'Failure to prevent' is a fraud game-changer

Criminal enforcement of economic crime committed by or on behalf of companies? The reality is that it didn’t exist in any meaningful form until the dawn of the Bribery Act 2010.

Before, the prevailing method of addressing corporate criminality was to pick off the individuals involved, and deal with the corporate via the commonly deprecated 'cosy deals', through which companies agreed to make a substantial payment (further to a civil recovery order, under Part 5 of the Proceeds of Crime Act 2002). Examples of prosecutions brought against corporates for corruption under the previous legislation (Prevention of Corruption Act 1906) were limited to instances such as the prosecution of a small family printing company, Smith and Ouzman Ltd, which concluded as recently as 2014.

The only multinational of note to have faced trial for offences under the pre-Bribery Act 2010 law was a UK subsidiary of French multinational ALSTOM: those proceedings concluded in 2018, with the company having largely succeeded in defending itself.

So, why has it proven so difficult for law enforcement to use the criminal law to hold corporates accountable?

The answer is the law of corporate attribution, which requires a criminal offence to be proven against an individual representing the 'directing mind and will' of the company (in practice an individual at board-level, or with specifically delegated authority from the board) Experience has shown that the larger and more complicated a company’s structure, the more difficult the exercise for the prosecutor.

There is no question that the 'failure to prevent' model, in the context of the section 7 Bribery Act 2010 offence, changed the game – particularly in combination with the introduction of deferred prosecution agreements (DPAs) into UK law in 2014. Whilst it took some time for the power to first be used, we have since seen a steady flow of prosecutions and negotiated DPAs, founded upon this offence. If it were not for the relative ease with which the offence can be established, when compared to substantive corruption offences against companies, it is unlikely that we would have seen anything like the number of self-referrals by companies to enforcement agencies that we have in recent years.

Prevailing advice to companies prior to the introduction of that offence might reasonably have been that the prospects of the company itself being prosecuted for corruption (as opposed to the relevant individuals) were slim. Allegations of criminality could be dealt with quietly, with the relevant individuals being disciplined or dismissed, remedial actions to internal procedures being made, and the company moving on without exposing itself by engaging with a prosecutor. Failure to prevent increased the stakes of such an approach, and inevitably changed the calculation for many companies and their advisors.

With fraud accounting for over 40% of all crime in this jurisdiction, the factual scenarios in which the new offence might be used are many and various. Obvious examples include where employees or agents of a company mislead consumers about the benefits or attributes of a product, in order to secure sales. This could also be an effective means of tackling misconduct which has hitherto been difficult to address through criminal enforcement, such as so-called 'greenwashing', an area where there is increasing focus from the enforcement authorities. Given the prevalence of fraud, the other obvious and inevitable consequence of the expansion of the failure to prevent model is that the volume of prosecutions against companies should logically increase exponentially compared to equivalent rates in recent years. With new tools at their disposal, the key question for enforcement agencies will be around resource, and whether they can materially increase the number of investigations into corporate criminality that they can competently conduct.

The government has promised greater funding to tackle economic crime, and so we can expect capacity to increase. Whatever the consequences in terms of volume, the new offence should certainly greatly enhance the prospects of successfully prosecuting companies for fraud and false accounting.

In order to protect themselves from criminal exposure, companies must take these developments seriously. Those who did not respond to the wake-up call that was heeded by responsible companies when the Bribery Act 2010 was introduced would be wise to use this development as an opportunity to drive positive change to their compliance programmes and, importantly, a positive compliance culture across their organisation. Whilst the focus is of course on larger companies, smaller and medium-sized enterprises cannot ignore the changes. Companies who are exposed to the offence will require any business (of whatever size) to warrant that they have reasonable procedures to prevent fraud and false accounting in place. Companies who do not put them in place will find themselves in jeopardy of losing business.

Quinton Newcomb is a partner at Fieldfisher