Articles 3rd Mar 2015

Life In The City: Another Day, Another Scandal

With the recent revelations of the part played by HSBC in assisting its clients to avoid or (allegedly) evade their tax obligations, many will be wondering whether there is now an irreversible culture of greed within the UK financial services sector.

Predictably, the reaction from Government and the prosecuting agencies involved assertions that they will bring those responsible to book, and the press have reported meetings between the Serious Fraud Office, the Crown Prosecution Service, the Financial Conduct Authority and Her Majesty’s Revenue and Customs. However, based on current legislation it is unclear who can be investigated (let alone prosecuted) and for what offence. So perhaps the government will now seek to address the extension of Section 7 of the Bribery Act 2010 (“the Act”) much faster than previously expected.

The Act came into force in July 2011. It was met with much criticism at the time and although the SFO is currently investigating a number of offences, it has been argued that its powers under the Act are limited. Certainly, the legislation lacks the teeth of comparable laws in the United States, which enable the ready prosecution of commercial organisations for a wide range of offences. Convictions result in enormous fines and the extensive publication of the names of the companies in question.

In short, section 7 of the Act makes it an offence for a company to fail to prevent bribery by its employees, agents and subsidiaries. The offence is one of strict liability, in that the company can be held liable for the offence even if it was unaware of the conduct in question.

For over a year now, David Green QC, Director of the SFO, has been calling for an extension of this provision, such that companies based or operating in the UK would be held similarly liable for all forms of economic crime committed by their employees. It is assumed that this would include offences such as fraud, money laundering, false accounting and cheating the revenue, although he did also emphasise that only those companies which actually gained from the offending would be prosecuted.

Mr Green’s observations were echoed by the Attorney General, Jeremy Wright, in late 2014, and so it is clear that this proposal is now under active consideration. If so, the requirement to prove complicity on the part of the ‘directing mind and will’ of the company may soon be a thing of the past.

The current scandal involving HSBC will no doubt add further support for this change to the law. However, it is noteworthy that since the introduction of the Section 7 offence in July 2011 there have been precious few prosecutions brought. Further it is well known that the SFO is currently involved in a number of large complex investigations, including LIBOR and the manipulation of foreign exchange markets. It is unclear, therefore, whether they will have the available resources to prosecute any new offences.

Thus the current HSBC scandal adds force to another debate: namely whether a new regulator responsible for enforcing company law should be created? This body could replace both the SFO, which is constrained by a very tight budget, and also the prosecutorial function of other regulators such as the FCA (which some say should concentrate more on regulation and less on prosecution anyway). If some sort of corporate affairs regulator were introduced, is there a further argument for suggesting that it should be funded by the City, in much the same way as the FCA is now? Certainly, the incessant stream of allegations emerging from the Square Mile suggests that a root and branch change to the present arrangements is worthy of consideration.

In the meantime, companies will no doubt be concerned by the prospect of any extension to s.7, as set out above. Not only might this result in hefty fines and reputational damage, but any conviction in the UK would preclude them from competing for public contracts in Europe.

If they haven’t already done so, therefore, your clients would be well advised to re-visit the internal policies and governance procedures which they previously put in place in relation to s.7, and to ensure that these would be sufficient to withstand wider scrutiny in due course.

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