Economic Crime and Corporate Transparency

Lord Leigh of Hurley Excerpts

Committee stage
Thursday 27th April 2023 Grand Committee

[Lord Garnier (Con)]

My Lords, I thank my noble friend Lord Sharpe for the courtesy he has shown to me and other noble Lords in holding meetings, along with his officials, to explain the Government’s case on failure to prevent and the adjustment of the law of corporate liability. It has been very helpful to have some understanding of where they are coming from and where they intend to go. It is fair to say that he was more forthcoming in those meetings than he was in providing an explanation for the SME carve-out this afternoon. I thank not only him but the noble Lord, Lord Fox, for tabling his amendments, which I support, and for his mention of the amendments I have tabled.

The amendments that I have tabled are exactly the same, almost to the semicolon, as amendments that I have tabled not only in this Parliament, since the 2019 general election, to Bills dealing with economic and financial crime, but also to Bills that I spoke to when a Member of the other place. I have taken an interest in how we deal with economic crime since I became the Solicitor-General in 2010. I appreciate that that was a long time ago and that my noble friend the Minister probably did not have a particular interest in the subject all that time ago. None the less, I appreciate that many will find what I have to say unoriginal, not least because I have said it so many times before but also because it aligns with what others on all sides of the House and in both Houses have been advocating for some little while.

I will first deal with the SME carve-out, which is provided for in one of the government amendments. I suppose it is fair to say that half a loaf is better than no loaf and that a bird in the hand is better than two in the bush. However, after nearly 15 years, following the banking crash of 2008-09, the subject of economic crime and corporate misfeasance has been if not on the top of everyone’s agenda every day then certainly close to it. For the Government to come up with a carve-out in the way that they have—bear in mind that we are only talking about failure to prevent fraud at the moment—is disappointing.

What we are here required to understand by Amendment 84C, proposed by the Government, is that if a company or business has a turnover of less than £36 million, has a balance sheet total of less than £18 million and has fewer than 250 employees, it should not be caught by the failure to prevent fraud.

[Lord Leigh of Hurley (Con)]

Two or more of those.

[Lord Garnier (Con)]

My noble friend Lord Leigh is entirely right: you have to pick two of this lucky trio and you are away.

One only has to think briefly about start-up businesses and the pressures that they come under when they may have very few employees and a turnover of much less than the Government indicate to realise that the danger of an associated person committing an act of fraud is not predicated on the size of the company. It is also possible to say that there will be people who will so construct their corporate affairs that each bit of their corporate existence is by some happenstance just below or well below the Amendment 84C cut-offs.

In any event—I have bored my noble friend the Minister with my feeble sense of humour on a number of occasions—there is no similar cut-off for failure to prevent bribery under the Bribery Act 2010 and no equivalent cut-off under the Criminal Finances Act 2017. Although my noble friend tells me that, after much consultation and because they do not wish to impose unnecessary burdens on business, the Government have come up with these numbers, as I think the noble Lord, Lord Fox, indicated, I have yet to hear a reason why they have landed on those figures or why as a matter of principle they have chosen to have a carve-out at all.

Here comes my feeble joke, so stand by. A burglar of five foot four should be prosecuted just as vigorously as a burglar of six foot six. There is no carve-out for small people committing crimes and there should be no carve-out for small businesses that fail to prevent crimes. When the prosecuting authorities—I look with respect at the noble Lord, Lord Macdonald of River Glaven—come to consider whether it is in the public interest, assuming that there is evidence, to initiate the prosecution, no doubt one of the factors that they will take into account is whether it is in the public interest to pursue that prosecution, bearing in mind the small size of the company and the mitigating steps that it took to do its best to avoid an associated person committing a criminal offence.

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In short, there are two major flaws: the limitation to large bodies and the scope of those who are to be within the amendment. To refer to associated persons is fine as far as it goes, but it does not extend to all the people you really need to capture.

[Lord Leigh of Hurley (Con)]

I find some of these amendments tricky, really. Clearly, we are all keen to prevent fraud but I frequently wear the hat of the SME company. I should make the further declaration that I am the director of a number of SMEs and an investor in many more—not many successful ones but, none the less, I put my money in and hope. I have read the Law Commission’s options paper and the briefing papers from the APPG on Anti-Corruption and Responsible Tax, and I have had the pleasure of innumerable discussions with the very persuasive Margaret Hodge and her extremely capable team. Congratulations to them; they have got the Government to move to the much-promised amendments from the other place, the debate on which I read carefully. Clearly, we all want to beef up failure to prevent and the amendments go a long way to doing that.

I broadly support the principle of excluding small companies and I shall explain a bit more about why. However, I agree that the terms here are a bit odd. Needless to say, I am a bit worried about a company with 250 employees turning over only £36 million—it is more bust than small. I suspect, however, that these are EU figures, translated from the euro; I do not how they were arrived at but they may need some polish. They are definitely more “M” than “S”, and thought might be given to restricting ourselves to “S” rather than “M”. Needless to say, one looks at one’s business to see whether one is within scope —and, of course, I was reminded that the problem is with the balance sheet qualification. Ordinarily, I never thought that it would apply but, as fellow members of the Institute of Chartered Accountants in England and Wales will recall, the recent brilliant accounting standards brought in require one to capitalise leases in the balance sheet, meaning that companies’ assets are, frankly, grossly inflated. This definition refers only to gross assets, not net assets, so you will capture many more companies than you thought you might if you stick to that definition. I urge another look at the actual definition, if this route is taken.

It is certainly possible for large companies to develop procedures and systems, but smaller ones are, frankly, stretched with other matters, such as, essentially, how to pay the next payroll and survive. It is not reasonable to expect many of them to stop working, sit down and have a cup of tea and dream up preventive procedures. Of course, business owners do not want to see fraud because, at the end of the day, they will be the main losers. However, I can see lawyers advising on the purchase of massive amounts of belts and braces, given the penalties, which could be a massive distraction from the incredibly challenging job of trying to run a business and make a profit, which is difficult enough. I suggest that we see how large companies cope with the Bill, what it means in practice, what “preventive measures” —the guidance is yet to come—actually means, and then give ourselves the power to bring in small companies if we feel it is appropriate at a later stage, once we see what happens in practice.

I also have some concerns about Amendment 101, on the senior manager responsibilities. Of course, I strongly support measures which are likely to reduce economic crime. However, I note that an assessment produced by the Law Commission on individual criminal liability concluded that

“in principle, directors etc, should not be personally criminally liable on the basis of neglect if the offence is one which requires proof of a particular mental state. Liability for directors on the basis of neglect should be restricted to offences of strict liability or negligence”.

We have some way to go to make me feel comfortable that those are right.

There are other outstanding issues concerning senior manager liability, specifically how this would be monitored and enforced. The legal obligations on senior managers at the moment affect the UK’s competitiveness, particularly when trying to recruit talent at senior levels. So I would be reticent to encourage the introduction of significant legislative change without a broad assessment, which I would welcome, of the likely impact. That means consulting with industry and an official impact assessment that considers international comparisons of the effect, particularly on recruiting senior staff. Therefore, I would welcome some more consultation and consideration of the consequences of this reform.

On the proposed changes to the “identification doctrine”, clearly, amending it is essential to tackle the most egregious intentional behaviour; I get that. Here, of course, it is easier to see that in a small company—the Victorian brothers example—the directors could be guilty of this behaviour and, in an overzealous environment of trying to score wins, they could be prosecuted first, quickly and more easily. However, where you have a company consisting of tens of thousands or even hundreds of thousands of people, can we be certain that the act of a few rogue managers or even one manager a long way down the reporting structure should rightly lead to the sort of punishments suggested in some of these amendments?

That does not sit easily with me, and again, I still want to be convinced that we are in sync with our major international competitors. Let us not forget that while FDI into the UK has historically been very high, it is not now. The UK stock market is out of fashion, and countries all around the world are seeking to attract our businesses to set up offshore. Any legislation we bring in has to be very mindful of that.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I think it falls to me to start the winding-up speeches, but noble Lords will be pleased to know that I will not try to repeat everything that everybody else has said. I declare my interest as a director of both a large company and small companies; I set up my own first business in 1981, so I have spent most of my life as a business owner.

In this group I support the amendments mainly led by the noble and learned Lord, Lord Garnier. I hate to break with the gentle congratulations that have been given to the Government for at least doing something, but having such a weak amendment could well be counterproductive. The Government could think that they have done something when, as has already been exposed by many colleagues, it does very little. It will exempt most companies and it probably will not touch where action is needed most.

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I finish where I started. In the end, the challenge for the Committee is that all these amendments are virtually universally supported here, but what difference will that make to the Government’s thinking on adapting their own amendments before Report, so that we get the Bill we want, because we all want it to be successful?

[Lord Leigh of Hurley (Con)]

Before the noble Lord sits down, will he clarify Labour’s position from the Dispatch Box: that it would be happy with one clause that requires prevention procedures to apply to an extremely large, multinational financial services company, for example, and to a local sweet shop which was incorporated? The noble Lord says that everyone agrees. According to the soundings I have taken from small business organisations, they would not be happy with that.

[Lord Coaker (Lab)]

I said everyone on the Committee —with the possible exception of the noble Lord. I was talking about how people feel about the Bill as drafted, with the carve-out for small and medium-sized enterprises. The noble Lord was referring to something that might include not the small but the medium, and that is a matter for debate, but the general view of the Committee was that the Government’s current carve-out is not acceptable. Where you put the threshold—whether you apply to a little sweet shop at the end of the road with a turnover of a few thousand pounds the same regulation you apply to a multinational company—could be sorted out in regulations, and if we saw them, we could suggest that they take into account the small sweet shop to which the noble Lord referred.

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[Lord Sharpe of Epsom (Con)]

I appreciate the point that the noble Lord was making and apologise for not addressing it more directly. I will refrain from answering that now and will write. I think I know how it is done, but I am not an accountant and I do not want to say something that he will pick apart. If he will indulge me, I will write on that subject with greater clarity to make sure that I am not making a mistake.

I thank all noble Lords for their participation in this debate and for their patience as I have taken them through a fairly long speech on the Government’s positions on these issues. We agree that reform is needed and, as we have made clear, the Government’s amendments represent a major step in delivering it. I hope that further explanation has reassured noble Lords on why we have presented the amendments with the scope and reach that they contain, and that the Government are committed to reform of the identification doctrine. I therefore very much hope that noble Lords will support the government amendments and not seek to move their own.

[Lord Leigh of Hurley (Con)]

I appreciate that my noble friend is at the Home Office, but none the less can he give us a commitment that the Government will look again at the definitions used in the Government’s clause for SMEs? I appreciate that they come from the Companies Act 2006, which themselves were cut and pasted from EU regs, but now that we are out of the EU we are free to choose definitions that suit our circumstances and our institutes’ accounting standards.

[Lord Sharpe of Epsom (Con)]

Yes, I am happy to give that reassurance.

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[Lord Coaker (Lab)]

My Lords, I rise briefly to support Amendment 85 from the noble Lord, Lord Alton, to which I have added my name, and to support the comments of the noble Lord, Lord Fox, and the noble Baroness, Lady Bennett.

As my noble friend Lord Ponsonby said, the question for the Government concerns giving teeth to the sanctions regime in respect to designated individuals. If it is not dealt with like this, what do the Government propose to do? There is clearly a gap, sanctioned individuals are finding ways around the law and we are not able to confiscate or seize the assets we want to seize. Criminalising a failure to disclose as a form of sanctions evasion, so that those assets can be seized, as referred to by the noble Lord, Lord Alton, is a very important step forward. Although this is just one amendment, Amendment 85 is really important.

As I said, if the Government do not believe that this amendment is appropriate, what are we going to do about the situations and individuals the noble Lord, Lord Alton, spoke about, and the huge sums of money, which are beyond the scope of the British state to collect from individuals? We all think we should be able to do something about that.

Just so the noble Lord does not feel on his own in being sanctioned, I am sanctioned as well, so we are in good company, as is the noble Lord, Lord Faulks. We could have a sanctions party here.

[Lord Leigh of Hurley (Con)]

I join the sanctions party. I rise to say that, as this amendment has the support of Cross-Bench, Lib Dem and Labour Peers, I add my support, even if I missed out on adding my name to those proposing it.