Economic Crime and Corporate Transparency

Lord Agnew of Oulton Excerpts

Committee stage
Thursday 27th April 2023 Grand Committee

[Lord Etherton (CB)]

My Lords, I hope that noble Lords will permit me to speak now, because I may not be able to stay for the whole of the debate on this group. I apologise to those who still have to speak to their amendments. I will comment on two aspects of these amendments. The first is the carve-out for organisations that are not large.

The original legislation that provided for a prevention of crime scenario was the Bribery Act 2010. I was the chairman of the Law Commission when that project began, under pressure from the OECD on the Government because of this country’s poor rating on bribery. As at least two noble Lords have pointed out, there was no carve-out for small organisations. I am satisfied in my own mind that, had we created such a carve-out, it would not have satisfied the OECD. It is important that there be consistency in the law. If there is to be a change from the position on bribery to the position here on fraud, there must be a good reason to do so. To produce inconsistency in broadly comparable situations seems bad law. That is the only thing I wanted to say about that.

As a member of what I am afraid the noble and learned Lord, Lord Garnier, would describe as the legal establishment, I urge some caution in changing the principles of vicarious liability in relation to criminal responsibility for companies. Again, the question of consistency is important; if this is to move forward, we must look at the ramifications across the whole of criminal law, and there has to be a very good reason why this area is selected for different treatment. I know that this is anathema to so many people here, but it would be a good subject for the Law Commission to look at. Of course, it would not be able to do so by Report. However, if the proposal has merit, it warrants a much wider investigation for its impact elsewhere.

[Lord Agnew of Oulton (Con)]

My Lords, first, I congratulate the Government on bringing forward an amendment—it is at least a start. My noble friend the Minister said that he enjoys a lively debate and was looking forward to another one today, so I do not want to disappoint him. I speak as an SME; cut me in half, and that is what I am, and have been all my life. Indeed, my interest in SMEs long predates my noble and learned friend Lord Garnier’s interest in bribery, as I set up my first business in 1978.

My point is that I absolutely understand how SMEs think, so it is not credible to say, “Oh, we must protect them”. For a start, the way in which the categories are set excludes probably 90% of businesses in this country. I cannot work it out exactly, but it is the vast majority of commercial activity, so that makes a nonsense, frankly, of what is being suggested. On the fair application of law, to respond to my noble and learned friend Lord Garnier, a 5 foot 3 inch burglar can do just as much damage as a 6 foot 6 one. There is no logic to that—and I speak not as a lawyer but as a simple businessman.

More profoundly, unless we bring about this culture change, we are not going to get the SME community to think about fraud. If you are a victim of fraud and have the mechanisms in place to detect it because of other people doing it to you, you are far less likely to have it committed against you. All we are doing is creating an artificial bubble for people who are victims. I keep banging on about this figure, but 40% of crime in this country is now economic crime, of which fraud is a large part. So as for the idea that we are protecting SMEs in any way—we are not.

Perhaps the most important element is the professional enabler—the accountant and solicitor. We heard from the noble and learned Lord, Lord Thomas, the other day that the behaviour of the legal profession is not perhaps as pristine as it was 20 years ago. If it can take short cuts because someone looks like a juicy client, then the temptation exists. Only 100 of the 10,000 law firms in this country would have to comply with this carve-out—so that is nonsense, too. Then we come to public procurement. I was procurement Minister, and we have had a great success in government in the last few years, doubling the amount of money going from public procurement to SMEs from £20 billion to nearly £40 billion. If this provision comes in, it will have a kind of freezing effect on government. I know what officials are like—they are very cautious people and, if they feel they are taking a risk by contracting with SMEs because they, in turn, are not doing proper fraud checks, it will be another reason not to use them. So there is that perverse impact.

If we go a bit further, large corporations will find ways round this. They can create separate subsidiaries and they can use all the things we have been talking about, such as different ownership in different jurisdictions, so this will not solve the problem. The point has also been made about inconsistency: bribery has not had a carve-out for SMEs, so why should this? I ask my noble friend to put a cold towel round his head and those of his officials and come up with a credible explanation.

[Lord Vaux of Harrowden (CB)]

My Lords, I, too, welcome the government amendment. It is a step in the right direction, but I think the Minister will hear fairly similar arguments from all of us as to why it does not go far enough—I will be doing the same thing. In simple terms, the offence that the amendment creates is that the company becomes liable if an employee of the company commits a fraud offence with the intention to benefit the company. I am struggling to understand why, if the employee of a smaller company with, say 25 or even 200 employees, commits fraud intended to benefit the company, that company should not be guilty.

At the risk of introducing a new question at this point in the debate, which I am quite pleased to be able to do, I do not understand how this works for groups of companies. Are the numbers calculated on the basis of consolidated figures or, as the noble Lord, Lord Agnew, suggested, could you just create a subsidiary specifically for the purpose of carrying out the fraud? If it is not on a consolidated basis, it cannot make sense at all.

I have worked for both large and small companies in my career and the reality is that it is much more likely that the directors of a small company will know what their employees are up to than those with a big company. They do not necessarily need burdensome processes to know what has happened. They are in the same office, they are walking the same floor and they are hearing the phone calls. In any event, it should be the responsibility of any company to have in place reasonable procedures to ensure that its employees do not commit fraud on its behalf. Frankly, that should be a basic minimum to be allowed to be in business. Because of the defences that are included, all that is required is to have in place

“such prevention procedures as it was reasonable in all the circumstances to expect”,

or to have no such procedures in place if that would be reasonable. Whether those procedures are considered reasonable in all the circumstances will be driven in part by the size and activity of the company. The Government have also given themselves power to provide guidance as do what would be reasonable and they could easily tailor that for smaller companies, so we really do not need to remove them from scope. In the absence of compelling reasons from the Minister, I would be minded to support the amendments of the noble Lord, Lord Fox.

The other element that seems to be missing from the government amendment is any personal liability of the company management. Without this, those who turn a blind eye to fraud can hide behind the limited liability of the company. If someone has been involved in the decision-making process that led to the failure to take reasonable steps to prevent fraud from being carried out on behalf of the company, they should personally be on the hook. Personal liability concentrates minds wonderfully. Finally, as we have heard, the amendment does not deal with the identity doctrine, which the amendment of the noble and learned Lord, Lord Garnier, tries to. Again, why not?

At Second Reading, the Minister, the noble Lord, Lord Johnson, said that this Bill

“will bear down even further on kleptocrats, criminals and terrorists who abuse our open economy, and it will strengthen the UK’s reputation as a place where legitimate business can thrive, while ensuring that dirty money has no place to hide … The Bill will ensure that law enforcement and the private sector have the tools needed to help tackle economic crime, including fraud and money laundering”.—[Official Report, 8/2/23; col. 1250.]

As currently drafted, it does not achieve those aims. The UK, sadly, does not have a reputation as a place where

“dirty money has no place to hide”—

depressingly, the opposite is true. If we want to make a real difference and repair our damaged reputation, we must take genuinely robust steps.

Throughout our debates in Committee, the Government have resisted a whole range of sensible suggestions that would strengthen our fight against economic crime. Here we are again, with a set of amendments from the Government that are just too weak. The suggestions of the noble Lord, Lord Fox, the noble and learned Lord, Lord Garnier, and others would not create a disproportionate burden on businesses but would strengthen our reputation. I am becoming baffled and rather depressed by the Government’s continued reluctance to take genuinely strong action to reduce the levels of economic crime and, without genuinely compelling reasons from the Minister, I will support the noble Lords’ amendments. We have heard many times in our debates that this is a once in a decade opportunity to tackle this. We really have to take it.

--- Later in debate ---

[Lord Sharpe of Epsom (Con)]

The noble Lord makes a good point. As I have said, I will endeavour to find some more figures and share them more broadly. I do not know whether it will take into account the precise analysis that the noble Lord seeks, but the fraud strategy is imminent and it would be strange to publish a strategy without saying what the strategy is there to address. Once again, I am piling all my faith into the fraud strategy—possibly misplaced faith, who knows?

[Lord Agnew of Oulton (Con)]

Can my noble friend confirm the figure the noble Lord, Lord Macdonald, put forward: that about 99% of businesses will be excluded? That was the figure that I found, but I would like to hear that from the Minister, as well as whether he thinks that is proportionate in the carve-out.

[Lord Sharpe of Epsom (Con)]

I am afraid that I cannot confirm that. I do not know, but I will find out.

I will go back to Amendment 100 and talk about the identification doctrine. As noble Lords are aware, prosecuting corporates for serious crimes is challenging, largely as a result of the identification doctrine. This principle dictates that the acts and minds of the individuals who represent the directing mind and will are treated as the acts and minds of the corporate itself. In practice, it can be difficult to determine the “directing mind and will” of a corporation. Large and sometimes opaque governance structures make it challenging to identify a senior manager in charge of specific operations. This means that the current law applies unfairly to smaller business. As set out at Second Reading, the Government are fully committed to addressing this problem and to bringing forward legislative reform to achieve it. However, as noble Lords are aware through the amendments that they have tabled, whereas the identification doctrine currently applies to all crimes, the scope of this Bill can permit reform only for economic crime offences. I am as frustrated about that as other noble Lords.

While this amendment would improve the law for economic crimes, it would not remedy the current issues faced by prosecutors for all other sectors of criminal law. However—and I take a partial deep breath here for my noble and learned friend Lord Garnier—given our shared overall ambitions for reform, I would welcome further conversations ahead of Report on this subject. My officials are working through the list of offences with practitioners to determine whether the offences can be reformed without impacting the wider criminal law. My noble and learned friend will also be aware that we are committed to introducing reforms that can be effectively used by prosecuting agencies over a broad range of business. I am sure that he will also agree that is vital that any unintended consequences or risks be identified and understood. I hope that noble Lords are satisfied that the Government are absolutely committed to reform in this area, but that we want to ensure that any reform can be effectively utilised.

Turning to Amendment 101—