Widening "Failure To Prevent" Duties: A New Monster Or Necessary Step?
As the UK beefs up a bill designed to foil fraudsters and money launderers, the question again arises as to whether the proper limits of advisors' responsibilities are at risk or whether wider burdens are worth the effort.
The trend of UK governments shifting compliance burdens to companies and advisors in the fight against dirty money is likely to add burdens to doing business, as seems the case if “failure to prevent” obligations spread ever wider, lawyers say.
The government wants to create new corporate criminal offences of failure to prevent fraud, false accounting or money laundering into the Economic Crime and Corporate Transparency Bill, which is working its way through the House of Lords, the UK’s upper legislative chamber. The bill follows the Economic Crime (Transparency and Enforcement) Act 2022, which was fast-tracked through parliament in March last year in response to Russia’s invasion of Ukraine.
Introduced on 22 January, the new bill aims to achieve two goals: “Prevent organised criminals, fraudsters, kleptocrats and terrorists from using companies and other corporate entities to abuse the UK’s open economy”; and “strengthen the UK’s broader response to economic crime.”
A concern is that making groups such as lawyers, accountants, and firms of various kinds carry the can for the offences of clients could deter even honest actors from working in certain areas, and add to burdens at a time when the UK is trying to retain a competitive edge after Brexit. On the other side, some figures argue that tightening the UK’s controls is positive for the country in the medium-term if it boosts its reputation. The UK has slid down indices of behaviour over bribery and corruption. London has suffered from a reputation for laundering funds from Russia. (This news service has also discussed these issues in relation to compliance and the burdens on directors and others in this video interview.)
A central concern is the extent to which an advisor or lawyer, for example, could or should carry responsibility for the conduct of clients because it transforms an advisor into a chaperone-type figure and potentially blurs where the primary responsibility for wrongdoing lies. However, much depends on how the law is enforced in practice and what is agreed beforehand.
“This criminalisation is part of the trend of the state shifting the burden of compliance to the private sector. The private sector has increased its due diligence and the resources that it dedicates to this. There is no indication from the current government or a future Labour government that they would look to reduce this burden for the purposes of having a commercial advantage after Brexit,” Phyllis Townsend and Ashley Crossley, of Baker McKenzie, told WealthBriefing. (Townsend is partner, wealth management at the firm; Crossley is head of the wealth management department in its London office.)
“Specifically in relation to the new UK Register of Overseas Entities owning UK land, it is unfortunate that the Law Society and other professional bodies were not consulted on the obligation for a UK-regulated agent to verify the accuracy of information placed on the register,” they continued. “The Law Society has advised members against acting as verifiers, as members will leave themselves open to criminal prosecution. This has led many legal and other professional firms to take the view not to verify their clients’ information.”
The lawyers said that the second Economic Crime Bill introduces a similar verification requirement in relation to the UK company register of beneficial ownership (referred to as the register of “Persons with Significant Control”).
The debate over whether widening such powers makes sense comes at a time when other recently introduced measures, such as Unexplained Wealth Orders, haven’t necessarily produced the desired results. One question is whether agencies such as the Serious Fraud Office have the resources to do the job.
Alun Milford, partner in the Criminal Litigation team at Kingsley Napley, gave a more sanguine take on the bill.
“The proposed failure to prevent money laundering offence would apply only to those already within scope of the Money Laundering Regulations 2017, while the others would apply to all companies in the UK. The law would draw on aspects of both the Bribery Act 2010 (BA) and Criminal Finances Act 2017 (CFA): the key will be the acts of a company’s ‘associate persons’, such as employees, agents and other intermediaries,” Milford said.
“To have a defence, a company will need to show that at the relevant time it had in place reasonable prevention procedures, as under the CFA, and the government will give guidance on those procedures. But the associated person will have to commit the crime intending to confer a business advantage on the company (or a benefit on a third party to whom the associate person is providing services on behalf of the company), a similar approach to the one taken in the BA,” Milford continued.
He pointed out that the “failure to prevent” type of offence first appeared on the statute book in 2011 so that most firms should understand this approach to tackling financial crime.
“However the new law would represent a significant expansion in the scope of corporate liability,” he said.
“Experience has shown that using this structure does make it
significantly easier to attribute liability to a corporate
entity. However, the law can only be as effective as the agencies
which enforce it. Only time will tell if the new offences will be
introduced as part of a package which includes better resourcing
for those agencies,” Milford said.