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)