Criminal liability in the corporate boardroom – Tidal wave or trickle?
The corporate world can be a ‘double-edged sword’. On the one hand, there are a number of different ways in which commerce is conducted, meaning that opportunities to conduct business are available and varied like never before. Conversely, due to the wide variety of financial instruments available, markets are susceptible to criminal activity by way of a multitude of sophisticated methods.
In this article, we discuss the recent legislation and regulations enacted and updated in order to combat the ever-rising threat of white-collar crime.
The UK has increased its efforts to tackle economic criminal activity and white-collar crime. There have been a range of major legal updates in recent years, all the with the aim of placing responsibility on the shoulders of companies with regard years with a growing number of specific corporate offences.
The Criminal Finances Act 2017 is a relatively new piece of legislation, implemented in autumn 2017.
The Act prescribes two new offences: the failure to prevent the facilitation of UK tax evasion (the UK offence) and the failure to prevent facilitation of foreign tax evasion (the foreign office). In order to be liable, an associated person of the business (relevant body) facilitates UK or non-UK tax evasion. The business must then fail to prevent its representative from committing the criminal activity. The only defence available to the business is to show that it had reasonable prevention methods in place or it was not reasonable to have such prevention methods in place under the circumstances.
The Criminal Finance Act also introduced unexplained wealth orders (UWOs). These investigatory tools require politically exposed persons (PEPs) and those suspected of being involved in financial crime to explain the source of their assets it those assets are disproportionate to their stated income. While these would not affect the liability of corporates directly, UWOs do provide an effective deterrent with regards to illegal money laundering. The National Crime Agency secured the first UWOs on 28 February 2018 and their true impact remains to be seen.
The Bribery Act 2010 placed liability on the shoulders of corporates. There is the specific corporate offence of failure to prevent bribery, under Section 7 of the Act, described by the Serious Fraud Office as the ‘crown jewels’, which has brought about a sea change in corporate behaviour. If it can be demonstrated that a person associated with the organisation has committed a bribery offence under either Section 1 or 6 (bribing another person or bribing a foreign public official), then the company will be liable under Section 7. The defence available in the Bribery Act is also stricter than the corresponding defence in the Criminal Finances Act. A corporate body is required to establish that it took ‘adequate procedures’ to avoid the commission of bribery. A lack of preventative measures is not considered a valid defence.
The recent case of R v Skansen Interiors Limited was the first test of the Bribery Act’s adequate procedures defence. Skansen Interiors, a British company, was charged with failure to prevent bribery and corruption under Section 7 of the Bribery Act. The case showed that it is not enough for a business to have a generic policy regarding combating bribery. Businesses must conduct thorough risk assessments. Once risks are identified, an anti-bribery policy should be developed accordingly. The principles outlined in the Ministry of Justice guidelines need to be followed and adapted for each organisation. It is not sufficient to just have a policy; there must be a top level commitment and ‘buy in’ to prevent bribery. Such a decision has important ramifications for businesses in the UK and emphasises that organisation should show commitment to going above and beyond with regard to tackling white-collar criminal activity.
Existing legislation has also undergone a great number of changes. The Money Laundering Regulations 2007 were replaced by the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. The new regulations are more prescriptive in relation to risk mitigation. Specific procedures must be taken by a relevant member of a business to assess its potential exposure to money laundering. Firm-wide risk assessments are a requirement and written risk reports must be produced as part of these assessments.
The Register of Persons with Significant Control was introduced in 2016 as a result of the Small Business Enterprise & Employment Act 2015 and updated the Companies Act 2006, as a means of increasing corporate transparency. A number of businesses often exist as corporate shells and are only used to transfer funds either gained illicitly or for the purposes of tax avoidance. The Register attempts to deal with this by requiring details of the beneficial owners and key figures of companies.
In addition, there are also various sanctions for the failure of corporate governance and liability imposed upon corporates under existing legislation, including the Corporate Manslaughter Act 2007, the Health and Safety at Work etc Act 1974 and the Modern Slavery Act 2015.
The verdict (for now)
Today, companies are more liable that liable than ever when it comes to criminal activity. Companies are required to go above and beyond when assessing internal risks. They are expected to recognise and identify individuals who are conducting criminal activity within their organisations.
Moreover, once those risks have been identified, it is vital that practices and policies are developed and reformed accordingly. Companies cannot reasonably expect to do ‘just enough’ when it comes to tackling criminal conduct; instead, they are expected to actively protect themselves from facilitating illegal economic activity.
While the impact of recent legislation and regulation cannot be understated, it is important to know that what is in place is never enough. White-collar criminal practices are constantly evolving, often in line with improvements in technology, and as long as the UK is at the forefront of the business world, individuals operating in the country will seek to launder illegal funds and conduct fraudulent activity.
While liability has undoubtedly increased, there is still room for improvement. On 29 March 2018, the Treasury Commons Select Committee announced an inquiry into economic crime. It will be interesting to see the findings and the impact the inquiry has in terms of the implementation of further regulations to combat white-collar crime.
The government also has plans to implement a public register of owners of foreign companies that have been involved in the purchase of UK properties. Following a consultation published in November 2016, the register will focus on two areas: public property and public procurement. Property will be measured by beneficial ownership and the test will mirror that of the Register of Persons with Significant Control. Individuals who own or control over 25 percent of an entity will be displayed on Companies House. The register will likely increase the visibility of wealthy and powerful individuals within corporates, with the desired effect of making it more difficult for those involved in white-collar crime to act in the shadows.
There is a clear pattern of bringing criminal law into the corporate boardroom with a number of specific offences and requirements being targeted at corporate organisations. Whether the trend will turn into a tidal wave is still questionable, but it is no longer a trickle.
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This article was first published by Risk & Compliance in July 2018 and is reproduced with kind permission. You can read the original article by clicking here.
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.