Thu, Sep 15, 2016

Failure to Prevent White-collar Crime - The New Reality for Corporates

If enacted, expansion in the scope of legislation relating to financial crime will increase pressure on boards of corporations to be proactive in preventing financial crimes being committed by individuals associated with the organization. Corporations and those responsible for their governance in the UK can currently be held criminally liable under the UK Bribery Act 2010 for ‘failure to prevent’ bribery offences committed by their employees, representatives or agents. This risk has resulted in an increased focus on building a robust compliance program to prevent bribery and corruption. However, other financial offences, including money laundering, tax evasion and fraud have previously not exposed corporations to risk of prosecution unless senior management could be shown to be complicit in the offence. Recent announcements indicate that that is soon to change.

In May 2016, former Prime Minister David Cameron announced plans to consult on a wide scale expansion of the ‘failure to prevent’ offences to include other financial crimes. In addition, the UK Government recently concluded a consultation on the expansion of corporate liability to include the offence of failure to prevent ‘tax evasion facilitation offences’ by persons associated with a company.

Despite the recent changes in leadership, it appears Prime Minister Theresa May is committed to continuing to address financial crimes by corporations. In a speech in September 2016, the UK Attorney General highlighted the difficultly in prosecuting corporations for financial crimes and announced plans to consult on the expansion of ‘failure to prevent’ offences to include such offences as money laundering, false accounting and fraud.

Under the existing Bribery Act offence, a corporation can be held liable for any offences committed by any person acting on behalf of the organization, including not only staff, but also contractors, agents and associated companies. The only defense available to an organization is to show that it had in place adequate procedures designed to prevent its representatives from committing such offences. It is likely that any expansion of the ‘failure to prevent’ regime will include a similar defense provision.

Should the ‘failure to prevent’ regime be expanded, corporations can expect increased scrutiny from law enforcement and regulators to hold them to account for financial crimes committed by their representatives. The recent Deferred Prosecution Agreement (DPA) entered into by a UK corporation for ‘failure to prevent’ foreign bribery highlights how authorities may seek to use these new powers to enforce financial crime offences.

These proposed new laws make it increasingly important for boards and management to not only implement a robust compliance program, but to ensure they are actively engaged in compliance monitoring, training and due diligence.

Compliance programs will need to expand to include:

  • risk assessments addressing financial crime risks
  • comprehensive policies and procedures to manage these risks, and 
  • bespoke compliance tools to ensure the organization is doing its utmost to prevent financial crimes being conducted by its representatives

Even the best compliance programs can be subverted. High profile investigations and prosecutions under the Bribery Act have highlighted the importance of an organization taking a serious approach to timely investigations of alleged wrongdoing uncovered by compliance teams or reported by whistle-blowers. A thorough investigation of these allegations not only allows an organization to identify and correct behavior which potentially exposes it to criminal liability, it also provides an opportunity to self-report wrongdoing to regulators. The DPAs entered into with the SFO demonstrate that early reporting can potentially reduce penalties imposed.

Wrongdoing within an organization rarely occurs in isolation. It is essential that when instances of improper behavior are identified, an organization commits the necessary resources to address any compliance failures. Kroll is noticing a sharp increase in requests from corporates to provide proactive risk assessments for bribery and corruption, sanctions and AML as well as assistance in providing independent review and assessment of their compliance program.

With the likely expansion of corporate liability for financial crime offences, organizations can take proactive action by conducting financial crime risk assessments, ensuring appropriate policies and procedures are properly implemented and observed and take steps to identify potential wrongdoing before any legislation takes effect.

All organizations are exposed to the risk of financial crimes being committed by their representatives. These proposed changes highlight the ever-increasing responsibility of boards and management to be aware of these risks and take proper steps to address them, or face the real prospect of criminal prosecution.

By Chris Ives, Associate Director, Investigations and Disputes, Kroll

Forensic Investigations and Intelligence

The Kroll Investigations, Diligence and Compliance team are experts in forensic investigations and intelligence, delivering actionable data and insights that help clients worldwide make critical decisions and mitigate risk.