Corporate Structures and Financial Crime

Emily Thornberry Excerpts

Thursday 4th July 2013 Commons Chamber

[Emily Thornberry (Islington South and Finsbury) (Lab)]

In beginning this debate, my hon. Friend the Member for Bassetlaw (John Mann) pointed out that the responsibilities of the two Front Benchers relate to different Departments. The reason why I am speaking on behalf of the Opposition is that it is our view that too many of the matters under discussion are crimes, should be crimes, should be prosecuted and are not being prosecuted at the moment. My presence underlines the emphasis that the Opposition put on that.

We welcome the fact that tax evasion was on the agenda at the G8 and the Prime Minister is right that we need to pierce the corporate veil. Lack of transparency enables criminals to hide behind shell companies and launder the proceeds of crime. In our view, however, the Prime Minister left the heavy lobbying until too late and the international commitment to breaking down corporate secrecy was weak. In fact, as my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) has said, it was feeble. The G8 members only agreed to consider national registries of the beneficial ownership of companies, which, to be frank, is very little commitment at all.

What is the Government’s commitment to that registry? Will it be public? The hon. Member for Banbury (Sir Tony Baldry) has said that the Prime Minister is on record as saying that he wants it to be public, but what does that mean? Will it be rigorous?

Every legal entity is ultimately controlled by a natural person—somebody who lives and breathes and who can go to jail if they do things wrong. Will there be a requirement that the information registered on beneficial ownership always includes a natural person? What penalties will there be for failing to supply the required information? Will there be an obligation to record the owner of bearer shares where the owner is not registered and the issuing firm does not track subsequent transfers of ownership? Will there be an obligation for companies that use nominee directors to reveal on whose behalf those directors are working?

We are told that the Government are reviewing all of this, but it seems to me that there is plenty of wiggle room. Will there be an obligation on the part of the registry to carry out due diligence on the information it receives? In practical terms, will Companies House have the resources to do that? Past studies have revealed that Companies House has not even had sufficient resources to routinely check company directors against a list of disqualified persons.

Will Her Majesty’s Revenue and Customs have the resources to investigate? HMRC currently faces £2 billion of funding cuts this Parliament, leading to a further 10,000 job cuts. Will the Crown Prosecution Service, also cut by more than 27%, have the resources to prosecute? Will the Government strengthen the regulation of corporate service providers that set up sham companies and straw-men directors? We do not know. Will we be told, and if so, when?

What we do know is that a future Labour Government will bring an end to the era of tax smoke and mirrors. As the shadow Chancellor, my right hon. Friend the Member for Morley and Outwood (Ed Balls), and the shadow Exchequer Secretary, my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell), have set out in Labour’s policy review on corporate tax, the Government should ensure that HMRC has the power, resources and capacity it needs. They should also explore how their general anti-abuse rule can be strengthened. The Government should also deliver internationally agreed reporting rules so that large multinational companies have to publish the key pieces of information that people need to assess the amount of tax they pay.

We also need to look at the channels through which the laundered money goes. Of the 17 banks analysed by the FCA, half were found not to have proper processes to prevent money laundering. Four of those were UK banks. I was disappointed that the FCA did not name those banks and have written to it asking it to do so.

Many Members have referred to last year’s US Senate report, which found that HSBC had been used to launder the money of Mexican drug lords. It called HSBC a conduit for

“drug kingpins and rogue nations”.

The US Department of Justice fined HSBC £1.25 billion for money laundering. I am not aware that the UK authorities have taken any action on that, beyond requiring an improved monitoring regime. Of course, the chairman of HSBC at the time became the Minister for Trade and Investment in this Government and continued to be so until recently.

Whether it is LIBOR rigging, money laundering or sanctions evasion, the UK has been slow to investigate British banks. When it has punished them, the fines have been dwarfed by those imposed by the US. For example, Barclays was fined £101 million in the US for LIBOR rigging, whereas the Financial Services Authority in the UK fined it £60 million and the Serious Fraud Office is still investigating. The SFO prosecuted only 20 cases last year and convicted 14 individuals. In the past two years there has not been a single corporate prosecution.

[Keith Vaz]

My hon. Friend is making an excellent point, which reflects what was said in the recent Home Affairs Committee report. However, there is an issue with the absence of personal liability, not just corporate liability. It is individuals who made the decisions.

[Emily Thornberry]

I am getting to that. I am grateful to my right hon. Friend.

Is it any wonder that KPMG has just reported that in the UK, fraud cases totalling more than £500 million were recorded in the first half of 2013, which is up by more than a quarter on the previous year?

We need a change of culture in our law enforcement agencies. We must equip them with the tools and resources that they need to get on the front foot. Under English law, companies are criminally liable only if it can be proved that a director was personally involved in the wrongdoing. That is an extremely high threshold—a problem to which the hon. Member for Wells (Tessa Munt) referred.

There is a good case for holding companies vicariously liable for their employees’ economic crimes, unless they can demonstrate that they had adequate compliance procedures. The last Labour Government did that in relation to bribery with the Bribery Act 2010. We want to build on that, but this Government want to water it down. They say, for some reason, that rules against bribery are red tape. That stopping people bribing one another can be seen as red tape is beyond belief.

If we change the law on corporate responsibility, we may see an increase in the number of companies that are prosecuted, so we must have a penalty structure that is worthy of receiving them. The highest fraud fine to result from an SFO prosecution is £2.2 million. The highest fine clinched by the US Department of Justice is larger than $3 billion. Why do we not introduce a system in which sentences are based on a percentage of the company’s turnover over the past three years?

Although the SFO’s problems are not entirely down to under-resourcing, resources are important because these crimes are expensive to investigate. Last year, the SFO’s budget was £34 million, compared with £40 million in 2009-10. In 2014-15, it will fall to only £30 million. It is so short of money that it has to go cap in hand to the Treasury whenever it wants to take over a major prosecution. That at least gives the impression that the Chancellor has a secret veto on whether fraud investigations take place.

The US approach of topping up the funds of fraud prosecutors is much more appealing. Where possible, confiscated assets are returned to the victims. The proceeds from the many cases in which the victims cannot be traced are poured into a central fund. Each year, teams of prosecutors bid for a portion of that fund for asset tracing and law enforcement investigations. We have the beginnings of such a system in the UK. We could extend that and put large fines or at least part of them into the pool as well. In these austere times, we need to explore such alternative means of funding.

[Stephen Barclay (North East Cambridgeshire) (Con)]

The hon. Lady is eloquently describing the failure of the tripartite regulatory regime that her Government put in place. She is correct that the fines in the UK are a fraction of those in the US. A further failure is that the fines have rewarded other banks. This Government have ensured that the fines that are paid do not reduce the levy so that banks no longer profit from the wrongdoing of other banks. That was the regime that her Government put in place.

[Emily Thornberry]

I am grateful to the hon. Gentleman, but in the time I have available, I would like to look to the future and consider the best method that we have for solving the current problems. I am happy to talk to him at some length outside the debate, because I am committed to the issue and will be interested to hear his point of view.

It seems to me that one good way in which the assets in question can be used, instead of lowering the levy, is to put them into a pool that prosecutors can use in future. That would help to pump up what we are doing. That seems to be a way forward, and I am putting it before the House today to get some sensible responses.

[Sir Edward Garnier (Harborough) (Con)]

Will the hon. Lady give way?

[Emily Thornberry]

Unfortunately I am running out of time, but I would like to hear from the hon. and learned Gentleman briefly.

[Sir Edward Garnier]

The hon. Lady urged us to look to the future. Does she agree that one thing that we need to consider with reasonable urgency is an alteration in how corporate criminal liability is described in law? At the moment, we have the Victorian “directing mind” principle, which is not really appropriate for vast international companies. Does she agree that we need to Americanise the system—

--- Later in debate ---

[Madam Deputy Speaker]

Thank you, Sir Edward, but you are continuing the debate. Your point is on the record, but we are now eating into the Minister’s time. I understand that he does not mind, so I call Emily Thornberry to conclude her speech.

[Emily Thornberry]

I am grateful to the hon. and learned Member for Harborough (Sir Edward Garnier) and appreciate his expertise in the matter, but I actually did say that immediately before he came into the Chamber. I am glad that there is now cross-party agreement, and I urge him to ensure that his party’s Front Benchers adopt my ideas. Now is the time to move on in relation to fraud, and I believe that companies should be held liable for the fraudulent activity of individuals, building on the Bribery Act. That is a way forward, and if we can agree on it, then great—let’s do it.

If the Government are committed to a crackdown on crime, why have they left it to Labour to amend the Financial Services (Banking Reform) Bill, which will come before the House again on Monday? Why have they not tabled amendments? We understood that the Prime Minister was committed to introducing a crime of reckless management of a financial institution, so why have the Government not tabled such an amendment? Why do we need to do it? It seems odd. We are concerned that, although the Prime Minister is happy to make pledges when everyone is watching, he hopes that when nobody is noticing he can carry on and do nothing.

It seems to us that an offence of reckless banking needs to do more than deliver symbolic sacrifices after the event. We need managers to be held liable if they turn a blind eye to those who are committing crime. They should have a responsibility to monitor what happens. No single person brings a bank to its knees and no single person should be responsible for UBS, Société Générale or Barings, whatever some may want us to believe. There are further people who are also responsible, and we need to ensure that the law allows for other people to be prosecuted. Nowhere is that more apparent than in the Government’s record on basic economic crime such as the failure to ensure that people are paid the minimum wage. In the past three years, only two bosses have been prosecuted for that, and workplace inspections have halved in the past 12 months. It seems to us that it is about time the Government started taking seriously economic crime of all types, including people not being paid a basic wage.