Economic Crime and Corporate Transparency

Lord Thomas of Cwmgiedd Excerpts

Committee stage
Thursday 27th April 2023 Grand Committee

[Baroness Morgan of Cotes (Con)]

My Lords, I will have more to say shortly on Amendments 91 and 94, but I will make some brief points on the Government’s proposed offence. I also take this opportunity to thank the noble Lord, Lord Browne—in case he is not here later—for his support not only for the committee but for Amendment 94.

Like others, I welcome the Government’s proposed offence. As we have heard, it is a long-overdue step in the right direction. My noble and learned friend Lord Garnier set out quite how long he and others have been calling for such an amendment. In looking at this, I was drawn to the fact sheet on the failure to prevent offence published by the Government on GOV.UK, which rightly says:

“Fraud is the most common offence in this country, amounting to 41% of all crime”


in England

“in the year ending September 2022”.

That is absolutely right, but the trouble with this amendment—to introduce a new point, which is quite good, rather than repeating and supporting what everybody else has said—is that, as we found in the inquiry, the 41% referred to in the fact sheet would not, on the whole, be caught by it. That is because the government amendment requires the company whose employee has committed the fraud to have benefited from it. As we will discuss later, the vast majority of frauds are not committed in a way that benefits the company, which often is the platform used to perpetrate a fraud on innocent victims.

My noble friend the Minister mentioned the forthcoming fraud strategy, which I am sure he will be as relieved as the rest of us finally to see, not least because we will all stop asking him when it will be published. I understand that “imminently” really does mean quite imminently, but we are all dependent on the Downing Street grid. However, it is important that we see it before Report, because it will be difficult for the Government to resolve these issues in a way that will keep both Houses happy—as we have heard, the House of Commons wants to see change on this—without seeing that strategy, which will provide part of an answer as to how this country will tackle fraud.

I have talked about why the drafting of this proposed offence is insufficient in requiring an employee or associated person to benefit the company. We have heard much from noble Lords about the small companies exemption. I support the queries raised about why that has been introduced. When listening to my noble and learned friend Lord Garnier, it occurred to me that part of the problem, and perhaps the reason why the Government think it is acceptable to have this exemption and others do not, is that, as we found in the inquiry, there is a total lack of research into who is committing these frauds—the types of companies involved and how big they are—who is benefiting and the size of those companies. The Government need to commission far more research into this whole area.

As we have heard, this offence is about driving cultural change. That is needed in companies of all sizes, not just the very largest. I was struck by my noble friend Lord Agnew’s comment about the significant number of law firms that would be exempted if this exemption were to take place. Speaking as a former solicitor, I think that he is absolutely right. Most solicitors’ firms are tiny; we know that they and others can be enablers of fraud and other economic crime, so to exempt them makes absolutely no sense.

I add my support to calls for, if not reform of the identification doctrine, at least commissioning to look seriously at how this might be changed. The trouble with this offence is partly that in proposing it many years after it was first called for, the Government are late in solving this problem and therefore late in realising just how much corporates have changed. The lack of a directing mind in corporate bodies is much harder to discern in the 21st century than it would have been in the 19th century.

[Lord Thomas of Cwmgiedd (CB)]

May I just briefly make four points? First, as regards exempting small companies, as a director of one or two small companies that are charities, I can see no reason at all why we should exempt them. Your accountant always goes through what measures you have in place to prevent fraud, and it is extraordinarily difficult to understand what the costs are.

Secondly, from the way in which the Bill is drafted, it plainly means a single body corporate. There is a whole host of good reasons why you would structure your corporate activities over a host of different companies. It is critical that, if you are to have a limit, it must include all associated companies. You can see a good illustration of the way this is done in the provisions of the Building Safety Act 2022 that deal with remediation in relation to cladding. The Government dealt with it there because so many SPVs—special purpose vehicles—are used in the property industry, and you simply cannot permit them to be treated separately. Certainly, there are extremely good reasons sometimes to structure your partnerships as a whole lot of separate partnerships, partly to limit your liability for negligence. However, it should not apply in relation to fraud.

Thirdly, dealing with two out of three tests is not sensible. Looking at the way in which you suggest fines be imposed on companies, if you are to go down this route, the variety of the ways in which companies operate is so enormous that if you are to have an exemption, you should catch as many as possible. Again, if you do not have a structure that brings in everyone, the position is more complex.

Lastly, I will say something about the reform of the doctrine of corporate responsibility. Of course, I agree with my noble and learned friend, and former colleague, Lord Etherton that we need to be very careful. However, we are trying to tackle economic crime, and there is therefore a special case to be made for dealing with that. If we say that we have to wait until we have the whole of the criminal law sorted out, although one or two people in this Room may see it in their lifetime—I see that the Minister has a young team behind him—the law moves with incredible slowness in reforming criminal justice, and if we do not go through with this in this Bill, I doubt whether even the young members of the team will see any change, not merely during their time at the Home Office but in their lifetimes. We ought to move now.

[Lord Macdonald of River Glaven (CB)]

My Lords, against the extraordinarily high rate of fraud offending, we have to set the fact that fraud is the most under-prosecuted offence within this jurisdiction. There is no doubt about that, and no doubt that people in the country understand it, are aware of it and are extremely angry about it, particularly victims of this crime. I would hazard a guess that virtually everybody present knows at least one person who has been the victim of a fraud that has not been prosecuted; I know several. That is a lot of people who are not getting justice—on both sides of the transaction, I might say. I therefore welcome this amendment but I am disappointed that SMEs have been carved out, largely because, on the Government’s own figures, no less than 99.9% of businesses in the UK are SMEs. That is a significant statistic when we are considering the size of this carve-out and the impact it is likely to have on the Government’s objectives.

Some comparisons have been made with the Bribery Act 2010, specifically Section 7, and the “failure to prevent” offence in that legislation. Similar arguments about SMEs were made during the debates that led to that legislation, including the claim that if SMEs were included within it then that would impact on their ability to export. I am sure these are the sorts of arguments the Government have in mind when excluding SMEs from this legislation—that somehow it would be too burdensome for SMEs, some of which, to most of us, are very large companies indeed. So it is germane that in 2015, the government survey of SMEs and the impact of the Bribery Act on them found that nine out of 10 had no concerns or problems whatever with the Act, and that 89% felt it had had no impact on their ability to export.

As the Committee has heard, when your Lordships’ House undertook post-legislative scrutiny of the Bribery Act, it concluded that there was no need for any statutory exemption for SMEs from the Act. The Law Commission similarly received submissions arguing that SMEs should be excluded from corporate liability reform. It disagreed and did not recommend any statutory exemption for SMEs. Furthermore, government research on SME adoption of preventive procedures in relation to the Bribery Act found that the average cost for an SME was £2,730, with medium-sized enterprises spending an average of £4,610. These are tiny figures that could not conceivably justify exclusion of SMEs from this legislation on the basis that it would be too burdensome for them. Points have already been made about the extent to which the Government are encouraging the placing of public procurement contracts with SMEs, and that is also highly significant.

Since the noble and learned Lord, Lord Garnier, has raised the question of prosecutorial discretion—it seems only yesterday that he was Solicitor-General, but that may be a sign of my age as much as his— I say in support of him that the amendment as drafted places a great deal of discretion at the disposal of prosecutors. The defence set out under new subsection (3)(b) is:

“It is a defence for the relevant body to prove that, at the time the fraud offence was committed … it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place”.


That is a potential carve-out that would deal with any problem or concern the Government have that the amendment’s impact might be disproportionate on SMEs. For all the reasons I have set out, I do not believe that it would be. I believe the real effect would be to leave whole swathes of business activity completely unaffected by this legislation so that, in effect, fraud would continue—disgracefully, in my view—to be an under-prosecuted offence.