Burges Salmon - Corporate Crime & Investigations - New Approach to Corporate Criminal Liability & New Offence of Failure to Prevent Fraud

Who does this affect?

Who does this affect? The offence applies to any organisation doing business in the UK, irrespective of their domicile (where the relevant requirements are met). When will a relevant body not be liable? • A relevant body will not be guilty of the offence if it was (or was intended to be) a victim of the underlying fraud offence and where it was not intended to benefit from that offence. • It will be a defence for a relevant body to prove that (i) it had in place such procedures to prevent associates from committing fraud offences as it was reasonable in all the circumstances to expect (“reasonable prevention procedures”), or (ii) it was not reasonable in the circumstances to expect it to have any prevention procedures in place. What are the risks for organisations? • The offence will not come into force until the MOJ issues guidance on “reasonable prevention procedures”. That is currently expected to be published in early 2024. • An organisation convicted of the failure to prevent fraud offence faces an unlimited fine. What can you do to prepare now? Pending guidance from the MOJ on “reasonable prevention procedures”, organisations might consider: • Risk assessment to identify areas of potential exposure. • Review of existing policies, procedures and systems to detect and prevent fraud, to identify potential areas for improvement. Outside of a typical compliance function, organisations will wish to consider: - Contractual arrangements with “associates” (including employees, agents, suppliers, distributors, etc.), some of whom will themselves be Large Organisations. - Standard representations and warranties in transactional documentation. • Review of the existing approach to internal investigations and reporting of corporate/employee wrongdoing to the authorities. While the new offence currently only applies to Large Organisations, it is highly likely that other organisations within the scope of the offence will expect business partners to have their own “reasonable prevention procedures” in place. This is therefore a change which businesses of all sizes should begin to consider.

The new approach to attributing criminal liability to corporates for economic crimes (section 196) What is the change? Under current law, where a company is prosecuted for a criminal offence which requires proof of a specific state of mind (for example, intent, recklessness or dishonesty), the prosecution must first prove the offence was committed by the company’s ‘directing mind’; only then can the guilt of the ‘directing mind’ be attributed to the company such that the company is also guilty of the offence in its own right. This is known as the “identification doctrine”. The ‘directing mind’ is generally understood to be officials at director or board level. Modern businesses are often large, however, with complex governance and management structures. As a result, it has become notoriously difficult to prove all of the elements of an offence against an individual ‘directing mind’ of larger organisations in order to secure the conviction of such an organisation. Section 196 of the Act amends the identification doctrine for certain economic crimes, such that, from 26 December 2023, if a senior manager of a corporate or partnership, acting within the actual or apparent scope of their authority commits a relevant offence, the organisation is also guilty of the offence. An individual who plays a significant role in— Senior Manager • the making of decisions about how the whole or a substantial part of the organisation’s activities are to be managed or organised, or • the actual managing or organising of the whole or a substantial part of those activities. A wide range of economic crimes, including: Relevant Offence 3 • Common law offences of conspiracy to defraud and cheating the public revenue • Statutory offences including: - Fraud and false accounting - Bribery - Sanctions and export offences - Offences under FSMA and the Financial Services Act - Money laundering and terrorism offences 3 Relevant offences also include attempt or conspiracy to commit a listed offence, encouraging or assisting a listed offence and aiding, abetting, counselling or procuring the commission of a listed offence. The Government is planning to extend this amended identification doctrine to apply to all offences by a senior manager while acting within the actual or apparent scope of their authority, not just economic crimes. The Criminal Justice Bill before Parliament at the time of writing is intended to make this change.