Directors in firing line for failing to prevent fraud

Despite the best efforts of Brexit and recent budget U-turns, the UK’s economy remains an attractive proposition for both domestic and global investment – at least for now. All good stuff, but this economic environment is appealing not only to genuine but also corrupt participants. In the case of the latter, this brings it with a need for ever increasing regulation to ensure that life is made as difficult as possible for those intent on using the UK markets to commit some form of financial crime. There is, after all, substance to, and a consequent desire to expunge, the UK’s reputation as a magnet for global money laundering activities.

A recent example of such regulation is the Economic Crime (Transparency and Enforcement) 2022 Act which (amongst other things) established a register of overseas entities with the laudable aim of reducing the ease with which foreign criminals can launder money through the purchase of property in this jurisdiction. Steps such as this will almost certainly help in the fight against fraud, but more is required, and further measures are currently being considered. This includes the provisions of the Economic Crime and Corporate Transparency Bill which is looking to be pushed through the statute books shortly and which contains proposals, for example, to reform the process for setting up new companies (including through the introduction at Companies House of identity verification requirements for all new and existing registered company directors) and to create additional powers to allow the appropriate authorities to seize and recover suspected criminal crypto-assets.

Even then, there are those who believe that these extended regulations will still not go far enough, and an all-party parliamentary group is set this week to propose various amendments to the draft bill, including provisions aimed at toughening up the UK’s corporate governance regime by imposing criminal liability on companies and their directors who fail to put in place adequate measures to prevent the business from being used as a conduit for economic crime (such as fraud, money laundering, sanction evasion and false accounting).

Such proposed measures are not without their detractors, and there will be those that will feel that such regulation will only serve to increase the already significant regulatory burden (and cost) on UK business, and in turn to dampen growth, whilst having a minimal and immeasurable effect in terms of stamping out fraud. Only time will tell.

Others argue that there is something inherently wrong in principle in making a person criminally liable for the wrongdoing of others. As one commentator put it, a landlord wouldn’t expect to be imprisoned for a brawl in their pub, and the position of company directors should be no different. But this misses the point. The proposal here is not (or should not be) to expose directors of companies to a liability simply by virtue of the fact that the business has, somehow or somewhere, been used as a vehicle for fraud. Rather, the proposed regulations are likely to be simply aimed at ensuring that reasonable and proper safeguards are put in place to minimise the risk of economic crime being perpetrated. If such safeguards are implemented then neither the company nor its officers should face any penalty, even if a fraud is, in fact, then committed via or within the organisation.

The reality is that many businesses will already have such measures in place, and for those that don’t then it should not be an overly burdensome task to comply with any proposed regulations through a mix of technology, strong internal governance and (perhaps most importantly) employee awareness and education.  

After all, it will be the business and its stakeholders that ultimately benefit from steps that are taken to protect against fraud and other forms of economic crime. With that objective in mind,  the imposition of tightened regulation on senior executives might very well be viewed as a  valuable and indeed necessary measure in the war on fraud.