Government reverse Lords defeats on Economic Crime Bill

The government changes include a new offence of ‘failure to prevent fraud’ and a significant widening of the ‘identification doctrine’. Additionally a gap in the Register of Overseas Entities identified last year by CIOT has been addressed by the government. All these changes were endorsed by MPs. 

The six government defeats in the Lords were:

• Making it a requirement for shareholders to state, as well as their name and address, whether they are or are not acting as a nominee
• Requiring updates to the Register of Overseas Entities within 14 days of a transaction rather than annually
• Requiring Companies House to publish openly the names of parties to trusts which own overseas entities in the register
• Extending the new offence of ‘failure to prevent fraud’ to organisations of all sizes, not just large ones
• Creating a new offence of ‘failure to prevent money laundering’
• Protecting enforcement bodies from high adverse costs when undertaking civil asset recovery against deep-pocketed suspects

Earlier stages of the Bill – as well as the measures in the Bill as a whole – are summarised in earlier blogs: Commons committee stage / Commons report stage / Lords stages

Rather than reporting the debate chronologically this report groups comments by topic (typically by amendment) to make discussion easier to follow.

General remarks

Business minister Kevin Hollinrake led for the Government once again on the Bill. He described it as “unquestionably a milestone piece of legislation that takes the UK’s fight against economic crime to an entirely new level”.

Explaining why the Government were rejecting opposition and backbench amendments in the Lords, the minister explained: “We believe that the six non-government amendments for debate would pose significant and disproportionate burdens on business, penalising reasonable companies and businesspeople with limited evidence that the burdens would be outweighed by any meaningful benefits.”

For Labour, Seema Malhotra said that strengthening the law in this area was urgently needed, which is why Labour had supported the Bill’s passage through both Houses. But, she said, loopholes remained and, presumably referring to a future Labour Government, “[w]here the Government fail to act, we will.”

Government amendments in the Lords

Reflecting on the amendments made to the Bill, the minister said it was now “in a better place and there is a great deal more of it than when it left for [the Lords] in January”. The expansion of the Bill from 239 pages to ‘closer to 400’ reflects a ‘spirit of genuine collaboration’ he said, thanking members of both Houses for their ‘collaborative and cross-party approach’.

The minister described the reforms made to corporate criminal liability in the Bill as ‘game-changing’. These included the new ‘failure to prevent’ offence, “which will drive cultural change towards improved fraud prevention in organisations and, failing that, hold organisations to account with prosecutions if they profit from fraudulent actions.” He said reforms to the identification doctrine for economic crimes to make it easier to prosecute corporations represented “the largest and most meaningful change to corporate criminal liability in decades.”

The minister also drew attention to amendments to:

• tackle strategic lawsuits against public participation (SLAPPs) that feature economic crimes, which the Government believe is the first national legislation in the world to combat SLAPPs
• improve the new statutory objectives for the registrar of companies
• improve the transparency of authorised corporate service providers and of the register of overseas entities

The shadow minister, Seems Malhotra, congratulated the minister “on the number of U-turns on areas that Labour argued for in Committee and on Report, including on closing loopholes around third party enablers and introducing a failure to prevent fraud offence”. She called the latter ‘a huge step forward’.

Dame Margaret Hodge (Labour), chair of the all party parliamentary group on anti-corruption and responsible tax, praised the changes made to the Bill. “When the Bill arrived in the House, it was, I hope the Minister will agree, a bit half-baked… But in this year that we have been considering the legislation, it has gone through tremendous transformations, so I salute the Minister for what he has done, but urge him to go that step further.” She saluted back benchers from all parts of the Commons and Lords “who have worked across parties, with the Cross Benchers, to ensure that we have some serious amendments that will give us a good framework to start the eradication of the malignant infection that we have with dirty money.”

Former Attorney General Sir Jeremy Wright (Conservative) ‘welcomed wholeheartedly’ the arrival of ‘failure to prevent’ offences.

Mary Robinson (Conservative), chair of the all-party parliamentary group for whistleblowing, praised the Government for giving people more protection when facing a SLAPP claim in relation to economic crime. She encouraged ministers to make it the first step in bringing a stop to SLAPPs altogether.

Richard Fuller (Conservative), a former Treasury minister, had concerns about a government Lords amendment regarding the disclosure of profit and loss accounts for certain companies, which the Bill will require of small businesses and microbusinesses that had previously been exempt. “It potentially causes considerable concerns for owners of very small businesses if they are to have their profit and loss and their balance sheets publicly declared through Companies House reporting,” he observed. The minister replied that he shared Fuller’s ambition that there “should be a simple process like a tick box to conceal that information from public view in [certain] cases”.

Shareholders acting as nominees

Lords amendment 23 introduced a new clause: ‘Register of members: information to be included and powers to obtain it’. The bulk of the new clause was introduced by the government but 13 lines of it (lines 84-96) were added by peers against the wishes of ministers. These make it a requirement for shareholders to state, as well as their name and address, whether they are or are not acting as a nominee and, if so, to provide details of the person or persons.

The minister argued that these lines were not necessary: “Provisions in the person with significant control framework, as strengthened through the Bill, already require the disclosure of a person of significant control behind a nominee on pain of criminal sanction for non-reporting. That achieves the same intent.” Because it would apply to all shareholders, “we would risk burdening millions of companies and their shareholders with new information requirements for no useful purpose,” he argued.

Seema Malhotra accused the Government of attempting to ‘water down’ the Bill and said Labour would oppose this. “[I]f there is no obligation for the person who is acting as the nominee to disclose on whose behalf they own shares, PSC [person with significant control] identity can remain hidden. It is far too easy for dishonest actors to hide their identities.”

Alison Thewliss, for the SNP, also backed the Lords, saying it was not enough for the Government just to say, as they did in a letter to MPs, “that such a measure would most likely be ignored by illegitimate actors and would be difficult to enforce.”

Margaret Hodge said this was “such a simple amendment. I cannot understand the resistance to it. All it does is give us more information and enable us more readily to know who are the genuine owners of particular companies. Allowing individuals to hide behind nominees is absurd.”

The government amendment removing the 13 lines in question was pressed to a vote in which it passed 295-205.

Notification of changes to the Register of Overseas Entities

Lords amendment 115 added a new clause, ‘Updating the register of overseas entities’, in a further defeat for the government. This would ensure that, rather than the Register of Overseas Entities only being updated annually, event-driven updates of beneficial ownership information would be required, with records updated within 14 days of a land transaction. 

The minister, Kevin Hollinrake, again rejected this change, stating that, although the amendments are well intentioned, they would “significantly increase burdens on both overseas entities and third parties transacting with them, as well as introduce an element of risk in land transactions that the annual update prevents.” He noted that the Law Society of Scotland, the Law Society of England and Wales and the British Property Federation had all expressed concerns.

Seema Malhotra said Labour supported the sentiment behind this amendment but would abstain on it if it went to a vote. She was concerned that, “there is a significant risk that if the legislation goes through in its current form, overseas entities may be able to make changes within the 12-month period but change them back before their annual reporting requirement in order to evade transparency.” A solution was needed to this loophole, she felt, though she noted the concerns of the Law Society and others.

The Lords amendment was disagreed to without being pressed to a vote.

Publication of parties to trusts

Lords amendment 117 sought to require Companies House to publish the names of parties to trusts which own overseas entities in the register. Currently Companies House collects this information but does not publish it.

The minister emphasised that the registrar already discloses trust information to HMRC, law enforcement and other persons with functions of a public nature if and when necessary and appropriate. There is also, he explained, a regulation-making power in the law to allow third-party access to trust data in certain circumstances: “That will enable individuals such as civil society organisations and investigative journalists to access such information under certain circumstances.” The Government intend to launch a consultation on this before the end of the year, he added.

Liam Byrne (Labour) asked the minister whether he had seen new research published by Arun Advani, Andy Summers and others “that shows that the current arrangements shield something like 152,000 properties from… transparency?” The minister said that the government “do not accept those numbers or the interpretation of beneficial ownership used in drafting the report.” He said that around 3,000 entities have not properly registered at this point in time and enforcement action is being taken on them, with about half a million pounds in fines issued so far.

Labour backed the Lords on this amendment. Seema Malhotra said it was “much stronger than government Lords amendment 124, which kicks the can down the road when it comes to acting on trusts by prompting yet another consultation.” She said that analysis of the register of overseas entities by Transparency International “shows that trusts are used to hide the ownership of about 7,000 entities, which is about a quarter of those on the register”. Alison Thewliss, for the SNP, made similar points in support of the Lords.

Margaret Hodge and Liam Byrne also both raised the Advani and Summers research. Hodge told the minister: “These are people I have worked with over the years in whose work I have total and utter confidence… What they are saying is that we do not know the beneficial owner of 70% of the properties identified as owned by an overseas entity. And we do not know the beneficial owner of two thirds of that 70% because there is a trust that hides the real beneficial ownership.” The minister responded that he thought the LSE had included tenants of properties rather than owners of properties, whereas the register only deals with ownership.

The Lords amendment was rejected following a vote (294-206).

Application of ‘failure to prevent fraud’ to smaller organisations

Lords amendment 151 is the introduction of the new offence of a ‘failure to prevent fraud’. A cross-party alliance of peers succeeded in removing the qualification that the new offence only applies to large organisations. In the Commons the Government sought to reinsert this restriction.

The minister explained that the Government want to keep the exemption for small and medium enterprises because they “are extremely mindful of the significant pressures that small companies are under, and do not want to place unnecessary and duplicative burdens on legitimate businesses.” The Government think the costs to businesses would be in the order of £4 billion.

However Sir Robert Buckland (Conservative), a former Lord Chancellor, pointed out that for failure to prevent bribery and tax evasion offences there is no threshold on small businesses. Why does this offence need one? The minister replied that with fraud, “it is more complicated to do it, so it would have a much greater impact on SMEs than bribery and tax evasion. It is a balance of risk and benefits when making sure where those regulatory burdens sit.”

Former Attorney General Sir Jeremy Wright (Conservative) noted that subsection (4) of the new clause made it “a defence for the relevant body to prove that, at the time the fraud offence was committed… the body had in place such prevention procedures as it was reasonable in all the circumstances to expect the body to have”. “Why would one of those circumstances not be the size and capacity of the organisation in question?” he wondered.

But Richard Fuller thought the Government was getting the balance right. “Leaving the burdens on business to the courts or whichever procedures to define is not a reasonable protection for small businesses,” he argued.

Fuller challenged Buckland, who was making the case for the measure to apply across the board: “As a result of the clause applying to smaller businesses in my constituency, can he tell me specifically what they will need to do differently that they do not do today?” Buckland replied that they will have in place “reasonable procedures to prevent people from acting on their behalf and unjustly benefiting their own companies and entities”.

Dame Margaret Hodge (Labour) thought the threshold that the Government had chosen to set was ‘extremely high’. For example, out of the 10,400 law firms in the UK, only 100 will be caught by the legislation as it is currently framed. The minister said the Government “do not think the number of companies is the right metric by which to assess the effect of the new offence. We believe economic activity is more appropriate. I can assure the House that 50% of economic activity would be covered by the organisations in scope of this new offence with the threshold in place”.

Labour’s spokesperson, Seema Malhotra, agreed that there should not be disproportionate costs for small businesses, but felt that this could be guarded against. Quoting Spotlight on Corruption she said it was open to the government to make clear in guidance “what reasonable procedures would be proportionate for SMEs, and in what circumstances it would be reasonable not to have them at all.” After deliberation Labour had decided “that we do not want to see the exemption for SMEs taken out of the Bill.”

Alison Thewliss (SNP) said it was ‘ludicrous’ that 99 per cent of businesses were not in scope. Preventive health and safety legislation had led to the number of deaths at work dropping dramatically. “This works the same way for bribery and tax evasion, so why would it not also work for fraud?”

The government amendment to limit this new offence to large businesses passed 297-209.

Failure to prevent money laundering

Lords amendment 159 would create a new offence of ‘failure to prevent money laundering’. The Government sought to remove this from the Bill.

“The UK already has a strong anti-money laundering regime which requires the regulatory sector to implement a comprehensive set of measures to prevent money laundering,” the minister explained. “Corporations and individuals can face serious penalties, ranging from fines to cancellations of registration and criminal prosecution if they fail to take those measures… A failure to prevent money laundering offence would be hugely duplicative of the existing regime. In our conversations with industry, it has been very clear that that duplication would create a serious level of confusion and unnecessary burdens on businesses.”

Quoting June’s Treasury review into AML regulations that “significant weaknesses remain in the UK’s supervision regime” Labour’s shadow minister said it is “pretty clear that the existing safeguards against money laundering are not enough.” She said this was a chance to take stronger action and the Government should take it.

Robert Buckland also backed the Lords on this one, saying Lord Garnier’s amendment was “a sensible reflection of the importance of ensuring we cover offences of money laundering… So I say to my hon. Friend, “Repent!”. He should follow the true path and come back and finish the job.”

Margaret Hodge said that taking out this provision, and the one on smaller businesses, was ‘ridiculous’. “If we can only get that clause as agreed in the House of Lords through, we would really see a difference in what is happening.”

The Lords amendment creating the new offence was rejected by the Commons 291-209.

Costs of enforcement bodies

Lords amendment 161 sought to protect enforcement bodies from high adverse costs when undertaking civil asset recovery against deep-pocketed suspects. The government sought to reverse this amendment but, in a concession to peers, ministers put forward a new clause of their own in its place.

The minister, Kevin Hollinrake, explained that the amendment “would be a significant departure from the loser pays principle and therefore not something we should rush into without careful consideration. The risk of paying substantial legal costs is just one of a multitude of factors that inform an operational decision to pursue an asset recovery case.” The Government cannot support the amendment, he said. “However, we recognise the strength of feeling on the issue and the potential merits of reform. We have therefore tabled an amendment in lieu which imposes a statutory commitment to review the payment of costs in civil recovery cases in England and Wales by enforcement authorities, and to publish a report on its findings before Parliament within 12 months.”

For Labour Seema Malhotra said this Lords amendment “would significantly aid the fight against economic crime in our country.” “I see no reasonable explanation as to why the Government would continue to oppose the inclusion of this amendment in the Bill and the strong backing it would give to the enforcement agencies, which we would expect to act with a strong threshold of evidence in order to bring any cases.” She was unimpressed by the delay offered by the government amendment.

“On adverse costs, the Government are saying that they are sympathetic to this, and they are going to consult and do some other things later on, but by not putting this measure in this Bill, they are allowing this uneven playing field to continue and be perpetuated,” said Alison Thewliss (SNP).

The Lords amendment was rejected by the Commons 292-206.

Next Steps

Following the debate a ‘Reasons Committee’ was formed, chaired by the minister, Kevin Hollinrake. This agreed the following Reasons for rejecting three Lords amendments:

Lords Amendment 115 - Because it would alter the financial arrangements made by the Commons, and the Commons do not offer any further Reason, trusting that this Reason may be deemed sufficient.

Lords Amendment 117 - Because it would alter the financial arrangements made by the Commons, and the Commons do not offer any further Reason, trusting that this Reason may be deemed sufficient.

Lords Amendment 159 - Because the law already makes sufficient provision in relation to the prevention of money laundering.

The Bill will return to the Lords on Monday 11 September, when peers will have to decide whether to accept each government amendment or rejection of their amendments, or disagree with the Commons and send unresolved issues back there.