Options Paper, and there is no certainty that such proposals would be included in the second round of legislation following on from the implementation of the Economic Crime (Transparency and Enforcement) Act in March 2022.
In her comments this month SFO director Lisa Osofsky argued that a radical expansion would help in “rebalancing the system for victims and justice,” while Max Hill QC commented that “the UK has led the way and set a gold standard on corporate criminal liability with the Bribery Act” but that the restrictive identification doctrine is challenging when attempting to hold companies to account.
Whilst the Options Paper stops short at proposing a wider FTP economic crime offence, the endemic levels of fraud seen in this country in recent years (and weaknesses in the existing FTP regime) mean that there is a strong case for extension, simply to keep abreast with the increasing number of fraudsters who act within corporations to harm businesses and consumers alike, and the failure of the current system to bring individuals to account.
