Stand by for guidance

The failure to prevent fraud offense, a key provision of the U.K.’s 2023 Economic Crime and Corporate Transparency Act, is expected to go into force later this year or 2025. The offense, part of the government’s overall strategy to fight financial crime, is meant to encourage corporate accountability for fraud. In this article, anti-fraud professionals assess the new law and consider what organizations might do to prepare as they await government guidance on “reasonable procedures” rules to prevent fraud.

In 2020, British banking giant Barclays was acquitted of conspiring with its senior executives to arrange an illegal payment with Qatar. The executives had arranged the payment to save the bank from needing a public bailout during the 2008 financial crisis. A jury later cleared senior executives Roger Jenkins, Thomas Kalaris and Richard Boath of fraud for their roles in the deal.

The U.K. Serious Fraud Office charged the bank and its executives with fraud in 2017, alleging that the trio made fraudulent advisory services agreements to disguise payments of 322 million pounds to Qatar. According to the SFO, those payments were fees paid in exchange for the Gulf state’s 4-billion-pound investment in Barclays and allowed it to buy shares in the bank at a discounted price not available to other investors. (See “No ‘directing mind and will’ found in SFO prosecution of Barclays,” Herbert Smith Freehills, May 5, 2020; “Three former Barclays executives found not guilty of fraud,” by Kalyeena Makortoff, The Guardian, Feb. 28, 2020; and “Former Barclays executives cleared of fraud charges,” by Andy Verity, BBC, Feb. 28, 2020.)

In the case, the court determined that the executives didn’t represent the ‘directing mind and will’ of Barclays, so the bank wasn’t liable for the fraud. The acquittal of Barclays and its senior executives was considered a major blow to the SFO and emblematic of its difficulties in prosecuting fraud cases against major corporations. One reason for this, some legal experts say, is the test that had long been used for determining corporate criminal liability in the U.K. — the identification doctrine. According to this doctrine, an offense must be committed by the “‘directing mind and will’ of a corporation to trigger attribution to the corporate itself.” (See “Factsheet: identification principle for economic crime offences,” Gov.Uk, updated Oct. 26, 2023.) If the person(s) identified as the “directing mind and will” of the corporation commits a crime, then the corporation is considered liable. Critics say that this framework has long created an uphill battle in the U.K. government’s fight against corporate wrongdoing. It’s this very framework that the 2023 Economic Crime and Corporate Transparency (ECCT) Act, is supposed to rectify with its failure to prevent fraud offense. The new offense is a strict liability offense in the vein of the U.K. Bribery Act that made organizations liable to prevent bribery. In the case of the failure to prevent fraud’s strict liability test, there’s no requirement to prove that a company’s senior management was involved in, or even knew about, misconduct for the organization to be held liable. (See “UK Corporate Criminal Liability: Reform of the Identification Principle,” by Alistair Graham, Chris Roberts, and Hormis Kallarackel, Mayer Brown, July 26, 2023 and “Thoughts on the new Economic Crime and Corporate Transparency Act - A New Era for Corporate Criminal Liability in the UK,” by Anneka Randhawa, Jonah Anderson, Ed Pearson, Mhairi Fraser, White & Case, Nov. 9, 2023.)