Financial Services Bill

Lord Garnier Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[Lord Garnier (Con) (V)]

My Lords, this is a lengthy Bill, and although in some respects it is politically uncontroversial, there are many points of technical detail that the House will want to scrutinise closely. I can think of no better people to assist in our deliberations on the Bill than the two maiden speakers. My noble friend Lord Hammond of Runnymede made a superb speech. I hope that, having briefly sipped from the glass of independence in 2019 after nine years in the Cabinet, he will not lose the habit of free thinking, even though he has retaken the Conservative Party Whip. The noble Baroness, Lady Shafik, also made her maiden speech today. Her contribution to the study and practice of economics in a whole host of financial and academic institutions is inspiring, so I look forward to learning a good deal from her, as well as from my noble friend, in the future.

I am intervening in this debate to highlight a matter that is not in the Bill, but it ought to be. It is a subject that the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Rooker, have touched on, and I gather that my noble friend Lord Hodgson of Astley Abbots may also speak about; namely, the need to expand the criminal law concept of failure to prevent crime, not least corporate financial crime. I have been thinking about the law on financial crime since the 2008 financial crash. I was the shadow Attorney-General for two years before the coalition Government came into office, and then the Solicitor-General in government. I developed the deferred prosecution agreement, or DPA regime. It was enacted through the Crime and Courts Act 2013. It is a regime that pragmatically and justly deals with corporate financial crime under the supervision of the courts. I will not go into the detail of the system now but, if I may say so, it works. I declare an interest not only as the Minister who introduced the system into this jurisdiction, but also as a practising barrister who, now long out of Government, appears in DPA cases.

DPAs are not, however, the end of the story. Financial crime is often thought of as the crime that does no real harm: no one gets killed, no bones are broken and there is no blood on the carpet. Equally, corporate offending is sometimes hard to visualise. But corporate crime and financial crime both cause great harm to people, to communities, to the economy and to our national reputation as a safe place to do business. Both are all too common and need to be investigated and dealt with effectively by the public authorities here and abroad. Financial crime is often, by the very nature of modern financial services, both international in its scope and committed electronically through corporate structures, albeit with a human mind and will behind it.

I hope, with other noble Lords, to expand on this theme in Committee, but for present purposes I shall say only this: Section 7 of the Bribery Act 2010 creates a corporate offence of failing to prevent bribery. It has been deployed successfully on several occasions and provides a model which can and should be replicated in other areas of financial crime. Furthermore, the Criminal Finances Act 2017 introduced corporate criminal offences of failure to prevent criminal facilitation of tax evasion. I suggest we should by this Bill expand the failure to prevent regime to cover at least some of the 50 or so financial or economic crimes that are available to be dealt with by DPAs listed in Schedule 17 to the Crime and Courts Act 2013.

Finally, we must reform the law relating to corporate criminal liability. The noble Lord, Lord Hendy, is right and I profoundly agree with him. I have been writing and speaking about the need to do this for years. The concept of the directing mind and will as the basis for corporate criminal liability, which the Americans abandoned before the First World War, worked for the small family businesses of the 19th century, but is now long outdated. Today, companies can operate in many different countries with national, regional and global boards and with hundreds of thousands of employees engaging in multi-jurisdictional trade in goods and services. Locating the directing mind and will of these vast conglomerates is difficult, if not impossible, and the current law does not reflect the reality of modern business life. It is an affront to common sense and justice. As in the United States, we need to introduce vicarious liability into our corporate criminal law.

Financial Services Bill

Lord Garnier Excerpts

Committee stage & Lords Hansard
Wednesday 3rd March 2021 Grand Committee

I am sure that the Minister will defend the current state of affairs and tell us that the trade associations have somehow turned a new leaf and are now different from what they used to be. But the fact remains that the professional bodies have no independence from their members and cannot deliver robust and effective regulation. Just how many more supervisors of the supervisors will the Government create? Even if they do, they still cannot change the Nelsonian organisational culture of the accountancy and trade associations. The best way to move forward is to reduce drastically the number of AML supervisors, which is what Amendment 51A invites the Government to do.

[Lord Garnier (Con) [V]]

My Lords, I am grateful to my noble friends and other noble Lords who signed Amendments 81, 82 and 83, which, with Amendment 84, take our debate in a slightly different direction from the other amendments in this group. I also thank my noble friend Lady Penn and the Economic Secretary, John Glen, for meeting me last week to discuss my amendments and for his letter received at 11 am. As can be seen from the names of those noble Lords who signed these amendments, they are driven not by party-political motives but by a desire to make the law of corporate criminal responsibility fit for the modern age.

Reform of this aspect of the criminal law is overdue. The Government accept that. I will raise the salience of this question and remind this Government, as I reminded their predecessors, that the current state of the law does not take account of modern company practice. The difference between us in substance is not that there should be reform but what sort of reform and when. I am glad to have this opportunity to explain my concerns and I apologise in advance to noble Lords if, in speaking for too long, I try the patience of the Grand Committee.

This is not the first time that I have tried to encourage reform of corporate criminal liability. I was persuaded more than 10 years ago when studying American law that the way we deal with corporate criminal liability is outdated. I was then trying to work out how best to introduce deferred prosecution agreements, or DPAs, into this jurisdiction—they were enacted via the Crime and Courts Act 2013—and I became convinced that, in an era of large, international companies with hundreds of thousands of employees, with main, local and regional boards in many different geographical locations and with turnovers sometimes larger than the GDPs of some small countries, what had worked in the 19th century was no longer suitable in the 21st.

A company, although a separate legal personality, is an artificial construct and can commit a criminal offence that requires, for example, proof of dishonesty only through the agency of a human. In 1915, the then Lord Chancellor, Viscount Haldane, giving judgment in the case of Lennard’s Carrying Co., said that a corporation is

“an abstraction. It has no mind of its own any more than it has a body of its own”.

Our law required a human directing mind and will to fill that vacancy. Equally, whereas a human being convicted of bribery can be sent to prison, a company cannot.

At present our law requires prosecutors to satisfy the identification principle, which essentially asks whether a person can be identified as the directing mind and will of the company and is thus capable of fixing the company with criminal liability for the act or omission of that identified individual. The difficulty in satisfying the identification principle has led to cases where only individuals, but not their employers, have been charged. A recent example is the phone-hacking scandal. Another example of the difficulties caused by the identification principle were the cases involving Barclays Bank and some of its senior staff in 2018.

One hundred and fifty years ago, companies were mostly small concerns that traded locally. Of course, many businesses were not incorporated at all, but there were exceptions to that general rule. As British maritime power and commercial reach became increasingly global during the 18th century, and developed yet further through the 19th century, company structures became more sophisticated. Financial services, be it in banking, capital raising or insurance in the City of London, kept pace to enable these advances. That said, leaving aside mechanical advances, a milling business of 1900 was not all that different from a milling business of 1800; had the managing director of that milling company bribed someone in the late Victorian age, it would not have been difficult to determine whether he could be identified as the directing mind and will of the company so as to fix it with criminal liability for the corruption, in addition to any that attached to the director.

Although the identification principle received its then-highest judicial approval in the Lennard’s Carrying Co. case in 1915, that principle had been developed during the 19th century, when most English companies were run by fewer than half a dozen people. It is now plainly an inhibiting factor when prosecutors are considering cases involving large, complex companies with international and country boards, operating around the world. In 1912, the US courts recognised that the identification principle was not suitable in a modern industrial economy, whereas three years later our highest court affirmed it. It is time that we caught up.

Since 1912, an American company can be liable for a criminal offence committed by an employee in the course of his employment for the benefit of the company. The offence may also benefit the employee, but if it benefits the company it, too, is criminally liable. It is the criminal law equivalent of the concept of vicarious liability that we have in English civil law. It is not complicated but, plainly, each case of suspected corporate offending will be highly fact specific. I would like to have that system here, but it is not going to happen. I therefore look to the failure to prevent model, not least because it is now well established in our own criminal law.

In 2011, US federal prosecutors told me that they greatly admired the failure to prevent bribery offence in Section 7 of the Bribery Act 2010. They said that the United Kingdom led the world in countering corporate crime because of that new offence. More recently, the Criminal Finances Act 2017 introduced a corporate offence of failure to prevent facilitation of tax evasion. The noble Baroness, Lady Bowles, may talk about that in support of her Amendment 84.

In the case of Tesco Supermarkets Ltd v Nattrass in 1971, Lord Reid held that, in order for liability to attach to the actions of a person, it must be the case that

“the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company … If it is a guilty mind then that guilt is the guilt of the company.”

That case turned on whether a store manager who broke the Trade Descriptions Act was the directing mind and will of the company. He plainly was not, but Lord Reid’s words are relied on in pretty well every case where a company is charged with an offence because of what an employee is alleged to have done. As Lord Justice Davis said in the 2018 Barclays Bank case, large modern companies are complex organisations not so that they can avoid criminal responsibility but to facilitate their business operations. They cannot be expected to have a detailed knowledge of what every manager throughout the world is doing, or to be held criminally liable for everything that they do. I agree.

That will not happen under these amendments but, under the current directing mind and will test, corporations involved in wrongdoing face little prospect of prosecution. As a result, corporate compliance procedures in the UK could slip. One of the reasons why Section 7 was introduced into the Bribery Act was to improve corporate behaviour. It has had an important preventive effect. When companies face little consequence for failing to maintain procedures to prevent financial crime, the business case for putting resources into implementing these procedures becomes harder to make.

If the failure to prevent regime were to be introduced for other economic crimes, such as those in my amendments, the impact on corporate standards would be significant because it would focus companies’ attention on having the right measures in place to prevent the commission of these crimes. It would also help us to maintain our reputation for the highest standards of business integrity, as we refocus our attention on building trade links around the world and on a future outside the EU.

The failure to prevent offence carries strict liability for a commercial organisation: a bribe paid anywhere in the world by an “associated person” with the intention of benefiting the company will cause it to commit an offence, and the only defence is that it had in place “adequate procedures” to prevent bribery. An “associated person” is defined under the Bribery Act as a “person who performs services” for or on behalf of the organisation; this may include employees, subsidiaries and agents. This was intended to embrace the whole range of persons connected to an organisation that might be capable of committing bribery on its behalf. It may include joint venture partners or entities, depending on the circumstances.

Under the law as it is now, companies can be prosecuted for not having in place systems to prevent a predictable crime here or abroad. This approach has proved effective. There have been prosecutions under Sections 1 and 7 of the Bribery Act, but Section 7 has been used to greatest effect in deferred prosecution agreements. I declare my interest as a barrister in private practice who has acted for both the Serious Fraud Office and companies accused of offences under the Act, but my experience of cases where companies have failed to prevent bribery by their associates tells me that the Act is not just necessary but works both to catch and deter corporate criminal conduct. I suggest that it would work as well with the offences in these amendments.

On proper analysis, my amendments are not a radical departure from the current state of the law but a small extension of it. Government and Parliament created the failure to prevent regime a decade ago. I am doing no more than increasing its ambit beyond bribery and tax offences to a few more financial and economic crimes. My amendments are limited to the UK financial system.

Amendment 81 says that a “relevant body”—in essence, a commercial organisation—commits an offence if a person associated with it commits an “economic criminal offence” in the course of using or providing financial services

“that might affect the integrity of the UK financial system.”

The expressions “relevant body” and

“the integrity of the UK financial system”

have the same meanings as in the Criminal Finances Act 2017 and the Financial Services and Markets Act 2000. For the purposes of this amendment, an economic criminal offence is defined by a list in paragraphs (a) to (g) of subsection (2) and includes, for example, conspiracy to defraud, theft and false accounting. As in the Bribery Act, there is a reasonable prevention procedures defence. “Reasonable” does not mean “perfect” so it is not a meaningless defence.

Amendment 82, which also has the same reasonable prevention procedures defence, defines an economic criminal offence as any of the approximately 50 offences

“listed in Part 2 of Schedule 17 to the Crime and Courts Act 2013”.

Those are offences that can be the subject of a DPA. Again, there is nothing radical there. Amendment 83 is in similar terms to Amendments 81 and 82, save that it relates to the failure to prevent a “criminal financial offence”, which is defined by the same list in the Crime and Courts Act used in Amendment 82 and a similar, but not identical, list of offences to that in Amendment 81. There is, again, a reasonable prevention procedures defence.

Clearly, we need laws that will make a real difference and deter crime. The approach taken in the Bribery Act and the Criminal Finances Act has proved its worth. Surely, it is now time to extend the tried-and-tested failure to prevent regime to the offences referred to in these amendments. Of course, I expect that they will be met by departments from the “Ministry of Paperclips” through to the “Department of Circumlocution”, as non-government amendments often are, with much sucking of teeth and earnest furrowing of brows. We have all heard the reasons why an amendment cannot be accepted, be it its drafting, its being in the wrong Bill, its public expenditure implications or its timing—and anyway, the Law Commission is about to look at this aspect of the law. I promise noble Lords that I wrote those words before I received the Economic Secretary’s letter this morning.

All Governments suffer from an aversion to ideas that they did not invent. That is not a criticism directed at my noble friend the Minister, I assure her, but of course this is an idea invented not by me but by government. Gordon Brown’s Labour Government introduced the Bribery Act, and David Cameron’s coalition Government took it on and ensured that it received Royal Assent. It had all-party support. Theresa May’s Government brought in the Criminal Finances Act 2017, to widespread acclaim. These amendments obediently follow those statutes. If the Financial Services Bill is not the right Bill for these financial offences, what on earth is? Surely, the Treasury can make a good case for adding these provisions, on financial and economic crime connected to financial services, to the Financial Services Bill. They will not cost money but, like DPAs, enhance our national economic reputation and, in the right case, see large fines flow into the Treasury.