Fraudsters beware
Fraudsters beware
The law may finally be catching up with you
Should a company face criminal sanctions for failing to prevent fraud? That’s the question the House of Lords is expected to debate today. The government has proposed amendments to its Economic Crime and Corporate Transparency Bill, now at its committee stage in the Lords after being passed by the Commons.
I explained the background in a column for the Law Society Gazette last month and concluded that the devil would be in the detail. Now we see the devil:
The new clause continues with seven more subsections and further details are included in other new clauses. They have been helpfully summarised in client briefings by the major law firms.
The new offence will apply only to larger companies and partnerships which meet at least two of the three following criteria:
more than 250 employees
more than £36 million turnover
more than £18 million in total assets.
So small and medium businesses will not be caught — unless these levels are lowered by ministers at some future point.
An “associate” is:
an employee, agent or subsidiary of the relevant organisation, or
a person who otherwise performs services for or on behalf of the organisation.
The types of fraud covered are:
Fraud by false representation, by failing to disclose information, or by abuse of position (sections 2 to 4 Fraud Act 2006)
Obtaining services dishonestly (section 11 Fraud Act 2006)
Participation in a fraudulent business (section 9 Fraud Act 2006)
False accounting (section 17 Theft Act 1968)
False statements by company directors (section 19 Theft Act 1968)
Fraudulent trading (section 993 Companies Act 2006)
Cheating the public revenue (common law)
As Allen & Overy explain, cooking the books to make a company look healthier could be caught — as would misleading statements made during a public procurement exercise or, potentially, greenwashing claims.
The proposed new offence does not cover money laundering.
Deferred prosecution agreements will enable companies to avoid criminal convictions if they put in place new safeguards and pay a hefty fine.
The government has promised to publish guidance before the new offence takes effect.
Comment
It goes against the grain to punish anyone for doing nothing. On the other hand, we all want to prevent fraud. And there are unresolved problems with the existing law. Although a corporation can be prosecuted, it will generally be liable only for the conduct of a person who had the status and authority to constitute the company’s “directing mind and will”.
This so-called identification doctrine depends on finding individuals who are senior enough to bind the company with their actions. A prosecution may fail unless it can be shown that the entire board was complicit.
In the absence of a more fundamental reform, the proposed new offence must be welcome. But why has it been introduced so late in the day? Rushed legislation is never good legislation.
Update 28 April: this piece turned out to be slightly premature as the proposed amendments were debated until yesterday. Despite concerns that they did not go far enough, the reforms were all approved.