Companies face new criminal offence in crackdown on liability

Companies face new criminal offence in crackdown on liability

The UK government is taking action against companies that turn a blind eye to fraud and other economic crimes. Under new legislation due to come into force later this year, an organisation will be automatically held liable for fraud committed by its employees and agents, as is already the case for bribery and criminal facilitation of tax evasion. The same legislation will also make it easier to hold organisations liable for a wide range of other criminal offences, including money laundering. In this context, the UK’s specialist fraud agency is significantly more active. Companies and M&A negotiators should be aware of the increased risk of prosecution and should work with legal advisers to mitigate this risk.

What should companies pay attention to?

Since 2010, the number of ‘failure to prevent’ offences – which hold organisations criminally liable for wrongdoing by those working on their behalf – has been on the rise. With criminal liability for offences committed by employees or agents anywhere in the business and at any level, even legitimate and sophisticated organisations have been caught red-handed. Fines are potentially unlimited – last year, a £465m fine was imposed to end an investigation into failing to prevent bribery.

The Economic Crime and Corporate Transparency Act (the Act) automatically makes an organisation criminally liable if a person working on its behalf commits a specified ‘fraud’ offence, provided that the fraud takes place on UK soil or affects UK victims. The list of specified fraud offences is very broad and covers a range of dishonest financial behaviour. For example, dishonest sales practices, false accounting and concealing material information from consumers or investors are all potentially covered.

In this context, a company could be subject to criminal prosecution if its staff, agents, representatives or subsidiaries commit fraud with the aim of benefiting the company or any other person or entity to which the company provides services. A defence will be possible if appropriate measures are in place to mitigate the risk of fraud. Companies must therefore act now to ensure rigorous oversight within their organisations, including the review of compliance policies and procedures, internal reporting channels (“whistleblowers”), staff training, audits and risk assessments, and standard third-party due diligence checks.

The related reforms also make it easier to hold organisations liable for a range of other economic crimes, including various money laundering offences. An organisation can now be found guilty if one of its “senior officers” commits an offence, which is a significantly lower threshold than the previous “directing mind and will” test. The question of who is considered a senior officer is a question of substance, not form, so job titles alone will not be determinative.

Impact of Mergers and Acquisitions: Negotiators Should Exercise Caution

More extensive due diligence is expected in this area, including a thorough review of financial information. Recent high-profile cases have highlighted the importance of conducting thorough, comprehensive and rigorous due diligence, including extensive disclosure exercises that buyers and sellers should prepare for in advance. Transaction teams should work closely with all their advisors (internal and external) and support ongoing discussions between them. This collaboration encourages information flows between practices (which is essential as issues uncovered during due diligence often span multiple areas or overlap), allowing for careful negotiation of acquisition agreement language, including warranties and indemnification clauses and post-closing mechanisms. Boilerplate clauses and dispute resolution methods are often more important than what the contracting parties appreciate prior to signing, who are understandably focused on closing the deal.

As we discussed in our previous article, “Avoiding Buyer’s Remorse in M&A Transactions,” the discovery of acquisition fraud is not uncommon, but can have a rapid and detrimental impact on the value of an M&A transaction, including fines and penalties for associated wrongdoing. Buyers who suspect fraud should seek legal advice as soon as possible to help them navigate this complex area without causing further harm.

Why it matters — A more proactive SFO

The new head of the UK’s Serious Fraud Office (SFO) has promised “faster action” against economic crime, and early signs – including a significant increase in new investigations and raids on business premises and private homes across the UK – indicate he is delivering on his promises.

The SFO now has enhanced powers to issue requests for information before formally opening an investigation. Requests for information can raise complex issues of jurisdiction, scope and timing, and failure to comply with a request for information is a criminal offence, punishable by imprisonment for the recipient. The SFO would recruit heavily and push for closer collaboration with its law enforcement partners, such as the National Crime Agency and the Metropolitan Police.

Conclusion

The recent failure to prevent crime will provide an additional tool for an increasingly active SFO. Law enforcement agencies are demonstrating their willingness to hold more organisations to account for crime and their willingness to accelerate investigations by taking decisive action. In this context, it will be essential to ensure that businesses implement and maintain compliance measures that are proportionate to their level of risk.

The Latham team has extensive experience representing clients in investigations by all UK regulatory and prosecutorial agencies, including advising on responses to requests for information and search warrant procedures, as well as related cross-border matters for both UK and international clients. The team draws on this experience to advise on the establishment of an effective compliance framework to mitigate enforcement risks.