Economic Crime and Corporate Transparency Act passed in UK Parliament

After years of debate and calls from the Serious Fraud Office (‘SFO’) to change the law, and months of discussion in Parliament, the Economic Crime and Corporate Transparency Act 2023 (the ‘Act’) received Royal Assent last Thursday, 26 October 2023, introducing (among other reforms) a new failure to prevent (‘FTP’) fraud offence and an expansion of the basis on which companies can be held criminally to account (the ‘identification doctrine’). According to the Government’s press release, these reforms provide prosecutors with ‘game changing powers to hold companies criminally liable for malpractice’.

The new FTP fraud offence is not expected to come into force for some time since it is subject to the Government issuing accompanying guidance (explained below) whereas the provisions of the Act which expand the scope of the identification doctrine will be enacted by the end of December 2023.

We will be considering these reforms in detail across a series of podcasts and briefings in upcoming months (for which, do subscribe to our blog at https://hsfnotes.com/fsrandcorpcrime/), and for now, note below the key developments since our last update on the topic.

Our previous briefings analyse the key elements of the failure to prevent fraud offence and identification doctrine reforms and some of the more recent developments before the Act was passed.

1. The FTP Fraud Offence (sections 199-206 of the Act)

Under the Act, a FTP fraud offence is committed where:

  • an ‘associated person’ of a ‘relevant body’ (ie. a ‘large organisation’) commits a relevant ‘fraud offence’;
  • intending to benefit (directly or indirectly) the relevant body or any person to whom, or to whose subsidiary, the associate provides services on behalf of the relevant body; and
  • the relevant body did not have in place reasonable fraud ‘prevention procedures’.

No offence is committed where the relevant body was (or was intended to be) a victim of the fraud offence. Like other failure to prevent offences, failure to prevent fraud will be subject to the deferred prosecution agreement regime.

Please see our briefing for further analysis of ‘an associated person’, relevant ‘fraud offence’, and reasonable ‘prevention procedures’, concepts which remain as trailed in the draft Bill.

Applies to ‘large organisations’ only

The scope of the offence continued to be the subject of Parliamentary debate in recent weeks (for which, see our briefing), and following a ‘ping pong’ process between the House of Lords and House of Commons on the appropriate size of the organisation which should be in scope, the Act provides that the offence applies to ‘large organisations’ only. An organisation will be in scope if it meets two out of three of the following criteria (in the financial year that precedes the fraud offence):

  • more than 250 employees;
  • more than £36 million turnover; and
  • more than £18 million in total assets.

If resources held across the corporate group cumulatively meet the size threshold, that group of companies will be in scope of the offence.

The Secretary of State may by secondary legislation amend the above criteria and remove the limitation to large organisations entirely. Therefore, there remains a risk (albeit a somewhat remote one at present) that small and medium-sized enterprises could be brought into the scope of the Act in the future.

When is the offence in force?

As stated above, the FTP fraud offence will come into force once the Government publishes guidance on procedures which can prevent organisations from committing a fraud offence (for more, see our briefing). There should be a public consultation on the guidance which will likely take place during 2024 and we are not therefore expecting the new offence to be in force until the latter part of next year or early 2025.

2. Identification doctrine reforms (sections 196-198 of the Act)

The Act also imposes corporate criminal liability on companies for economic crime offences committed by their ‘senior managers’. Under the Act, if a senior manager of a body corporate or partnership, acting within the actual or apparent scope of their authority, commits a ‘relevant offence’ (e.g. bribery, fraud, money laundering), then the organisation itself will be criminally liable. This is a significant departure from the existing identification doctrine which has historically made it challenging to bring criminal prosecutions against companies in England and Wales. For more information on the changes and their impact, see our briefing here.

As stated above, these reforms will be enacted by the end of December 2023.

3. Comments

Nick Ephgrave, the new director of the SFO, has said that ‘this is the most significant boost to the SFO’s ability to investigate and prosecute serious economic crime in over 10 years‘ and ‘big businesses can no longer turn a blind eye to fraud.’  These amendments to the law are significant and should, without a doubt, make it easier for prosecutors to bring criminal cases against corporates. The practical impact of the reform to the identification doctrine will likely flow through over the coming years, as complex fraud offences typically take a number of years to investigate and prosecute, and companies will over the coming months need to consider their ‘reasonable procedures’ response to the failure to prevent fraud offence.

We will be considering the reforms in a series of podcasts and accompanying briefings in more detail over the upcoming months and will continue to monitor for key developments in this area including with respect to the public consultation on reasonable fraud prevention procedures. Any companies considering how best to address these new developments, and (in due course) the scoping of any reviews of their ‘reasonable procedures’ should contact any of the below HSF team members to discuss further.

 

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
Jessica Chappatte
Jessica Chappatte
Senior Associate
+44 20 7466 2130
Serge Durdyyev
Serge Durdyyev
Trainee Solicitor
+44 20 3692 9640

Hong Kong SFC broadens powers to tackle insider dealing, but puts on hold other proposed measures following industry feedback

In June 2022, the Hong Kong Securities and Futures Commission (SFC) proposed a number of sweeping enforcement-related reforms which would have, among others, significantly enhanced the SFC’s ability to obtain investor compensation orders against regulated persons who had committed wrongdoing if enacted Continue reading

SFO secures first conviction of an individual for DPA-related conduct but challenges remain

In early March 2023, the Serious Fraud Office (the “SFO“) secured its first conviction of an individual in connection with conduct subject to a deferred prosecution agreement (“DPA“). Whilst undoubtedly a success for the SFO, the conviction is the only one of its type to date, despite the SFO having entered into 12 DPAs since the introduction of the DPA regime in 2014, and it arose from a guilty plea rather than the completion of a contested trial. As a result, it is not clear that this will be the beginning of a trend which will see more individuals convicted as a result of conduct which is also the subject of a DPA. Indeed, the week after the conviction, three former executives of G4S (a company which had also entered into a DPA) were acquitted after the SFO offered no evidence against them.

First conviction of an individual linked to a DPA

Although the SFO has brought prosecutions against a number of individuals in respect of conduct related to a DPA, the conviction of Roger Dewhirst was the first time that the SFO had secured a conviction.

Mr Dewhirst was one of five individuals charged in connection with suspected bribery offences by two UK companies. The conduct at issue involved the payment of bribes to secure contracts from Mr Dewhirst’s employer. The two companies involved, Bluu Solutions (“BLS“) and Tetris Projects (“TPL“), entered into DPAs with the SFO in July 2021 (as we discussed here) and agreed to pay a total of £2.5 million in respect of offences under the Bribery Act 2010 (the “Bribery Act“).

According to the agreed statement of facts (available here), BLS sought to influence the award of five refurbishment contracts over a two-year period (March 2014 – July 2016).Two of its directors made unlawful payments totalling over £466,000 to secure four contracts, and promised to make further payments to secure a fifth.

BLS and TPL were initially competitors until BLS was acquired by the group which owns TPL. BLS employees began working for TPL in January 2016 and the two BLS directors alleged to have paid the bribes became directors of TPL. According to the agreed statement of facts, the two directors continued to authorise improper payments once at TPL, which were paid from a shared bank account. The directors have subsequently been acquitted of related charges at trial.

Mr Dewhirst pleaded guilty to two counts of receiving bribes contrary to section 2 of the Bribery Act. The charges related to the receipt of around £291,000 in bribes intended to help BLS secure a refurbishment contract. Mr Dewhirst’s three co-defendants (including the two BLS directors referred to above) were acquitted for their alleged role in the scheme in January 2023 following a jury trial. Mr Dewhirst’s wife was acquitted in a separate trial in October 2022 in respect of related money laundering charges.

Whilst the conviction is a positive milestone for the SFO, it is worth noting that Mr Dewhirst’s guilty plea, and the acquittal of his co-defendants mean that the SFO has yet to secure a post-DPA individual conviction in a contested trial.

The BLS and TPL DPAs (available on the SFO’s website here) also highlight some of the potential risks that companies face in mergers and acquisitions, and particularly the risk of successor liability. This is also an issue that we discussed in the context of the Amec Foster Wheeler Energy DPA, entered into in July 2021.

The BLS/TPL agreed statement of facts notes that BLS had minimal procedures in place to prevent bribery by its associated persons (eg the anti-bribery and corruption (“ABC”) policy was generic and not effective or enforced, no formal bribery risk assessment had been conducted, no due diligence was carried out in respect of third parties, no anti-bribery training was delivered, etc). Anti-bribery procedures were introduced into the new combined business following the merger, but these new procedures could not be considered adequate, according to the agreed statement of facts, as they lacked the top-level support from the two directors implicated in the bribery who “appear to have been determined to carry on as they had at BSL pre-integration and to conceal their intentions and conduct“. Top-level commitment is one of the six principles for implementing adequate procedures to prevent bribery in the Ministry of Justices’ Guidance on the Bribery Act (available here). Following an internal investigation, triggered by potential issues identified in a post-acquisition audit, TPL self-referred to the SFO and took steps to remediate its anti-bribery compliance programme. However, TPL itself also entered into a DPA in respect of its failure to prevent the ongoing bribery post-acquisition.

Further acquittals of individuals

On 10 March 2023, three former executives of G4S were acquitted after the SFO offered no evidence against them and stated it was no longer in the public interest to prosecute them. The SFO also reportedly recognised that challenges in disclosure had contributed to its decision to not offer any evidence in the case.

The defendants had been charged with seven counts of fraud in relation to conduct in respect of which G4S had entered into a DPA and agreed to pay a financial penalty of £38.5m and the SFO’s full costs of £5.9m in 2020 (the full details of the G4S DPA were discussed in our blog post here).

The collapse of this prosecution underscores the continued challenges in prosecuting individuals for conduct related to DPAs, including challenges with disclosure in complex fraud cases (as discussed in our blog relating to the prosecution of individuals in respect of conduct related to the Serco DPA).

 

 

Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Brian Spiro
Brian Spiro
Partner
+44 20 7466 2381
Kate Meakin
Kate Meakin
Partner
+44 20 7466 2169
Robert Hunt
Robert Hunt
Partner
+44 20 7466 3423
Elizabeth Head
Elizabeth Head
Of Counsel
+44 20 7466 6443
Rebecca Critchley
Rebecca Critchley
Associate
+44 20 7466 2318

Tackling economic crime in the UK – The Economic Crime and Corporate Transparency Bill

A new bill to tackle economic crime is currently progressing through the legislative process. The Economic Crime and Corporate Transparency bill (the Bill) was first laid on 22 September 2022 and is expected to receive royal assent in the coming weeks. Whilst the Bill remains subject to change as it continues to pass through Parliament, its key provisions are likely to remain relatively similar. Continue reading

Do companies have a moral duty to self-report to the SFO?

Herbert Smith Freehills’ Corporate Crime and Investigations team has contributed to the Global Investigations Review. The article, ‘Do companies have a moral duty to self-report to the SFO?‘ considers the recent SFO case involving Amec Foster Wheeler (Amec) and argues that while the corporate bribery settlement has not introduced any legal obligation to self-report wrongdoing to the Serious Fraud Office, the judgment does encourage companies to seriously consider their moral and ethical duties when deciding whether to do so. Continue reading

SFO Secures Two Further DPAs

On 19 July 2021, the High Court approved two separate deferred prosecution agreements (the “DPAs”) between the UK Serious Fraud Office (“SFO”) and two UK-based companies (the “Companies”) for active participation in, and failure to prevent, bribery pursuant to sections 1 and 7 of the Bribery Act 2010 (read the SFO press release here). Continue reading

Ten Not Out! – SFO Secures Its Tenth DPA (Amec Foster Wheeler Energy Ltd)

On 1 July 2021, coincidentally the tenth anniversary of the UK’s Bribery Act coming into force, the UK’s tenth deferred prosecution agreement (“DPA”) was approved between the UK Serious Fraud Office (“SFO”) and Amec Foster Wheeler Energy Limited (“AFWEL”), a UK-based global engineering company (read the SFO press release here). This concludes the SFO’s four-year investigation of the legacy Foster Wheeler and Amec Foster Wheeler businesses. The DPA was previously agreed in principle at a private hearing held on 25 June 2021 before Lord Justice Edis, sitting at the Royal Courts of Justice (see details of the private hearing here). Continue reading

The collapse of the SFO’s prosecution of former Serco executives: lessons for corporates

On 26 April 2021, the prosecution by the Serious Fraud Office (the “SFO“) of fraud charges against two former directors of Serco Geografix Limited (“Serco“) collapsed. The SFO offered no evidence against the defendants, and the presiding judge directed the jury to return verdicts of not guilty. This happened after it became apparent that the SFO had failed to disclose to the defendants certain relevant materials, rendering it unsafe for the prosecution to proceed. The SFO’s statement on the matter confirmed that it was “considering how best to undertake an assessment to prevent this from happening in the future”. Continue reading

Supreme Court judgment in the KBR v SFO appeal – limits to extraterritorial impact of the SFO’s document compulsion powers

On 5 February 2021, the Supreme Court handed down judgment in a keenly anticipated case concerning the scope of extraterritorial application of the SFO’s section 2 powers, R (on the application of KBR, Inc) (Appellant) v Director of the Serious Fraud Office (Respondent) [2021] UKSC 2 (“KBR v SFO”). Continue reading

Supreme Court hands down judgment in SFO’s case concerning the extraterritoriality of section 2 powers – Appeal of KBR is allowed

The Supreme Court has today handed down judgment in the case of R (on the application of KBR, Inc) (Appellant) v Director of the Serious Fraud Office (Respondent) [2021] UKSC 2 concerning whether the Serious Fraud Office (“SFO”) can require a foreign company to produce documents held overseas, pursuant to its investigation powers under section 2(3) of the Criminal Justice Act 1987 (“CJA”). Continue reading