The Economic Crime and Corporate Transparency Bill: where are we now?

The Economic Crime and Corporate Transparency Bill (the “Bill“), which is set to introduce, among key reforms, a new failure to prevent fraud offence (“FTP Fraud“), is in the final stages of the Parliamentary process. The Bill is expected to receive Royal Assent by the end of this year. The Bill’s next debate is scheduled to be on 18 October 2023, when Parliament returns from conference season.

The Bill has been subject to several amendments and disagreements between the House of Commons and House of Lords, including most recently the rejection of the House of Lords’ attempt to introduce a ‘failure to prevent money laundering offence’. In this briefing, we summarise these recent developments.

Our previous briefings analyse the key elements of the proposed failure to prevent fraud offence and identification doctrine reforms contained in the Bill.

Large organisations vs ‘micro-organisations’

The FTP Fraud offence, as originally proposed by the Government, was limited to ‘large organisations’1, with the stated intent of avoiding the imposition of a disproportionate regulatory burden on small and medium-sized enterprises (“SMEs“).

A number of Lords, most vocally, Lord Edward Garnier KC, disagreed with this approach and sought to expand the scope of the new offence to all organisations, irrespective of size. Vividly, he described the Government’s approach as “…the equivalent of us saying that every burglar over 6ft 6in is liable to be prosecuted … but every burglar under 6ft 6in gets off scot-free…”. In the House of Lords, Lord Garnier KC’s amendment removing the SME exemption was passed. The Bill as sent from the House of Lords to the House of Commons therefore contained an expanded version of the offence.

On 5 September 20232, the House of Commons rejected this and returned it to the House of Lords, as part of the ‘ping pong’ process between the Houses. The House of Lords introduced a compromise amendment to extend the offence to ‘non-micro organisations’3, but this was also rejected by the House of Commons4, on the grounds that it would increase one-off costs for businesses from around £500 million to £1.5 billion and annual recurrent costs from £60 million to over £192 million.

The current position is therefore that the FTP Fraud offence remains limited to large organisations. The Houses do not appear to disagree on the other elements of the offence (e.g. meaning of an associated person, availability of the defence of adequate procedures) although this is still subject to further consideration and debate.

Failure to prevent money laundering

Significantly, the House of Lords sought to introduce a new ‘failure to prevent money laundering offence’. This was also rejected (rightly, in our view), by the House of Commons on the basis that existing laws already make sufficient provision in relation to preventing money laundering. The Government has stated that it has no plans on expanding the offence to cover other economic crimes at this time and the House of Lords have not insisted on this particular amendment.

Having said that, the Bill already contained a power for the Secretary of State to pass secondary legislation to remove or add further predicate offences within scope of the FTP Fraud Offence, provided the offence is: (i) one of dishonesty, (ii) otherwise of similar character to the in-scope fraud offences, or (iii) a substantive money laundering offence (i.e. an offence under sections 327-329 of the Proceeds of Crime Act 2002 (“POCA“)). There remains, therefore, a possibility that the offence will be extended to money laundering in the future – and without the same Parliamentary scrutiny that would attend primary legislation.

Other areas of disagreement

The House of Lords’ other proposal to introduce in the Bill cost controls in relation to civil recovery proceedings was also struck down by the House of Commons. As a reminder, civil recovery proceedings are an alternative to prosecution. They are brought under Part V of POCA and enable law enforcement agencies to recover property that was obtained by ‘unlawful conduct’, or that represents such property, in civil proceedings before the High Court.

In relation to unexplained wealth orders (“UWOs“) (so-called ‘McMafia orders’), section 52 of the Economic Crime (Transparency and Enforcement) Act 2022 imposed limits5 on costs orders issued against law enforcement agencies following unsuccessful UWO-related applications. These provisions were introduced following the debacle of National Crime Agency v Baker6, in which three UWOs were discharged and significant costs were awarded against the NCA. The case and costs regime have been widely perceived by MPs as acting as a deterrent to law enforcement seeking to recover criminal proceeds – although the alternative view is that parties who are targeted by UWOs which the NCA did not have a proper legal basis to seek should not be liable for the costs of such orders being discharged.

In any event, the House of Lords sought to impose a similar costs cap for civil recovery proceedings. As part of the ‘ping pong’ process, this has also been rejected, and replaced by an obligation on the Government to assess and report to Parliament on whether it would be appropriate to restrict the court’s power to make costs orders against law enforcement agencies in civil recovery proceedings.

Commentary

A new FTP Fraud offence will inevitably be introduced. Both Houses agree on this. The threshold at which a company could become criminally liable for FTP Fraud, are still to be finalised, and could be subject to further changes at the eleventh hour – but, for now, companies are likely to welcome the House of Commons’ rejection of Lord Garnier KC’s amendments.

It does not appear that further amendments are anticipated to the proposal to reform the identification principle. As explained in our previous briefing, this reform has no immediate compliance impact, but will ultimately be significant for companies’ risk exposure.

It remains unclear when the Government’s guidance on reasonable fraud prevention procedures will be published (the offence cannot come into force before then), which it is hoped will provide much needed clarity to commercial organisations assessing their own procedures.

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1 Defined, currently, as organisations meeting two out of three of the following criteria: (1) more than 250 employees; (2) more than £36 million turnover; and (3) more than £18 million in total assets.

2 https://bills.parliament.uk/publications/52462/documents/3896

3 Defined in the Lords’ amendments 151B and 151C as an organisation meeting two out of three following criteria: (1) more than £632,000 but less than £36m in turnover (2) more than £316,000 but less than £18m in assets; and (3) more than 10 but fewer than 250 employees – https://publications.parliament.uk/pa/bills/cbill/58-03/0363/220363.pdf

4 https://bills.parliament.uk/publications/52635/documents/3941

5 Specifically, no costs can be ordered against a law enforcement agency in respect of certain types of applications, unless it (a) acted unreasonably in making or opposing the application to which the proceedings relate, or in supporting or opposing the making of the order to which the proceedings relate, or (b) acted dishonestly or improperly in the course of the proceedings.

6 [2020] EWHC 822 (Admin)

 

Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Robert Hunt
Robert Hunt
Partner
+44 20 7466 3423
Kate Meakin
Kate Meakin
Partner
+44 20 7466 2169
Brian Spiro
Brian Spiro
Partner
+44 20 7466 2381
Elizabeth Head
Elizabeth Head
Of Counsel
+44 20 7466 6443
Eamon McCarthy-Keen
Eamon McCarthy-Keen
Associate
+44 20 7466 3776

OFSI updates guidance on enforcement and monetary penalties for financial sanctions breaches and publishes first breach report without imposing a monetary penalty

On 31 August 2023, the Office of Financial Sanctions Implementation (“OFSI“) published several updates to its Enforcement Guidance. These provide some further clarity about OFSI’s assessment of financial sanctions breaches, and approach to its power to publish details of a financial sanctions breach where it has decided not to impose any monetary penalty (a “Disclosure Report“).

The updates provide that:

  • OFSI categorises financial sanctions breaches as follows: lesser severity, moderate severity or sufficiently serious to justify a civil monetary penalty. Those categories were not previously referred to in OFSI’s Enforcement Guidance.
  • Lesser severity cases are likely to be dealt with via a private warning letter, provided there are no significant aggravating factors, and the breach does not form part of a wider pattern. Moderate cases are likely to be dealt with via a Disclosure Report if OFSI considers a warning letter would be too lenient but a monetary penalty would be disproportionately punitive.
  • In addition to moderately severe cases, Disclosure Reports may also be considered to be fair and appropriate under other circumstances, including where there are valuable lessons to be learnt for the industry and, exceptionally, where it is not in the public interest to issue a monetary penalty (e.g. in humanitarian cases). Reports highlighting industry lessons may focus on an individual case or several cases of a similar nature which may be aggregated.
  • Disclosure Reports will usually publicly name the firm or individual who has committed the breach and provide a summary of the facts of the breach. Where such a person is named, OFSI will contact them in advance to provide them with the opportunity to make any representations in relation to its finding.

Also on 31 August 2023, OFSI published a Disclosure Report for the first time. Firms will wish to consider this report and whether it has any read-across value for their systems and controls.

Commentary

When OFSI first acquired the power to publish Disclosure Reports in June 2022, there was uncertainty about how, and how extensively, this would be used. This was particularly so in light of the relatively low number of monetary penalties imposed by OFSI to date for breaches of UK financial sanctions. The updates to OFSI’s Enforcement Guidance, and first Disclosure Report, provide a clear indication of OFSI’s intention to use this type of report to communicate its expectations about sanctions compliance. Many will welcome an increase to the level of guidance and commentary provided by OFSI, given the comparatively limited practical guidance available to those seeking to comply with UK financial sanctions. Equally, there remains significant interest in whether and when OFSI will take enforcement action against persons who have deliberately sought to breach financial sanctions, as opposed to financial institutions who have sought to comply, made an error, and self-reported their breach.

 

Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Elizabeth Head
Elizabeth Head
Of Counsel
+44 20 7466 6443
Ali Grodzki
Ali Grodzki
Senior Associate
+44 20 7466 6329

Sanctions tracker: UK issues general licence in respect of legal services restrictions

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Sanctions tracker – UK introduces legal services restrictions

The UK’s long-awaited sanctions restricting the provision of legal services to Russia were announced on 29 June. The announcement gives a somewhat misleading impression of the law, and we summarise the new restrictions in this post.

The new measures are introduced by the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2023 (the “Amending Regulations”), which amend the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”). Continue reading

Sanctions tracker: EU adopts 11th sanctions package and UK introduces Russia-related legislation

Following its announcement of an 11th package of Russia sanctions in May (which we covered here), the European Union has now adopted the package. Key elements of the 11th sanctions package include fresh targeted sanctions against individuals and entities, an enlargement of restrictions on the sale, export and transit of certain goods and technology, as well as additional measures to prevent sanctions circumvention.  We summarise the key elements in this post, along with a round-up of other recent sanctions developments from the UK. Continue reading