The likelihood of a UK ‘failure to prevent economic crime’ law has risen significantly since Russia’s invasion of Ukraine and could have major implications for businesses and their anti-money laundering (AML) frameworks.
In March 2022, the government fast-tracked measures to fight financial crime in response to the invasion. But these measures did not include the introduction of the much discussed ‘failure to prevent’ (FTP) offence as MPs did not want to pre-empt the Law Commission’s review of corporate liability.
This long-awaited review will consider the FTP issue and is due around June 2022. Meanwhile, the government has promised a more substantive economic crime package in June or July of this year. It’s not clear whether this package will be able to include a failure to prevent economic crime (FPEC) law, but the pressure for it has been growing for some time and could prove irresistible.
A new FPEC offence featured in the government’s Economic Crime Plan 2019–2022 and the Serious Fraud Office (SFO) has said this offence tops its wish list. In January 2022, A House of Commons Treasury Committee report, stated that it was “disappointed the government had not yet reformed corporate criminality laws”. In that report, the influential Fraud Advisory Panel also called for an FPEC offence.
Meanwhile, public concern about illicit wealth keeps growing, driven by the sanctions imposed against Russian oligarchs and a regular flow of financial crime scandals and revelations, such as those published by the International Consortium of Investigative Journalists.
What an FPEC law could include
Analysis from JMW Solicitors and Red Lion Chambers reveals that an FPEC law could expose companies formed, registered, or operating in the UK to criminal prosecution for not having adequate safeguards against economic crime.
Such a law will likely include money laundering, bribery, corruption, market abuse, false accounting, and breach of financial sanctions. It could also include cyber and environmental crimes.
It would require companies to implement tailored procedures for tackling such crimes. In a recent example, NatWest bank was fined a record £265 million under the existing Money Laundering Regulations for failing to prevent nearly £400 million of money laundering.
“Failure to prevent money laundering already represents a breach of money laundering regulations. The FCA has become more stringent in enforcing AML standards, hence the large recent fine for NatWest. But new FPEC legislation might include a consolidated, and perhaps more stringent, criminal offence.”
~ Rodrigo Zepeda, co-founder and CEO of Storm 7 Consulting.
JMW and Red Lion said an offence of this breadth would mark a radical expansion of corporate criminal liability. With a few exceptions, UK companies are currently only criminally liable if identified personnel commit the crime themselves. This identification can be difficult to prove and prosecute, particularly for large, multi-layered companies – hence the many calls for reform.
The bribery and tax evasion laws already include a “failure to prevent” principle and any new offence will likely retain these features.
The Bribery Act makes a company criminally responsible for failing to prevent bribery by an ‘associated person’, which includes agents, subsidiaries, and anyone performing services for or on behalf of the organisation. It is irrelevant where the bribery occurred or if any employees even knew about it.
The only defence is if the organisation had ‘adequate procedures’ designed to prevent such conduct. The failing to prevent tax evasion facilitation law contains identical concepts. Under both laws, culprits face an unlimited fine, even if the ‘associated person’ is never prosecuted.
There have been few prosecutions under these laws so far. But failure to have proper procedures can also lead to deferred prosecution agreements, which have contributed over £1 billion to the public purse since 2016. So, the consequences can still be very costly for businesses.
JMW and Red Lion said removing the need to identify perpetrators will lead to more investigations and more DPAs. But an FPEC’s value will also lie in its impact as a deterrent and catalyst to cultural change in companies.
Preparing to comply
An FPEC law might not apply to every company. An initial proposal for it in the Financial Services Bill 2021 – subsequently dropped – applied only to FCA-regulated companies.
JMW and Red Lion also said adequate prevention would be different for every business.
In anticipation, companies of all sizes would be wise to review existing procedures for preventing bribery, tax evasion, money laundering, and fraud. Considerations include, how an FPEC risk might affect your company; how you will assess, monitor and mitigate the risks; and whether all associated persons will be aware of the measures and receive suitable training.
“Implementation is unlikely to be required now, but it will be important to start considering your safeguards and fostering a culture of awareness around economic crime risk. Expanded corporate liability is on the table and forewarned is forearmed.”
How technology can help
If the proposed FPEC law becomes a reality – and all the signs are that it will – then companies will need a great deal of time to prepare.
The hard truth is that implementing new FPEC compliance procedures and policies will be expensive, complicated, and time-consuming. As a result, risk-based technology will be essential in helping companies deal with its complexities.
Solutions that automate and increase accuracy in compliance processes will be necessary, including in client onboarding, know your customer (KYC), and screening for adverse media, politically exposed persons (PEP) and sanctions. Live transaction monitoring will also be crucial in staying on top of the evolving risks.
Modular solutions will work best as clients can customise these to their needs, instead of buying solutions from multiple vendors. These solutions could quickly flex to meet a wider FPEC law. So even if an FPEC takes time to be introduced, it will be an important consideration in any new technology purchase.
