Directors: prevent economic crime or face criminal sanctions

Following our recent article on the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") that received Royal Assent in March this year, the Economic Crime and Corporate Transparency Bill (the "Bill") has been published and went through its second reading in the House of Commons on 13 October 2022.

The Bill's objective is to further strengthen powers to tackle illicit finance, reduce economic crime and help businesses grow. Specifically, the measures aim to:

  • Reform Companies House, including by giving Companies House the power to query documents submitted and to investigate companies it suspects are being used for fraud or money laundering.
  • Update limited partnership law and improve transparency.
  • Amend the Act to maintain consistency with changes to the Companies Act 2006 made by Part 1 of the Bill and make minor and technical changes.
  • Amend the Proceeds of Crime Act 2002 to explicitly apply criminal and civil asset recovery powers to cryptoassets.
  • Make a number of discrete changes relating to money laundering, terrorist financing and the regulation of legal services.

However, as Steven Richards (Head of Fraud) has commented here, whilst the proposed changes have been welcomed for as far as they go, the second reading's debate witnessed a reoccurring theme of disappointment for the Bill's measures not going far enough.

The Bill has been described as "piecemeal"; "tinkering with the challenges at the margin instead of boldly adopting a more systemic approach to bearing down on dirty money"; and failing to address key matters that are vital to a comprehensive approach.

New offence

Dame Margaret Hodge, of the All-Party Parliamentary Group on Anti-Corruption, and Kevin Hollinrake, of the All-Party Parliamentary Group on Fair Business Banking, have expressed an intention to table amendments to the Bill including extending the "failure to prevent" offences of economic crime and individual director responsibility. The details of the proposed amendment are yet to be disclosed and are likely to be raised in the upcoming committee stage. However, the economic crime manifesto presented by these two all-party parliamentary groups includes the following recommendation:

The Government should legislate to introduce new failure to prevent offences for economic crimes, including money laundering and fraud. The law must be reformed so that both companies and senior executives can be held liable for criminal activities or for failing to drive out dirty money.

It is therefore likely that the proposals tabled for the Bill reflect this recommendation. This would mean that senior executives could ultimately face a jail sentence for offences taking place within their business or failing to implement policy and procedures to identify and prevent money laundering and fraudulent practices.

The proposal raises various questions. Firstly, is it needed? Supporters of the proposal point towards the cost of economic crime to the UK economy and scandals such as the Danske Bank scandal (where an Estonian branch of the Danish bank allowed suspect payments to move through the bank using British registered companies, for which the total amount of money laundering through that branch was €200billion) for which a fine is likely to follow but an individual being held to account is not. The proposal could ultimately support a cultural shift by requiring senior executives to ensure there are effective due diligence processes in place to prevent and identify economic crime.

Secondly, would it be effective? The proposal would be an extension to the current failure to prevent provisions on bribery and tax evasion. Whilst successful prosecutions under these provisions may be limited, fines under the provisions have been substantial. This does however raise a further question about enforceability, particularly in respect of resource availability to investigate and then enforce prosecutions. Additionally, is it in the public interest to prosecute individuals once a company has already been held accountable.

Next steps

The details of the proposal and the committee's response remain to be seen. Foot Anstey will be closely following this development, consulting with clients as to their views and advising clients on the implications. Ultimately, should this amendment be accepted by the Committee, this would add to the ever-growing list of director duties which, when economic conditions tighten, present directors and their insurers with more risk, and creditors with more opportunities.