Corporate Economic Crime

Stephen Kinnock Excerpts

Tuesday 3rd November 2015 Westminster Hall

[Stephen Kinnock (Aberavon) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate my hon. Friend the Member for Ealing North (Stephen Pound) on his inspiring and passionate speech. The image he gave towards the end of his speech of Al Pacino playing Arthur Scargill will live with me for the rest of the day.

Before I start, I must declare two interests: I am the Parliamentary Private Secretary to the shadow Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Wallasey (Ms Eagle), and in a previous life, I worked for the World Economic Forum, many of whose members were FTSE 500 companies. In fact, my experience should reassure the City and our friends in the financial services sector that I am not here to attack them; on the contrary, I come here today with their best interests at heart.

We all remember the events that led up to the collapse of Lehman Brothers and the tumultuous events of the ensuing months and years—events that changed the course of history and caused many of the troubles that the world faces today: the sovereign debt crisis, chaos in the eurozone and the freezing of public and private sector investment. A sluggish economy with an uncertain future means that many who have been worst hit want to see “the bankers”, as they are characterised, punished. People feel that the law is broken and that those who broke it have been let off scot-free.

Cool heads have prevailed and blanket retribution has not been applied, which is a good thing, but the Government now seem to have swung far too far in the other direction, towards total and complete inaction, with the odd knighthood stripped but little more to show than that.

The City and the financial services sector need to be held accountable, for their own good as much as for the public’s, and our common interest should now be to rebuild trust. Right now, trust levels are at rock bottom. According to the Edelman Trust Barometer, financial services is the least trusted industry worldwide. Almost 60% of the British public rates the banking industry’s performance as poor or very poor. That is not sustainable if we want the City to carry on thriving. In fact, if we break the figures down, we see that the City’s trust score is artificially inflated by higher levels of trust in retail banks, while of those polled only 18% trust investment bankers and only 12% trust fund managers.

In the light of such a fundamental breakdown in confidence, hon. Members can imagine how pleased I was to read the following paragraph in the Conservative party’s 2015 manifesto:

“We are also making it a crime if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations and making sure that the penalties are large enough to punish and deter.”

To Labour Members, that was music to our ears, so the Government’s recent decision to backtrack on corporate liability was all the more disappointing and puzzling. I am concerned that, in backtracking on that vital manifesto pledge, Ministers will have opened themselves up to suggestions—totally unfounded, of course—that they are acting on the demands of a number of those who donate large sums of money to the Conservative party. I urge the Minister to dispel those nasty rumours.

The Conservatives’ courageous and correct manifesto commitment had teeth and was a wholly proportionate response to the fact that fraudulent activity increased by 22% in the first half of 2015 compared with the first half of 2014. That is not good for our financial security or for the future of an industry that fundamentally requires public trust and backing more than ever before. Despite promises to the contrary, there have been no criminal sanctions for reckless management, nor have we seen any sign of the much touted rule that bars managers of failed banks from running other companies.

I want the City to succeed, because it is vital to our economy, but I am concerned that the Government are too short-sighted to see what real, long-term, sustainable success means. Success means rebuilding trust and changing how the City is perceived. In closing, therefore, I would like to make a number of recommendations on smart regulation.

First, the Government must act on their own manifesto and enforce corporate liability. Criminal sanctions for bad management are almost universally supported by the public and are key to establishing a new corporate culture based on transparency. Secondly, the Government must act on the Treasury’s “UK national risk assessment of money laundering and terrorist financing” by cracking down on professional enablers in the legal and accountancy sector. Thirdly, they must get serious about investing in the tools and technology necessary to keep pace with these criminals.

Labour Members want only to see a thriving financial services sector. For the sector to thrive and prosper, it must regain the trust of the British people and reclaim its licence to operate. That is why the measures in the Conservative party manifesto were so welcome, and why it is vital that they are urgently incorporated into law. It is absolutely right to be pro-business, but it is wrong to be pro-business as usual.

--- Later in debate ---

[Catherine McKinnell]

My hon. Friend makes an important point that goes to the heart of the argument. My hon. Friend the Member for Aberavon argued cogently that, ultimately, we need a better way of establishing responsibility for the actions of a company and those who serve within it. It is not enough for those at the top to wash their hands of responsibility for the actions of the officers and employees who operate, act and work under the company’s name.

There needs to be much greater clarity about the legal framework. Many bodies, including the Law Commission, have called for that. What is even more key is that the Government seem to share that view. In a consultation undertaken in July 2015 on the introduction of a new corporate offence of failure to prevent tax evasion, the Government concluded:

“Under the existing law it can be extremely difficult to hold the corporations to account for the criminal actions of their agents”.

That observation has been made by the Government and Ministers on several occasions, as well as by my hon. Friends in their contributions today.

The Law Commission, the OECD working group and the director of the Serious Fraud Office point to section 7 of Labour’s Bribery Act as a potential solution. As my hon. Friend the Member for Ealing North set out in his speech, section 7 of the Bribery Act makes it an offence to fail to prevent bribery. It places the onus on companies to prove that they have put in place adequate procedures to prevent bribery and is widely seen as a far more effective way of holding companies and the individuals within them to account, which is why many want to see that model extended to other types of economic crime.

[Stephen Kinnock]

We have talked a lot about accountability and trust today, but another important word here is “risk”. We saw in the events leading up to 2008 and the collapse of Lehman Brothers a systemic failure to manage risk. It is in the interests of both Government and the private sector more broadly—the real economy and the financial services sector—to put systemic measures in place to manage risk in a way that ensures the appalling events in and following 2008 never happen again. Some regulation of the market is therefore, by definition, required as a risk management tool. Does my hon. Friend agree?

[Catherine McKinnell]

My hon. Friend makes an important point and anticipates my next point. First, I want to clarify exactly where the Government seem to be on this issue.

The Government’s recent announcement has caused much confusion among those who care about this issue, because it seems to be very much at odds with what they have been saying and the messages and signals they have been sending out. In his first speech as Attorney General over a year ago, the right hon. and learned Member for Kenilworth and Southam (Jeremy Wright) suggested that he was considering the section 7 proposal. We then discovered, in an answer to a written parliamentary question, that it had been dropped. We need clarity from the Minister today about exactly why that decision was made and what the Government will do to ensure that our concerns are addressed if they are not proceeding with that proposal.

The director of the Serious Fraud Office, David Green, has made clear his support for the expansion of section 7 of the Bribery Act. He has described how useful it would be to better facilitate the use of deferred prosecution agreements. My hon. Friend the Member for Neath (Christina Rees) set out eloquently how deferred prosecution agreements work and their potential importance in dealing with some of the issues that have been highlighted. It is no secret that the Serious Fraud Office director favours the use of DPAs, which are currently more widely used in the United States. To clarify, they provide for a corporation to avoid prosecution by entering into an agreement with a number of conditions attached, which may include paying a financial penalty, paying compensation or co-operating with future prosecutions of individuals. In doing so, they avoid prosecution. The aim is to hold key individuals to account, to secure significant financial penalties from companies that have committed wrongdoing and, ultimately, to prevent future wrongdoing by encouraging or mandating reforms within those companies.

Deferred prosecution agreements are not without their critics, but they have been widely used in the US for the past 20 years or so and brought in some $4.2 billion to the Department of Justice in 2014 alone. One key problem with importing the use of DPAs to the UK is that they are intended to be a carrot, while the stick is the prospect of prosecution for corporate economic offences.

Transforming Rehabilitation Programme

Stephen Kinnock Excerpts

Wednesday 28th October 2015 Westminster Hall

[Stephen Kinnock (Aberavon) (Lab)]

I beg to move,

That this House has considered implementation of the transforming rehabilitation programme.

It is a pleasure to serve under your chairmanship, Mr Nuttall. It is now almost 12 months since the formal creation of the 21 community rehabilitation companies and the establishment of the new national probation services. It has since become clear that fundamental flaws in the former Secretary of State’s thinking are beginning to impact on service delivery. The CRCs were initially created to address new work arising from probation supervision being extended to clients leaving prison after serving less than 12 months in custody. The probation service supported extending statutory support to this group with adequate funding. Had a consultation taken place on how that could be best achieved, I have no doubt that genuine alternative methods could have emerged, but it was unfortunately evident from the outset that the Secretary of State’s predecessor was fixed upon the payment-by-results outsourcing model.

Prior to the reorganisation, probation trusts were highly successful, with a good record of reducing reoffending. They had won European-wide awards for public service and all the trusts had been recognised as either good or outstanding by recent inspections. Trusts had established good local partnerships with other agencies, including in the private sector, that had been producing excellent results. In a number of trusts—for example, West Mercia and the Willowdene project—these partnerships have extended into innovative work with the third sector, addressing and supporting the same group of clients whom the transforming rehabilitation reorganisation targeted. Indeed, a major review by the third sector review group indicates that the procurement process was incoherent and meant that third sector providers who were supposed to have opportunities to engage in TR were disfranchised.

[Wayne David (Caerphilly) (Lab)]

It is not only politicians who have opinions on this subject, but the voluntary organisations themselves. The National Council for Voluntary Organisations sent us a briefing for this debate, which made the point that, despite the warm words of the former Justice Secretary, there is very little voluntary sector involvement.

[Stephen Kinnock]

My hon. Friend makes an excellent point. The purpose of a consultation is to listen to the experts. In this case, the experts have described themselves as being used as “bid candy” to dress up the bids, rather than being involved in a truly engaged fashion. I agree entirely with my hon Friend’s point.

Significant challenges were immediately obvious. First, the marketplace was not interested in taking over the management of high-risk offenders for the limited profits associated with managing that target group. Further, the Ministry of Justice had been heavily criticised by both the Public Accounts Committee and the National Audit Office for its poor management of previous contracts in courts, community payback, electronic monitoring and the quality of some provision in private prisons and detention centres. There was therefore limited political support for privatising the whole lot, hence the “split” solution.

Several probation experts argued that splitting the probation service into two distinct groups was a far riskier solution than selling all the service to private providers. The split in the service creates challenges, some of which, with great patience, effort and commitment from all stakeholders, could be managed, but a world full of good will is not going to address the insurmountable structural flaws arising from the split. These include, but are not limited to: local service delivery and management of clients; bureaucracy and inefficiency, with additional processes generated to manage the allocation of cases and accountability; substandard internal communications, especially those founded upon outdated and unstable technology within the National Offender Management Service; and inefficient management of staff due to internal competition, which undermines morale and professional unity.

However, the greatest flaw was rushing the whole programme through to meet a strict political timetable without any adequate testing or piloting. The MOJ also failed to establish workable, sustainable contracts with the CRCs. These are already the subject of significant challenge from the new CRC owners. Equally, in its haste to successfully establish the CRCs, all efforts and energy were focused on the contracts share sale, and very limited evidence emerged of any serious planning or risk assessment of the future management of the newly nationalised National Probation Service.

With no piloting or credible assessment of what the new work meant or involved, the allocation of budgets and staff was largely guesswork. Initially, NOMS stated that 70% of work was expected to be transferred to the CRCs as only around 30% of total clients would be classified as high risk. This was not a scientific experiment, and it quickly became evident that it did not translate. The staffing split soon became 50/50, with ongoing confusion about where some work should sit. Current staffing levels and reliance on expensive agency staff are simply not sustainable, nor value for money for the taxpayer. A case needs to be made to the Treasury for emergency support for the NPS.

[Christian Matheson (City of Chester) (Lab)]

Does my hon. Friend agree that this sounds all too familiar? As with other privatisations led by the Conservatives in government, they privatise the profits and nationalise the debts, and long-term liabilities to the taxpayer become greater than they were before.

[Stephen Kinnock]

I do agree with my hon. Friend. It is important to put a system in place that works. The old maxim, “If it ain’t broke, don’t fix it”, applies. We absolutely have to be open to new forms of innovation, working in partnership with both the third and private sector, but that was already happening. The new system that has been put in place has unfortunately caused a great deal of confusion. I hope that today we can make some progress on sorting that out.

The contracts allow the CRCs to pass back tough cases and still get paid on a fee-for-service basis. A further problem concerns the additional redundancy costs. The probation unions have recently had cause to lodge formal disputes with the national negotiating council on account of one of the CRC owners—in this case Sodexo—refusing to honour the terms of voluntary redundancy under the national staff transfer and protections agreement. Staff terms and conditions should be honoured, and the MOJ should police this as part of its contract management.

I now want to turn to the report by Her Majesty’s inspectorate of probation. It is expected that Ministers will cite the latest report from Paul Wilson as evidence that it is too early to form a judgment about TR and that it will be another two to three years before the public can see evidence of the effectiveness of the reforms. Although not disputing the valuable work of HMIP, we believe this is a wholly unsatisfactory analysis that will assist the Government in their attempts to gloss over the reality that is the failure of TR. I do not believe we can afford to wait two to three years for the situation to resolve itself when the consequences of a failing probation service are so critical to public safety.

A further vital point is about transparency. In a letter written to the Select Committee on Justice, the Minister claimed he was putting measures in place to improve transparency. We fully support the need for the performance of the probation services and the CRCs to be properly monitored and for the results of that monitoring to be made public. As such, we strongly recommend that private probation providers are made to comply with freedom of information requests so that they, too, can be openly scrutinised by hon. Members and the public. We also call on the Government to place the details of the 21 private contracts in the public domain so that they are open to scrutiny.

Finally, I want to raise serious concerns about service delivery. The MOJ is proposing a reduction in the number of full reports delivered to courts and a greater reliance on oral reports. Oral reports by their very nature do not allow for a full risk assessment to be carried out by probation staff, nor for any information that is held by other agencies to be collected. As such, they should be used on low-level first-time offences only. However, the push to use these types of reports in the majority of cases will see them being used for wholly inappropriate offences.

We are already aware that, because of pressures on staff and staff shortages, oral reports are being used for sexual and domestic violence offences. Such cases are complex, and there are underlying risk issues that must be investigated fully prior to sentencing. Children’s services and the police should be contacted to see whether there are ongoing risks to children and victims. Without that information, it is impossible to manage the case effectively or safely, or to propose to the court the most appropriate sentence.

I will summarise the seven key recommendations that must be implemented urgently. First, there should be open engagement between the unions and senior MOJ and NOMS management and stakeholders to identify ways to resolve some of the urgent performance issues arising in the NPS. Secondly, there should be a full post-implementation review of TR and the contracts and performance of CRC providers since 1 February 2015.

Thirdly, the NPS should be properly funded, sustainable and effective at managing some of the most dangerous offenders, and there should be funding for information and communications technology that is fit for purpose. Fourthly, there should be effective contract management, including a full analysis of CRC operating models, to ensure a safe delivery of service that focuses on public protection and rehabilitation, not just on cost-cutting exercises. Fifthly, all CRC owners should be made subject to freedom of information requests, so that their performance can be scrutinised by MPs and the public.

Sixthly, there must be robust and fully open contract management to ensure that providers are adhering to staff terms and conditions as underwritten by Ministers. Seventhly, a mechanism should be put in place to enable those in CRCs who are made redundant to transfer swiftly to the NPS at the same grade as they were prior to the split. That would not only ensure that skilled staff are not lost, but help to reduce the pressures in the NPS caused by staff shortages.

A wise person once said that what matters is what works. It is crystal clear to all concerned that the transforming rehabilitation programme conceived by the coalition Government is simply not working. We in the Labour party are pragmatists. As such, we urge the Minister and his colleagues to remove ideology and dogmatism from this matter in order to enable common sense to prevail. We call on the Minister to listen to the experts and fix this broken system before it is too late.

--- Later in debate ---

[Stephen Kinnock]

I thank the Minister and all hon. Members who have attended the debate, which has been excellent. The fundamental point that the Opposition would make is that there is nothing wrong with experimentation and innovation, but that there is a fundamental structural problem now: the splitting and fragmentation and the proliferation of providers have created lack of clarity and are increasing bureaucracy and inefficiency. The Conservatives are always keen to cut red tape and bureaucracy, but the reforms are having the opposite effect. The Government are applying a false economy and are playing with fire, with the risk to public safety. We urge them, constructively, to create a cross-party taskforce and work in partnership to build a streamlined—

Motion lapsed (Standing Order No. 10(6)).