Corporate Economic Crime

Christina Rees Excerpts

Tuesday 3rd November 2015 Westminster Hall

[Christina Rees (Neath) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Stringer.

I congratulate my hon. Friend the Member for Ealing North (Stephen Pound) on securing this important debate. As we heard from him, economic crime is on the increase and fraud very much remains a hidden crime. I, too, turned to the 2014 PricewaterhouseCoopers global economic crime survey, which found that 44% of UK organisations reported some type of fraud—the global average is 37%. The majority of respondents felt that the number of instances and the financial impact of economic crime had increased since 2013. The proportion of employees committing economic crime increased from 34% to 41%, and most crimes are committed by junior staff.

The Treasury’s money laundering and terrorist financing national risk assessment found:

“The size and complexity of the UK financial sector mean it is more exposed to criminality than financial sectors in many other countries”.

The risk assessment also stated that the banking sector is at highest risk of money laundering because London is home to 250 foreign banks and is the largest centre of cross-border bank funding. We clearly need laws to combat economic crime.

Existing UK corporate liability law is based on the identification principle, which requires prosecutors to show a person who is the “directing” or “controlling” mind of the company—that is, that someone sufficiently senior intended to commit the criminal act—to prove the company guilty. In the case of large multinational corporations, however, it is difficult to identify individuals who are the directing or controlling mind. In other words, they are getting away with it.

Indeed, in 2013 the director of the Serious Fraud Office, David Green, said that

“a corporation is only liable if the top personnel can be shown to be complicit, but this is very hard to prove—rarely does the email chain go above a certain level”.

Furthermore, the identification principle creates perverse incentives for board-level officers to distance themselves from knowledge of wrongdoing, so any decision to engage in wrongdoing is split between individuals with different knowledge, making it difficult to prove that one person had the intent.

What are the alternatives? The Labour Government introduced the Bribery Act 2010, but there have not been many prosecutions, and the first convictions did not take place until December 2014, when three men were jailed for a £23 million biofuel investment scam. Those men, who worked for Sustainable Agroenergy plc, preyed on people, conning them into investing their savings and pension funds.

The Bribery Act overhauled laws that dated back 122 years and gave prosecutors new powers to fight modern internet bribery. As we have heard, section 7 of the Act made it an offence for a commercial organisation to fail to prevent bribery by its employer; the defence is adequate procedures. No prosecutions have been pursued under that section, so it has not been tested in the courts, but Alan Sheeley, the head of civil fraud and asset recovery at Pinsent Masons, said that the Act’s

“impact on the attitudes and policies of businesses of all sizes has been staggering.”

The Labour party sees section 7 as a model that could be used to prosecute all economic crimes. A company would be liable for failing to prevent certain offences of economic crime unless it showed that it had put adequate procedures in place to prevent it. As we have heard, however, although the Attorney General made that proposal in September 2014 and included it in the 2014 anti-corruption plan—and even though it was in the Conservative party’s manifesto and it received widespread cross-party support—the Under-Secretary of State for Justice, the hon. Member for South West Bedfordshire (Andrew Selous) responded to a written question from the hon. Member for Gower (Byron Davies) to say that the proposal had been dropped.

The Government have received much criticism for reneging on that promise. Indeed, Elly Proudlock, a member of WilmerHale’s white-collar crime team, said:

“It is surprising that the Government has decided not to pursue law reform in this area, given the small number of corporate prosecutions to date and the repeated insistence by David Green…that the threshold for establishing corporate criminal liability must be lowered.”

The new offence of failure to prevent bribery has had a profound effect on the attitudes and policies of businesses of all sizes. The threat of prosecution has reduced offending, so we need to change the culture in companies on committing economic crime. It is concerning that the attitudes of those in senior positions in companies contributes to the prevalence of economic crime committed by their employees. To broaden section 7 to include all economic crime may well have a positive effect on those senior people and, in turn, that may change the culture of their employees. The threat of prosecution may well be persuasive in itself.

The alternatives include introducing a new vicarious liability regime similar to the US model, whereby companies are liable for the illegal acts of employers and agents when such acts are in the scope of their employment and benefit the company. However, vicarious liability is notoriously difficult to prove.

What about deferred prosecution agreements, another import from the US, where they are used extensively? DPAs were introduced to the UK in 2014 by the Crime and Courts Act 2013. They are a method by which an organisation can avoid prosecution by entering into a contract with certain conditions, which may include paying a financial penalty, paying compensation or co-operating with future prosecutions of individuals. They can be used for fraud, bribery and other economic crimes. The SFO says that a DPA would be appropriate when the public interest is not best served by mounting a prosecution. No DPAs have been signed yet, but there is speculation that two small private companies, Barclays and Tesco are involved in discussions. The SFO’s director, David Green, suggested that two will be signed by the end of 2015.

On one hand, many see DPAs as a proven method of compensating for economic crime. In the US they brought in more than $4.2 billion last year and more than $9 billion in 2012. That may be evidence of their effect in reducing economic crime. On the other hand, they are a way for companies to get out of jail, because no one goes to jail.

Of greatest concern is whether DPAs will work in the UK. Without the threat of criminal liability prosecutions and the likelihood of an organisation being prosecuted, what is the incentive to sign a DPA? Why pay a significant fine, pay compensation or co-operate in prosecutions if there is no chance of getting caught in the first place?

One of my concerns is the practical question of the lack of resources needed to pursue large, complicated cases against well-resourced multinational corporations. If the resources are not there, adding new offences to the statute book will not be effective. We need new methods to combat economic crime, but we also need resources.

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[Catherine McKinnell]

My hon. Friend makes an important point. We should not shy away from learning lessons from any jurisdiction that manages to control risk, as my hon. Friend the Member for Aberavon highlighted, and to hold companies to account where wrongdoing has occurred. Where there are lessons to be learned from the US, we should learn them and do what we can to implement them within our own system. We could then hold ourselves up as a beacon for other countries and hold our heads high as a well-regulated, world-leading financial centre. That has to be our aim in all of this.

As my hon. Friend the Member for Neath pointed out, without the fear of corporate economic crime being prosecuted, there is little incentive for companies to enter deferred prosecution agreements and no incentive for companies to co-operate with the SFO to change their practices as mandated under a DPA. Unlike in the US, which has far stronger vicarious liability laws, there are still far too few corporate prosecutions in the UK under the current identification principle. No matter how much we may wish to learn from the United States—if that is what we see as the right way forward—without a strengthened corporate liability regime, we will be hampered in our efforts to implement such changes.

Finally, I turn to another area that shows concerning signs of backtracking by the Government and in which we would otherwise have seen individuals in companies held accountable for their own and others’ actions. In its 2013 report on the banking sector and how to prevent the failings that led to the 2008 crash, the Parliamentary Commission on Banking Standards similarly recognised the difficulty in identifying individuals and holding them to account. One of its key recommendations was to introduce a senior managers regime to hold named executives personally responsible for key risks in the bank. That issue was raised by my hon. Friend the Member for Aberavon, who made a powerful speech about encouraging better and more responsible management within companies to change bad practice where it is found. The commission recommended that the regime place a burden of proof on those named executives, who would have to show the regulator that they had done all they reasonably could to prevent failings or misconduct if they were to avoid sanction.

[Christina Rees]

Does my hon. Friend agree that even though we have the legislation in place in section 7, there is no will to use it? That is the problem. There has not been a single prosecution.

[Catherine McKinnell]

My hon. Friend raises a concern relating to the Bribery Act, but there are two ways of looking at the Act’s implementation and the fact that no prosecutions have yet happened under it. There is evidence that it has already brought about significant changes in corporate culture and that the managers tasked with the responsibility of ensuring that they have taken all the steps they could reasonably be expected to have taken to prevent bribery in their organisations have taken those steps. Some positives can therefore certainly be derived from the situation, but I agree that a very close eye needs to be kept on prosecutions. I note that there are already murmurings from the Government about backtracking on the Bribery Act and trying to weaken that legislation, and we must stay vigilant about that.

On the senior managers regime, the commission recommended that the regime place a burden of proof on those named executives. The recommendation was accepted by the Government and enshrined in the Financial Services (Banking Reform) Act 2013. However, the Bank of England and Financial Services Bill, which is currently in the other place, is set to reverse that burden of proof, meaning that instead, the regulator—the Financial Conduct Authority—will be required to prove that senior managers have failed in their duty to prevent misconduct or prudential failings. The onus will be back on the regulator, and not on the named senior executives. Is that just more backtracking from the Government, who seem to be going soft on economic crime? I would be grateful if the Minister provided reassurance that that is not the case.

Ministers urgently need to look again at their approach to tackling economic crime, because without change, the prospect of ensuring that justice is served to those who have mis-sold financial products, evaded tax, laundered money and defrauded seems as remote as ever, and the risk of the scandals of recent years being repeated has far from disappeared.