The Economic Crime and Corporate Transparency Act 2023: Extension of corporate criminal liability

Disputes in Perspective

There are two new corporate offences under the Economic Crime and Corporate Transparency Act 2023: the senior manager offence and the failure to prevent fraud offence. London-based Global Regulatory Enforcement partners Rosanne Kay and Patrick Rappo are joined by London senior associate Emma Shafton to discuss the new offences and their relevance to disputes lawyers.

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Transcript:

Intro: Welcome to Disputes in Perspective, a Reed Smith podcast. This podcast series will discuss disputes-related trends, hot topics, and developments occurring in the global legal landscape, and hopefully provide you with some helpful insights and practical tips. If you have any questions about any of the episodes, please feel free to contact our speakers.

Rosanne: Welcome back everyone to Disputes in Perspective. My name is Rosanne Kay. I'm a partner in the London office specialising in white-collar crime and I am joined today by two colleagues also from Reed Smith's London office and also specialising in white-collar crime, Patrick Rappo and Emma Shafton. And what we wanted to do briefly today is to talk about the new corporate crime offences, and in particular, explain how they are relevant to disputes and litigation. To start with, though, I'm going to ask Emma to just give us an overview of these new offences and why they're significant.

Emma: Well, there are two new offences under the Economic Crime and Corporate Transparency Act of 2023. The first is the senior manager offence and the second is the failure to prevent fraud offence. So dealing with the senior manager offence briefly first, this has been enforced since the 26th of December last year and it introduces criminal liability for companies of any size for a wide range of financial crimes. So that includes things like money laundering, breach of sanctions legislation fraud bribery and a company can be held criminally liable where any of those offenses are committed by its senior managers. Previously corporate liability could only be attributed where the prosecution could show that there was a directing mind and will of a company involved in the offending and as a result historically it's been really difficult for prosecutors to successfully prosecute companies for financial crimes. So that's the first offence, and that's the strict liability offence. And the second, which is not yet in force, is the failure to prevent fraud offence. That will come into force when the UK Home Office publishes guidance. And as of the date of recording, which is the 23rd of September, that guidance hasn't been published yet, but it could come in the next few weeks or the next few months. And what this offence does is introduces criminal liability for large organisations and their subsidiaries where an associate commits fraud. An associate could be an employee, an agent, or somebody that performs services for or on behalf of the organization. So a consultant maybe or an intermediary. And that associate must intend that the fraud benefits the organization or any other person to whom the associate provides services for or on behalf of the organization. So that could be a customer, for example. Now the failure to prevent fraud offence is strict liability offence and it will be made out unless the organisation can show that it has reasonable preventative policies and procedures in place and the guidance that I've referred to will detail what will be expected of companies. The offence will come into force following a brief preparatory period which could be as little as six months and that will be confirmed once the guidance is published. So that's a brief summary of the two offences and really the introduction of them cumulatively represents a seismic shift in the law on corporate criminal liability in the UK and they've both been welcomed by prosecutors such as the Serious Fraud Office. One other point that's very important to note is both of those offences apply extraterritorially so they can apply to non-UK companies operating in the UK conducting business here. And the failure to prevent fraud offence can be committed by all large organisations and their subsidiaries wherever they are incorporated or formed or carrying on business. So it appears to have a much broader reach than the failure to prevent bribery offence under the UK Bribery Act, which our listeners will no doubt be familiar with already. So that sets out the two offences, Rosanne, but perhaps I can ask Patrick at this stage, what do you think the investigation, prosecution, conviction risks are of these two new offences?

Patrick: Thanks for that summary, Emma. That was great. I think when looking at this, the important thing to note is that, as you say, this is a seismic change in the UK law, and particularly the senior manager regime. I think the view is that there's going to be much more appetite in relation to that, which, as we'll hear shortly, has more linked defences to it than the failure to prevent regime, and applies to a wider range of offences than just fraud. So the fact of the matter is that on the senior manager offense. If a senior manager commits a bribery matter, which is dealt with by the SFO, if a senior manager commits a money laundering matter, which will often be an FCA, financial conduct authority type offense, or commits a tax evasion offense, which will often be HMRC dealing with enforcement in relation to that. at. So the senior manager regime has a much greater range of potential enforcers looking at it. And I think at the minute, there's a race in order to be the first entity to bring a conviction successfully under this legislation. So I think there's a much greater appetite for enforcement generally, and specifically to use this new tool in the armory. And effectively, there's a race to try and get there first. So I think there's a much bigger investigation risk because all of those agencies are investigating these cases in order to effectively show their value to the new government, which is in place in the UK. In terms of the prosecution risks, as I mentioned before, the reality is the fact that there is a quite wide-ranging defense available to the failure to prevent offence, which is that of having reasonable procedures in place, and the fact that that's limited to large companies, which again we'll explain shortly. Will mean that there's a much smaller group of companies that that can apply to, and a much broader range of offences. So I think the prosecution risk for failure to prevent is probably lower, but there are things that you have to do in order to limit that risk to yourself as a company. But in terms of the senior manager regime, I think in relation to that, the prosecution risk is very significant because now companies will be liable for the activities of their senior managers in the course of their perceived work that they're doing for the company. So that massively expands corporate criminal liability risk. And therefore, in terms of conviction, I think the risk really is in relation to that side of things for activities of senior managers to do fraud measures or AML measures or bribery and corruption or sanctions violations or tax violations. But again, the proof will be in the pudding, and we'll have to see what sort of happens in the near to medium term in relation to this. But I think the next question really is back to you, Rosanne, in terms of what I was alluding to there, of what are the defences for companies and the prospects of success for the state when they bring investigations and prosecutions in relation to both of these sets of offences?

Rosanne: Yeah, I mean, I think, I mean, I'm sort of echoing what's already been said, which is that it's the senior manager offense, which is actually the one that creates a real difficulty for companies because the definition of senior manager is quite vague and there is no defence to the senior manager offence. So, there's nothing that a company can sort of anchor itself to, to avoid liability if a senior manager commits one of the relevant offences. Obviously, it's of assistance if the company has a strong compliance culture and structure in terms of its policies and procedures, A, to prevent the offence occurring in the first place, but also to act as some kind of mitigation, even though that's not formally recognised in the offence. That's obviously different from the failure to prevent offence, where there is a reasonable procedures defence in the sense that if a company can demonstrate that it had reasonable procedures in place to prevent the fraud, then that will help them in their defence. So the prosecutors are going to find it easier to prosecute for the senior manager offence and harder to prosecute under the reasonable procedures, the failure to prevent offence. But as with all the failure to prevent offences that we've seen before, Bribery Act in particular, we're likely to see some DPAs. But I think what's really the sort of nub of what we wanted to discuss today was the relevance of these two offences to disputes lawyers. And Patrick, maybe you could start by telling us a bit about that topic from a sort of civil litigation perspective.

Patrick: Well, certainly I was sort of heading up the bribery and corruption divisions at the Serious Fraud Office when the failure to prevent bribery offence came out. And it's no sort of hidden secret that at that time, the serious fraud office was mad keen to use those powers and was looking to investigate as much as possible. And one of the ways to do that was look to see what's happening in the civil courts and see which cases are happening there, which are bribery related. And if there's any potential action that could be taken on the criminal side. And again, it's a great source of information, which has potentially already been pre-prepared by a number of companies or entities that are facing off against each other in civil litigation proceedings. So a lot of these are public, a lot of the information will have been gathered, and as a result, it's a matter for the regulators, the serious fraud office in this case, to swoop in with compulsory Section 2 notices to see if they can obtain the matters from the parties. Obviously, the parties would need to liaise with the court prior to doing so, and there would be issues around litigation privilege and legal professional privilege generally, which would arise. But that does not mean that this wouldn't happen. them. So as a result, there is a very real risk that those who are involved in litigation in the courts could face further inquiries from the serious fraud office and the senior manager offence, which will open up AML, sanctions violations, fraud violations. Tax evasion, and bribery and corruption. Any of those sorts of proceedings which are mentioned in the civil context in litigation could result in those regulators, many of whom have compulsory powers, issuing compulsory notices. The SFO's example is a Section 2 notice, but HMRC, the FCA, and others all have very similar powers to be able to get information out of parties to that litigation. And then there's, as I mentioned, the disclosure issue, as well as the legal professional privilege side of things which would need to be considered. But that's obviously with civil litigation being in place. Rosanne, on the other side, where there is criminal litigation in place, what could happen to companies? I'm sure our audience would be interested to hear from you about in terms of civil litigation after convictions in the criminal courts.

Rosanne: Absolutely. And the risks to a company who has been found criminally liable, that they might face further civil liabilities in respect to the same issues and conducts, for example, in the form of potential shareholder action, employment claims. If there have been unfair dismissal. So it's something to have in mind. The other point is is that obviously, if you are in civil litigation, where there are allegations of fraud that have been made, then as a representative of a party involved in that litigation. You're going to be thinking very carefully about your potential criminal liability and how you want to take that into account in terms of your litigation tactics and settlement tactics, particularly in terms of the timetable of the procedure and when additional evidence about the particular conduct is going to come to light, particularly in the trial, and be revealed to the other side. Because you'll be thinking that people like Patrick a few years ago will have had their eye out for this kind of material so they could swoop in and take action. So I think there's lots for dispute lawyers to be aware of and conscious of and that the risk for parties in litigation involving fraud allegations is going to increase as a result of these new offences because of the ease with which the authorities in this country can now prosecute companies in respect of fraud offences where those companies fall within the offence and meet the criteria for falling within the offence.

Emma: With all of that in mind, Patrick and Rosanne, can I ask you this both? What exactly should companies be doing to protect themselves in light of these two new offences? So perhaps, Patrick, if I go to you first.

Patrick: In terms of how to avoid criminal prosecution, which is one side of this, you want to make sure that you don't get criminally investigated and or criminal enforcement being taken against you. The reality is nothing can really stop the investigation. Litigation but in terms of the prosecution or the chances of a successful prosecution the reality is with all of these failure to prevent offences they follow a similar model where there will be six sets of principles effectively in place which will be brought out in the guidance which is yet to get ministerial approval but that will effectively cover, tone from the top, reasonable and proportionate policies and procedures based on a risk assessment having been carried out. Due diligence being undertaken in relation to counterparties and territories where you're doing business, communications internally and training in relation to this, and then auditing and monitoring the effectiveness of these policies and procedures and amending them to effectively keep them up to date. And then I think if you have policies and procedures which fit within those six principles, the prospects of the Serious Fraud Office and or others being able to bring successful proceedings against you becomes much more contentious, because the reality is if you have no policies and procedures. It's much more difficult to argue that it's a reasonable and justifiable process to have no policies and procedures for anti-fraud measures in place than it is to say, well, we do have all of these procedures, but heck, we thought that they were reasonable. Can we be blamed for that. So as a result, it's much easier to defend policies and procedures in place than being able to defend that you have new policies and procedures at all. And if you're an enforcement authority, you're much more likely to target those that have committed egregious breaches and have had absolutely no safeguards in place than to take a risk on prosecuting a company in relation to its policies that it had. Although the SFO did that in one of the first DPA cases, Deferred Prosecution Agreement cases where they said that the bank in question in Tanzania or its Tanzanian entity didn't have adequate enough procedures. That was an unusual one. But I think in reality, it's going to take some time before any of the prosecution agencies really attack a set of policies and procedures because they're less likely to have the industry knowledge that companies will have in terms of producing what is likely to be reasonable. But Rosanne, over to you in terms of what you think of the sort of civil side and what can be done to minimise the risks on the civil side.

Rosanne: Well, I think, I mean, a lot of what you've said is also relevant to the civil side in terms of hopefully preventing the risk of the issues arising in the first place. And I suppose after that, once an issue does arise. Then the critical thing is the sort of timeliness and thoroughness of an internal investigation to determine what has occurred and allied to that, what is the company's potential exposure, both from a criminal perspective, but also from a civil perspective. And from both those perspectives, it will be really important to consider the extent to which the investigation is covered by privilege. So that's one really important point. And that has been an issue in the past in the sense that companies who have undertaken internal investigations in connection with regulatory issues have then found themselves on the end of disclosure requests in connection with materials created during those internal investigations from civil claimants and have had difficulty in claiming that those materials are covered by legal privilege, that that is a whole topic in itself. But obviously, we're just flagging it as something to be bearing in mind. I mean, other points are obviously, as a result of the investigation. You might find that you might need to take disciplinary action against certain employees. And in order to sort of limit the sort of civil action, you obviously want to be clear about the basis on which any disciplinary action is taken to ensure that it's fair and doesn't expose the company to civil liability. I think that probably covers the key points that we wanted to talk about today. Patrick, I don't know if you've got anything else to add.

Patrick: No, simply just to, you know, the important thing here is to take learnings from the other bits of legislation that have happened in the past. And ultimately, these are offences aimed at your senior managers or your associated persons. And to stay out of trouble in relation to this, it's really essential. That you train those two sets of individuals within an inch of their lives as to what you, the company, expect them to be doing, and then make sure that your policies and procedures clearly evidence what you have done. And in terms of Rosanne's point that you were mentioning about investigations, that you have data access policies in place that enable you to investigate properly and take action against individuals and potentially even claw back monies from them and also to ensure that you're able to move them on as needed. But again, there are so many complex and overlapping areas in relation to this, such as privilege and so on, that it's always worthwhile to get additional assistance in relation to that. So please do get in touch with us if you would like to understand more about the legislation coming in or more about the impacts on the civil side and how to prepare for it. And as ever, thank you very much for joining this session today. And please keep an eye out for future sessions coming up in the series. We look forward to seeing and hearing from you again. Thank you.

Outro: Disputes in Perspective is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's litigation and dispute resolution practice, Please email [e-mail]. You can find our podcast on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

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