Financial Services Bill (Third sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 3rd sitting: House of Commons
Thursday 19th November 2020 Public Bill Committees

[The Chair]

We will now hear from Susan Hawley, from Spotlight on Corruption, who is joining us remotely. I remind colleagues that we have until 12.15 pm for this session. Sue, please could you introduce yourself for the record?

Dr Hawley: Hello. I am Susan Hawley, executive director of Spotlight on Corruption. We are an anti-corruption charity that monitors the UK’s enforcement of its anti-corruption and economic crime laws.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Q139 Thank you for giving us your time today, Sue. You have also given the Committee some written evidence, which I will come to in a second. Before I do that, I just want to let you know that a number of witnesses on Tuesday were more clearly focused on the European end of the Bill—the onshoring of various regulations—but with you we will probably concentrate more on the later clauses in the Bill. Before I come to your written evidence and your specific suggestions about financial crime, what is your general impression of the Bill?

Dr Hawley: Than you, Pat. We very much focus on, and our expertise is on, the potential of the Bill to bring the UK into greater equivalence with the EU on money laundering and to ensure high standards of corporate governance in the financial services sector. Overall, we support some of the points made by our colleagues, which I think you might be hearing later today—from Jesse Griffiths of the Finance Innovation Lab, for example—around ensuring that there really is strong parliamentary accountability for regulatory changes.

[Mr McFadden]

Q May I come to your specific suggestions? You submitted written evidence that focuses on a suggestion for an amendment to the Bill on the prevention of economic crime. Could you talk us through your suggestion and where you think the Bill may have a gap to fill in that area?

Dr Hawley: Absolutely. We really welcome this opportunity, and many thanks for inviting us to give evidence to the Committee. We want to make the case for the urgent introduction, through the Bill, of a “failure to prevent economic crime” corporate offence. We think that could fit in the “Insider dealing and money laundering etc” part of the Bill. We want it to focus particularly on the areas of fraud, money laundering and false accounting.

Just to explain the problem we think needs addressing, fundamentally at the moment, particularly after the judgment in the Barclays case, which was the only prosecution for financial crime following the last financial crisis, there is increasing legal commentary that large financial institutions are beyond the reach of prosecutors for certain economic crimes. Legal attempts to resolve this have failed—in fact, the Barclays judgment has now made it even more difficult for prosecutors to prosecute large financial institutions—and only action by Parliament can change that.

If I may, I will say a little about the reasons why this amendment is needed. We outline in our evidence four broad areas that we think the amendment would resolve. One of them is about the protection of market integrity. The real issue is whether the current state of the law, particularly after Barclays, promotes strong enough corporate governance and deters corporate wrongdoing. The Treasury Committee has already highlighted that it does not—in its words, it is “wrong” and “dangerous”.

The second issue is about fairness and ensuring equality before the law for large and small financial institutions and companies. That is particularly important, we think, in the context of the burgeoning fraud crisis, which is being exacerbated by the pandemic. It cannot be fair or right that small companies face the burden of prosecution in the UK and that large companies can be seen as getting away with it.

The third area is about equivalence, or parity with international standards, on the enforcement of economic crime. The Law Commission—I will come on to the Law Commission later in our evidence, if I may—has announced it is doing a review of corporate crime rules. It has said that one of the reasons for that is so that the UK does not fall behind. We think there is a real danger that the UK falling behind might happen very speedily. It is already quite behind the US—we have seen a lot of commentary from legal experts about how the UK, effectively, outsources its economic crime enforcement to the US, which means that some British institutions are being fined very heavily by the US authorities, and that money is going to the US Treasury.

It is not just the US, but the EU. There is a real emerging issue with the sixth EU anti-money laundering directive, which requires EU states, from early December this year, to have strong corporate criminal liability for anti-money laundering. That liability must include where there is a lack of supervision or control, and the Government recognised when they looked at whether we should opt into this directive—which they chose not to do—that the UK’s corporate liability regime would not fit the directive but would need to be amended if the UK were to opt in. A real issue here is that UK companies might end up operating in the EU to higher standards than they are operating to in the UK, and that might become more of an issue of market access for UK financial services.

The final area is consistency across economic crime. We have seen a “failure to prevent” offence introduced for bribery and for tax evasion. No less harm is caused to society by fraud and money laundering than is caused by the other offences, and it creates real problems for enforcement agencies. Prosecutors have long asked for that “failure to prevent” offence to be extended to other economic crimes. We think its introduction would benefit the UK, because it would see more enforcement—higher fines—coming into the UK Treasury, and it would benefit society, because when companies have in place procedures that prevent economic crime, it helps to reduce the cost of that crime to society.

I will stop there, in case there are any questions. I am very happy to talk about how we think this amendment is compatible with the ongoing Law Commission review.

[Mr McFadden]

Q I have a couple of questions, and my colleagues might too. There are quite a lot of different parts to this, and I want to ensure that I understand properly what you are saying. You referred, I think, to a corporate offence. Is the first big point that you are making here that, although individual prosecutions may be rare—you are right that on LIBOR, for example, they were very rare—even then it tends to be the individual trader who gets prosecuted, rather than the organisation they were working for? The organisation they were working for can always say, “We didn’t know what he or she was doing,” and wash their hands of it. Is the first essential point you are making that you want to create a corporate offence rather than an individual offence whereby somebody goes to jail for a certain number of years for committing an economic crime?

Dr Hawley: Absolutely. We think that the corporate offence is essential, but that does not mean we do not think that individual accountability is very important. There is also a real issue about how senior executives are held to account. If we take LIBOR as an example, I think there were four convictions out of 13 prosecutions for the rate rigging in the UK, and in a lot of those cases people said, “The management knew we were doing this.” That was their defence. If that is really the case, you are not going to change the culture. There are two really important reasons for having a corporate offence, and part of it is about changing the culture. If corporates know that they might face a huge fine, they will put in place procedures to stop that happening. That is really important.

[Mr McFadden]

Q The other part I want you to explain a little more is that you said that small and large companies are treated differently under the law as it stands, and you implied that there is a greater sense of liability for small companies. Can you explain that a little more to us? What do you mean by that, and why is that the case?

Dr Hawley: Under the current law, if there is not a “failure to prevent” offence in a piece of legislation, a company can be held to account only if its directing mind can be found to have intended for the crime to occur. In a small company, the directors are much more hands-on, so it is much easier for prosecutors to pin the blame on someone at a senior level—it has to be at the board level—and therefore prove that the company is guilty. That is not how large corporations and businesses work, and that is what prosecutors have been saying for a long time. They work on a much more devolved basis.

The problem is that the way the law is at the moment, not only does it make it easier to prosecute small companies —small companies bear the burden of prosecution—but it incentivises bad corporate governance in larger companies because it encourages people to insulate the board from knowledge about wrongdoing. That is the point that prosecutors and people in the legal community have been making for some time.

[Mr McFadden]

Q So there is almost an incentive for the board to be in ignorance, because that is a legitimate defence when wrongdoing is exposed in the company. Is that what you are saying?

Dr Hawley: This is what we write about in our evidence. HMRC, in its consultation on its new “failure to prevent tax evasion” offence, specifically highlighted that these laws encourage bad corporate governance. It says that they provide incentives for senior management to turn a blind eye to wrongdoing in order to shield the corporate body from criminal liability and they disincentivise the reporting of wrongdoing to senior members of corporate bodies. That is not me; that is the Government consultation on the “failure to prevent tax evasion” offence for criminal finances, but that is no different from the other economic crime offences. That is a corporate governance issue that cuts across all these economic crimes.

[Mr McFadden]

Q The final question I want to ask you is about what you said about equivalence. We had a series of bodies give evidence to us the other day, all of which said that they had no desire for a race to the bottom, that they want the highest possible standards of regulation and corporate governance, and that that is good for the UK, the financial services sector and so on. You are implying that there is a danger here of a looser standard on this issue in the UK than in the EU. Could you explain that to us a bit more? What is the difference in terms of the way that they will view corporate offences and the gap that you see in the UK?

Dr Hawley: In the UK at the moment there are two ways in which companies could be held to account for money laundering. One of them is under the money laundering regulations, and that is a minor offence. To give you a comparative example, if it is an individual being fined for that, they would get two years in prison. The kinds of fines we are seeing are around the £5,000 mark. There have been some higher marks—sorry, that was HMRC’s enforcement at a regulatory level. We have not seen any corporate criminal fines in this space at all. There is no criminal enforcement going on under the money laundering regulations, but that is a different issue. To explain the law, theoretically companies could be held to account, but it is a relatively minor offence. That is very different from holding them to account for the main offences under the Proceeds of Crime Act, which, for an individual, carries a maximum sentence of 14 years. You can see from that that it is a very different type of offence, and the courts would treat it very differently.

Under the EU’s sixth anti-money laundering directive, all states must have corporate criminal liability and must impose criminal and non-criminal sanctions that are proportionate and dissuasive. We are already seeing countries such as Germany taking really strong steps to implement that. It has a corporate sanctions Bill coming up, which has a clause that requires prosecutors to investigate suspicions of corporate crime. It is a very strong Bill. Before that, Germany was the outlier and had no proper corporate criminal liability. We see it in the Netherlands as well, where increasing levels of corporate fines are being imposed for money laundering, and there is a very strong corporate liability framework there as well. In Ireland, the Irish Law Commission has recommended changes to the law on corporate liability. We are seeing a raising of standards across the EU that the directive will bring in the context of money laundering.

[Mr McFadden]

I have no further questions, although my colleagues might have.

[The Economic Secretary to the Treasury (John Glen)]

Q Thanks for giving evidence, Susan. Following the December 2018 Financial Action Task Force mutual evaluation on the UK, which was pretty positive, there were a few elements that we need to address. You will know that BEIS is taking forward a lot of that work with Companies House and looking at the registration of overseas entities as well. This Bill ensures that HMRC retains its ability to access the ownership of beneficiaries of UK-linked overseas trusts. Can you explain to the Committee how important that is, notwithstanding what you have just been talking about?

There is a Law Commission consultation going on. We have fully transposed the fifth anti-money laundering directive in line with international best practice. You gave us some perspectives on Germany and Holland in terms of future orientations, which is something that I imagine we would look at in the context of that review. How would the provisions of the Bill help?

Dr Hawley: Obviously, we have welcomed the leadership that the Government have taken on beneficial ownership and the implementation of the fifth AMLD. My colleagues from Transparency International, who are giving evidence later to the Committee, have done more work on the beneficial ownership side. They are the people to talk in more detail about how the Bill specifically relates to that.

We hope that there will be other legislative vehicles brought forward soon to introduce the property register of beneficial ownership and the Companies House reforms. It is excellent that that consultation has now come out and the Government have taken strong steps towards looking at how Companies House can be strengthened, because, as FATF noted, it was, as you have mentioned, an area of weakness.

I do not want to bang on about it, but FATF also highlighted the lack of high-end money laundering convictions in the UK and questioned whether that was really reflective of the risk within the UK. We are carrying out some analysis into what is happening with regulatory fines in this space. The number of fines seems to be going down dramatically, and we are not seeing an increase in high-end money laundering convictions. To be honest, we are a bit worried that the Law Commission review, which we really welcome, will take too long.