The UK government is cracking down on organisations turning a blind eye to fraud and other economic crime. Under new legislation set to take effect later this year, an organisation will be automatically liable for fraud committed by its employees and agents, as is already the case for bribery and the criminal facilitation of tax evasion. The same legislation will also make it easier to hold organisations accountable for a wide range of other criminal offences, including money laundering. Against this backdrop, the UK’s specialist fraud agency is significantly more active. Sponsors and portfolio company management should be alive to the heightened risk of prosecution, and should work with legal counsel to mitigate this risk. Our market-leading team stands by ready to assist.
Since 2010 there have been a growing number of “failure to prevent” offences — which pass on criminal liability to organisations for wrongdoing by those working on their behalf. As liability can accrue from crimes committed by employees or agents working anywhere in the business, and at any level, even legitimate and sophisticated organisations have been caught out. Fines are potentially unlimited — last year, a fine of £465 million was imposed to settle an investigation into failure to prevent bribery.
In this environment, portfolio companies could face criminal liability if their personnel pay bribes, facilitate tax evasion, or commit fraud. While it is unlikely that a fund would be held liable for criminal conduct committed by a portfolio company itself, the test for the new “failure to prevent fraud” offence is nuanced and fact-specific; it warrants careful consideration in the context of each sponsor/fund structure.
A defence will be available if appropriate measures are in place to mitigate fraud risk, so sponsors should act now to ensure robust oversight at both portfolio companies and within their own fund structures — including the review of compliance policies and procedures, internal (“whistleblower”) reporting channels, staff training, audits and risk assessments, and standard due diligence checks of third parties.
Related reforms mean it is also easier to hold organisations responsible for a range of other economic crimes, including various money laundering offences. An organisation may now be guilty if one of its “senior managers” commits an offence — a significantly lower threshold than the previous “directing mind and will” test. The question of who amounts to a senior manager is one of substance, not form, so job titles alone will not be determinative.
The new director at the UK’s Serious Fraud Office (SFO) has promised “swifter action” on economic crime, and early signs — including a significant uptick in new investigations and dawn raids at UK business premises and private homes — indicate he is delivering.
Notably, the SFO now has enhanced powers to issue requests for information (RFIs) before it formally opens an investigation. RFIs can raise complex questions of jurisdiction, scope, and timeframe, and failure to comply with an RFI is a criminal offence, punishable by imprisonment for the individual recipient. The SFO is reportedly recruiting heavily and is pushing for closer collaboration with law enforcement partners such as the National Crime Agency and the Metropolitan Police.
The latest failure to prevent offence will be an additional tool for an increasingly active SFO. There is appetite to hold more organisations to account for criminal wrongdoing, and a willingness to speed up investigations with decisive action. In this environment, ensuring funds and portfolio companies implement and maintain compliance measures proportionate to their level of risk will be key.
Latham’s team has extensive experience representing clients in investigations brought by all UK regulators and prosecuting bodies, including advising on RFI responses and dawn raid procedures, as well as related cross-border matters for UK and global clients. The team leverages this experience to advise on establishing an effective compliance framework to mitigate enforcement risk.
