Failure to Prevent – Time to Prepare

Back in 2010 the Government introduced the Bribery Act, which for the first time held businesses truly to account for failing to prevent an act of bribery by the business or a person associated with the business.

Prior to this, corporate criminal liability depended solely upon the identification doctrine – a company could only be liable if the individual involved was a “controlling mind” of the company. This new legislation is an important departure from the doctrine, and has started a trend that may well lead to a whole new raft of Failure to Prevent (FTP) policies in years to come.

Under Section 7 of the Bribery Act (2010), a relevant body, business or organisation could be prosecuted if they fail to prevent an ‘associated person’, such as a member of the senior management team employee, agent or consultant from committing a bribery offence, which could include paying a bribe to acquire business, maintain a relationship or gain a business advantage.

Following on from this the Government has just recently introduced two new offences for failing to prevent tax evasion in the UK and overseas in the Criminal Finances Bill 2016-17.

Under these new strict liability offences, a company may be prosecuted if certain ‘stages’ are met during the facilitation of tax evasion. These are laid out in the official Government guidance published in October 2016 alongside the bill and are as follows:

Stage one: The criminal tax evasion by a taxpayer (either an individual or a legal entity);

Stage two: The criminal facilitation of this offence by a person acting on behalf of the corporation, whether by taking steps with a view to; being knowingly concerned in; or aiding, abetting, counselling, or procuring the tax evasion by the taxpayer;

Stage three: The company failed to prevent a person associated with it from committing the criminal act at stage two.

 A relevant body can only commit the new offences if a person associated with it deliberately and dishonestly facilitates a tax evasion offence. The associated person does not commit an offence when he or she inadvertently, or even negligently, facilitates another’s tax evasion.

This “person”, whether an individual or corporate body, must have provided the services for, or on behalf of, the relevant body. This could include people directly employed by the company, as well as consultants, contractors and sub-contractors.

The other element, the overseas offence, only relates to certain relevant bodies which are incorporated under UK law, or that have carried out part of the business in the UK, or where the relevant associated person was located within the UK at the time of the criminal act occurring.

Failing to prevent any of these offences could result in a company receiving unlimited financial penalties and ancillary actions, such as serious crime prevention orders.

 Protection from FTP

 When seeking to defend itself against the current failure to prevent offences a business or relevant body must be able to demonstrate that at the time the offence was committed it had ‘adequate procedures’ in place to prevent the facilitation of tax evasion.

Adequate procedures for the facilitation of tax evasion are based around six guiding principles, which are inspired by the original guidance for the Bribery Act (2010). These are:

Risk assessment: The business must regularly assess the nature and extent of its exposure to the risk of those who act for or on its behalf analysing whether they have the motive, opportunity and means to facilitate tax evasion and how that risk might be managed.

Proportionality: To be ‘reasonable’, procedures must be ‘proportionate’ to the risks the relevant body faces. This should account for the level of control and supervision the relevant body exercises over those working on its behalf, but does not have to be so strict that it considers each possible outcome.

Senior level commitment: The highest levels of management must show that they are openly committed to preventing persons associated with it from engaging in the criminal facilitation of tax evasion.

Due diligence: Due diligence procedures must be undertaken during the relationship with associate persons to identify the risk of criminal activity.

Communication: Businesses must have policies in place which clearly communicate against engaging in activities to help clients commit tax fraud. A relevant body must be able to demonstrate that this culture is embedded throughout the organisation.

Monitoring and review: Importantly companies must monitor and review their prevention procedures and make improvements where necessary.

These are six important principles should be the starting point for any business or organisation, whether they are concerned about an associated person or not.

The majority of large and medium-sized companies are likely to have these types of procedures in place already as part of their legal protection planning, but it is thought that a much larger number of small businesses are simply not aware of their legal responsibilities.

All business, no matter of their size, should thoroughly vet each employee, agent, consultant or contractor that is likely to act at some point on the company’s behalf.

Once the person joins the company, a business must be able to demonstrate that a suitable level of supervision is in place and maintain clear records of this if they are to stand a chance of mounting a defence, should the worst happen.

As they say, forewarned is forearmed, so all businesses and their advisors should seek to gain as much information as possible about each offence and be shown to be passing this information on to those people associated with the business.

When providing training or communicating messages about FTP records should be kept and each communication should be signed and dated by the person it was sent to.

Unlike some other corporate offences, what is required of each business is relatively clear and while still open to some interpretation, the law provides a strong set of guidelines to be followed.

The Future

But where is FTP legislation heading next? Consultations have already closed for more offences related to ‘economic crimes’ such as failing to prevent money laundering, fraud and false accounting committed either by a business itself or one of its employees, with a decision (depending on the outcome of the upcoming general election) expected by the end of the summer.

Under the new proposals, new rules could come into place similar to the other strict liability FTP rules created under the Bribery Act and Criminal Finances Bill.

The current suggestions proposed for these new offences, put forward by the Government in their consultation papers, include:

  • Amending, but not abolishing, the identification doctrine.
  • Creating a strict (vicarious) liability offence that would make companies guilty, through the actions of their employees, agents or representatives, of the substantive offence, without the need to prove any fault element.
  • Creating a strict (direct) liability offence focusing on the responsibility of companies to ensure that offences are not committed in their names or on their behalves (similar to the current Acts).
  • Having “failure to prevent” as an element of the offence.
  • Introducing regulatory reform on a sector by sector basis.

It is not yet clear whether all or any of these proposals will be included in the final legislation, if or when it is introduced in the future.

However, should such legislation come into force many expect that the same ‘reasonable prevention procedures’ defence will be applicable to the new crimes, with some minor tweaks to make it relevant to each offence.

Based upon this growing trend many in the business and legal community are expecting additional proposals for more corporate offences for FTP in the future.

These may include  statutory conspiracy, encouraging and adding and abetting economic crime offences, but these are likely to follow a similar legislative path as the current rules should they be introduced in future.

Regardless what the future holds, it is critical that all parties have the right procedures in place, whether it is the business responsible for the associated person, its legal representatives or other businesses related to it.

While some of these offences are relatively new, there is no defence for not knowing about the legal responsibilities of a corporate, so it is vitally important that businesses are properly prepared.

For the majority of businesses it may be best to create a dedicated role within the management team to ensure the correct procedures are in place or it may be simpler to instruct in-house counsel or an experienced legal team to help with these responsibilities.

Like any good doctor knows, prevention is better than cure, and this is the approach business must take when it comes to FTP.

 By Nigel Rowley 

Nigel is the Managing Partner and Head of Litigation and Dispute Resolution in the London office of Mackrell Turner Garrett and Chairman of Mackrell International – one of the world’s leading legal networks.

Nigel has been a member of the Diversity Law Institute and a member of the Trial Law Institute since 2012. He was also made the only non-US Fellow of the Litigation Counsel of America in the same year.

Nigel has also been named Lawyer of Year 2016 at the InterContinental Finance & Law Magazine (ICFM) 500 Leading Lawyers Awards, which sits alongside the firm’s other recent recognitions including top rankings with the Global Chambers Awards, Corporate International Global Awards 2016 and Global Law Experts Awards 2016.

About Mackrell Turner Garrett

 Mackrell Turner Garrett is a full service law firm with offices in Central London and Surrey.

The firm was founded by John Mackrell in the City of London in 1845 and maintains its strong commercial background. Today, with partners employing over 60 staff, we provide an extensive range of legal advice and services for individuals, partnerships and companies.

To find out more about Mackrell Turner Garrett, please visit www.mackrell.com

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