Lords consideration of Commons Amendments and Reasons to the Economic Crime and Corporate Transparency Bill - Sep 11

Motion A

Moved by

Lord Johnson of Lainston

That this House do disagree with the Commons in their Amendment 23A and do propose Amendments 23B and 23C in lieu—

23A: As an amendment to Lords Amendment 23, leave out lines 84 to 96

23BAs an amendment to Lords Amendment 23, in the text inserted by subsection (5) of the new Clause, leave out section 113C (required information about members: nominees)

23C: As an amendment to Lords Amendment 178, in the text to be inserted, after paragraph 12A insert—

“12B After section 790I insert—

“Power to impose further duties

790IAPower to impose further duties involving nominee shareholders

(1) The Secretary of State may by regulations make further provision for the purpose of enabling a company to which this Part applies to find out about anyone who has become or ceased to be a person who is—

(a) a registrable person in relation to the company by virtue of shares being held by a nominee, or

(b) a registrable relevant legal entity in relation to the company by virtue of shares being held by a nominee.

(2) The regulations may, in particular—

(a) impose obligations on a company with a view to obtaining—

(i) information about whether a person has become or ceased to be a nominee shareholder;

(ii) if they have, information about: (A) the shareholding; (B) the nominee; (C) the person for whom the nominee holds or held the shares;

(iii) any other information required by the regulations;

(b) impose obligations on others (including nominees or former nominees) with a view to providing the company with—

(i) information of a kind described in paragraph (a)(i)

or (ii);

(ii) any other information required by the regulations.

(3) The regulations may, in particular, make provision similar or corresponding to any of the preceding provisions of this Chapter.

(4) The provision that may be made by regulations under subsection (1) includes provision amending this Chapter.

(5) Regulations under this section are subject to affirmative resolution procedure.””
The Minister of State, Department for Business and Trade (Lord Johnson of Lainston) (Con)

My Lords, I shall also speak to Motions B, C, D and D1. I thank noble Lords for their extraordinarily high level of constructive input over the last few days as we have come to this point. I believe that together, across the House, we have created a truly powerful piece of legislation that will have a meaningful impact on how Companies House operates, how we deal with financial crime and how we make our system safer and cleaner.

I should declare my interests. I have interests in limited companies and other companies, but I do not believe there is any conflict of interest in this process today.

Motion A relates to Lords Amendment 23, tabled on Report by the noble Lord, Lord Vaux of Harrowden, which would require members of all UK companies to declare whether they were holding shares on behalf of, or subject to the direction of, another person or persons as a nominee and, if so, to provide details of the person or persons. We have been in conversation over the last few days about that amendment. While we understand the intention to tackle what we perceive to be an industry of nominee service providers prone to acting unlawfully, I am afraid we do not believe that the amendment is the appropriate way to achieve that goal.

However, the Government, via Motion A, have therefore tabled Amendments 23B and 23C in lieu of Commons Amendment 23A. I hope that is making sense to the noble Lord. The new amendments allow the Secretary of State to make regulations to make further provision for the purpose of enabling a company to find out who its PSCs are—that is, people of significant control—in cases where shares are held by a nominee. That could include, among other things, imposing further obligations on companies to find out if they have nominee shareholders and, if so, for whom they are holding shares, or imposing further obligations on nominee shareholders to disclose their status and for whom they are holding shares.

It is important that we make it clear that the reason for tabling the new amendments rather than accepting the noble Lord’s revised amendment is that we are slightly wary of imposing disproportionate burdens on business. There are a vast variety of nominee types which we need to make sure we have taken into account when ensuring that we are getting the right information from the right types of nominees. As I have said to the noble lord—at this Dispatch Box, I believe—the commitment in principle to try better to understand the route between the nominee and the beneficiary is an important one. We want to do it in the right way, and these amendments would give the Secretary of State the powers to do that. I hope that the noble Lord can agree that that is the right approach to take and, assuming that is so, can support the Government in this new amendment and consider withdrawing his own.

I turn to Motion B.

Lord Agnew of Oulton (Con)

My Lords, I apologise to my noble friend the Minister. I had been told that I needed to address my Motion D1 while Motion A was under discussion. I am very happy to wait but those were the instructions I had from the Table. Would anyone like to clarify?
Lord Johnson of Lainston (Con)

I am told that I should continue, and we will hear from my noble friend at a later stage—which I welcome and look forward to greatly.

Motion B is a technical Motion that allows the power to modify who is able to file with Companies House on others’ behalf, to ensure it is consistent for all types of filings. I hope the House is assured that these amendments are minor but sensible modifications to the Bill.

Motion C relates to Lords Amendment 115, also tabled by the noble Lord, Lord Vaux, at Report. This will introduce two new duties for overseas entities, the first requiring event-driven updates on beneficial ownership information, and the second requiring overseas entities to update their records no more than 14 days before the completion of a land transaction. We believe that requiring event-driven updates for the Register of Overseas Entities will not work in principle. I would like to reassure noble Lords that we have done an enormous amount of highly collaborative work with the noble Lord, Lord Vaux, on this issue. We are concerned that this would create additional risk for purchasers of properties involved with overseas entities. However, as I hope I have made clear to noble Lords, we are extremely committed to working further on this subject. The Government commit to keeping under review the question of the update period for the Register of Overseas Entities. That is extremely important, and I personally commit to that on behalf of the Government. We will have more evidence at our disposal as the first set of annual updates comes through. If we felt it necessary to change the reporting requirements, and if there were not the risks that we feel may be presented by the noble Lord’s proposal, then we would look to consult on that. For that reason, we will not be supporting that amendment.

I turn to Motion D, which my noble friend Lord Agnew will then speak to. Again, I am very grateful to my noble friend for his extraordinarily high level of commitment to making sure that the Economic Crime and Corporate Transparency Bill is genuinely powerful legislation that will enable us to achieve the goals we wish to achieve. Ultimately, transparency is at the core of our ambition. However, we are concerned, in that his amendment would make information about trusts submitted to the Register of Overseas Entities publicly available by removing it from the list of material listed as unavailable for public inspection. I note that my noble friend has also tabled a further amendment.

However, it is important to come back to these points, because they are very relevant to our ambitions. We are resolute in saying that we will not unilaterally change the rules relating to these trusts, and I think Members of the House understand why. However, we have committed already to launching a full public consultation before the end of the year on how we can further improve the transparency of trust information. Following further discussion with my noble friend, I would like to make it clear that the public consultation to which we are committed is a separate exercise from the commitment to make regulations that I have discussed already. The consultation will look at the case for broader transparency regarding trusts. The Government’s ambition is to increase and improve transparency. We commit absolutely that we will undertake this consultation and that it will be launched before Christmas of this year and run for no more than 12 weeks. That is in line with discussions we had with my noble friend.

I reassure my noble friend that Ministers across departments are committed to meeting this deadline and acting swiftly on the consultation’s findings. I would be very happy to meet with my noble friend, and indeed any noble Lords, soon after the consultation closes to discuss how we can move forward at pace. We therefore oppose my noble friend’s amendment, but I hope he can take the commitments I have made today at the Dispatch Box as sufficient reassurance to persuade him to withdraw his amendment. I beg to move.

3.45pm

Motion A1 (as an amendment to Motion A)

Lord Vaux of Harrowden

Moved by

Leave out from “House” to end and insert “do agree with the Commons in their Amendment 23A, and do propose Amendment 23D to Lords Amendment 23 in place of the words left out by Amendment 23A—

23D: Line 83, at end insert—

“113C Required information about members: nominees

If a member holds 5% or more of the share capital or voting rights of the company, the required information about a member includes a statement by the individual, or where the member is a body corporate, or a firm that is a legal person under the law by which it is governed, by an officer of that body corporate or firm, as to whether or not they are holding the shares on behalf of, or subject to the direction of, another person or persons, and if they are—

(a) where any such person is an individual, and the shares held on that person’s behalf or subject to their direction amount to 3% or more of the share capital or voting rights of the company, the information required by section 113A in relation to that individual;

(b) where any such person is a body corporate or firm that is a legal person under the law by which it is governed, and the shares held on that person’s behalf or subject to their direction amount to 3% or more of the share capital or voting rights of the company, the information required by section 113B in relation to that body corporate or firm; or

(c) a statement that the member is not holding shares on behalf of, or subject to the direction of, such person that amount to 3% or more of the share capital or voting rights of the company.””

Lord Vaux of Harrowden (CB)

My Lords, I hope that Motion A1 is clear. Before I start, I remind the House of my interest as a non-practising chartered accountant.

On Report, your Lordships agreed Amendment 23, which included a requirement that shareholders should have to state whether they are holding shares on someone else’s behalf and, if so, on whose behalf they are holding them. This requirement was rejected, as we have heard, by the other place. Motion A1 aims to reverse that, while trying to take on board some of the matters raised in debate in the other place. If I may, given that the debate we had in this House was now some months ago, I will briefly remind the House of the issue that that amendment was trying to resolve.
One of the easiest ways to hide the true identity of an owner of a company is to use a nominee—somebody whose name will appear on the register of members but who is in fact acting under the instruction of and for the benefit of the actual beneficial owner. A substantial industry has grown up to provide these nominee services. There are of course legitimate reasons for using a nominee, such as an asset manager holding and managing a range of shareholdings, but it is quite revealing to do a Google search of nominee shareholding services.

A near-endless list of such services appears, and these services are usually sold very clearly as being primarily about creating anonymity for the true shareholder. Let me quote from one of them:

“The beneficial owner may choose to appoint a Nominee Shareholder because they do not want to register the shares in their own name. A Nominee Shareholder is a great way to keep shareholder information away from public records”.

Another one states:

“In the United Kingdom, the purpose of using nominees is confidentiality. Because of the confidentiality requirements, owners are reluctant to associate themselves with beneficial ownership, and the practice of nominating shareholders will hide their association”.

Most nominee service providers market their services in the same vein. A few of them refer to the PSC—persons with significant control—rules or to anti-money laundering in the marketing literature, but they are very much in the minority. As I said, there are legitimate reasons for holding shares through a nominee, but not wanting to register the shares in their own name and keeping shareholder information away from public records are not legitimate reasons. In fact, that is precisely what this Bill is trying to stop.

The amendment originally passed by this House was intended to strengthen the Bill to prevent the misuse of nominees to hide the true ownership. I continue to believe that this is a very real issue and, as a result, I have tabled Motion Al, which tries to reintroduce the original amendment, but changed to reflect some of the reasons for rejecting it made in the other place—in particular, the question of undue burden that the Minister referred to a moment ago.

However, since I tabled my Motion A1, I am very pleased to say that the Government has tabled Amendment 23C within their Motion A. It shows that they now recognise that there is a genuine issue here and, in particular, that the enabling industry needs to be incentivised to clean up its act. I especially welcome the fact that proposed new subsection (2)(b) will specifically allow the Government to impose obligations directly on those who act as nominees. The real flaw in the current rules is that those enablers face no real risk at all when acting as they do. I hope that this specific mention in the Government’s Amendment 23C will cause the nominee industry to take note and clean up its act, in the knowledge that if it does not, it will face regulation.

While I would have preferred to have taken action now and introduced something in the Bill, the fact that the Government recognise the issue and are proposing a regulating power to deal with it is most welcome. I very much welcome the commitments made by the Minister a moment ago. I thank him and, given that and what he has just said, I will not press Motion A1. I thank him and his officials for their continuing very constructive engagement, which has been the case throughout the Bill. I look forward to seeing the proposed regulations before too long—he will know that I will not be dropping the issue until we see the regulations.

I shall also comment very briefly on Motion C, which moves an amendment passed in this House that aimed to fix an anomaly in the register of overseas entities, which is that it has to be updated only annually. First, I point out the reason given by the Commons:

“Because it would alter the financial arrangements made by the Commons, and the Commons do not offer any further Reason”.

That, frankly, is totally inadequate and nonsensical in this case. It has to be updated only annually. Other registers, such as the register of persons with significant control, have to be updated within 14 days of any change being identified. This anomaly means that the register of overseas entities can be up to a year out of date at any time. That introduces the risk that an innocent part might unknowingly find themselves entering into a transaction with a sanctioned person, for example.

Unfortunately, because of the way the register works in conjunction with the registration of property, this all becomes extremely complex. I thank the Law Society for its helpful and constructive engagement in many meetings over the Recess to try to find a solution to this. While we did find a possible way through, it was so convoluted as to be impractical—so I am not going to oppose the removal of this amendment, even if the issue it was trying to solve remains real.

The register of overseas entities is still in its early stage. While it has been successful up to a point, as I am sure we are going to hear from the noble Lord, Lord Agnew, there are still many properties the ownership of which is, at best, unclear. I am very pleased to hear the commitment the Minister made in his speech just now that they will keep this anomaly of annual updating under review. In the meantime, I caution any person who is buying or selling property from or to an overseas entity, or who is entering into a lease over a property with an overseas entity, to require it to be a condition of the transaction that the entity’s entry in the register is updated immediately prior to the transaction completing. Only by doing that can the innocent party know who they are actually transacting with. With that, I beg to move.

Lord Agnew of Oulton (Con)

My Lords, I shall speak in favour of my Motion D. I am grateful to my noble friend the Minister for his ongoing dialogue with me as we grind to the end of this Bill: he has been patient and courteous, as ever. My problem is that the Government continue to say one thing and then do something different. Just to remind noble Lords, the reason I pressed my original amendment was that a gaping hole had opened up in this newly created register of overseas interests. It is barely a year old and we have more than 50,000 properties owned by an entity whose beneficial owners are withheld from public view. That is approaching one-third of all entries. It is rapidly becoming the default advice from cute law firms to their overseas clients to use a trust structure that is opaque.
In rejecting my original Commons amendment, the Government claimed refuge behind the principle of financial privilege. This is bizarre, if not worse, but in a spirit of collaboration I will not use the word that I had planned to use. The costs to Companies House of publishing trust information are estimated on the back of an illusory envelope at between £600,000 and £2.8 million—a figure supported by absolutely no methodology—but under the Bill, Companies House funding is going to rise exponentially. The current filing fee of £13 will rise to anywhere between £60 and £90 if the guidance we have been given is followed. Taking the bottom-end number, £60 means an increase of £47 a year times 4 million companies, or £188 million a year, against this odd figure of £600,000 to £2.8 million. Even if the higher filing fees deterred some company creation or dissolution for non-viable entities, the additional cost, frankly, is a rounding error. Indeed, if the Government were to approach this logically and calculated that as a transparency cost, it would be around about 70p per registered company per year, or about 1.25%.

I give this example only because I continually worry that I get very clear assurances from the Minister but the actions taken by the Government are rather different. I accept through gritted teeth that we cannot debate that amendment as I was blocked from tabling it. This leaves us with a much watered-down proposal to try to hold the Government to account to get on with the consultation they say they need to ensure that there are no legal challenges. The Government have accepted that they need to start straightaway, in this calendar year, but they do not yet accept the principle of my proposed new subsection (2) that the consultation includes the principle of public access to protected data on a bulk basis.

This sounds arcane, but it is crucial because currently HMRC is not providing the information when requested, and it can be requested only on a case-by-case basis. As I have shown, there are already more than 50,000 hidden owners where the public are being denied the information, so doing it individually is simply not practical. I have consistently said that those with a bona fide need for confidentiality should have it, but this would be a very small proportion of the 50,000.

On the terms of the consultation, there are a couple of elephant traps that the Government should be aware of. A few years ago, when the consultation was issued to tighten up the non-dom loopholes, the lawyers’ excuse for not tightening them up was that anyone who declared non-dom status should have a reasonable expectation that it should last in perpetuity. That sounds pretty sinister to me, but apparently that argument has already been rolled out to civil servants on the issue of more transparency with trusts. I warn the Minister to be alert because, as I understand it, civil servants have already expressed their compliance with this idea. I hope that we as politicians are still running the country, not the civil servants.

We have heard from my noble friend the Minister and he has given commitments, which I very much appreciate. However, I hope he understands why I am extremely nervous: what he says and what the Government do are not always totally aligned. I will take his words exactly as he says them, though, and I ask him to keep a very careful eye on this process over the next few months. I think he has learned enough about me to know that, for all my many weaknesses, one thing I am is dogged. We will keep a careful eye on this. On that basis, I will withdraw my amendment.
Lord Eatwell (Lab)

My Lords, I strongly support the amendment from the noble Lord, Lord Agnew. I do this as a former chair of the Jersey Financial Services Commission. In Jersey we made a major effort to increase the transparency of trust information so that beneficial ownership could be accurately identified. One of the inhibitions for cleaning up, if you like, the register in Jersey was the behaviour of the Government in the United Kingdom, and their persistent obfuscation of the way in which trusts were to be treated.

The amendment from the noble Lord, Lord Agnew, contains exactly the process that needs to be dealt with in a consultation. I understand the assurances he may have received and that he may feel it appropriate to withdraw his amendment, but I hope he proves as dogged as we know him to be in pursuing this. I assure him of my continuing support.

Lord Faulks (Non-Afl)

My Lords, I also support what the noble Lord, Lord Agnew, has said and done. I am very sorry that the Government did not accept the amendment in relation to trusts. It was entirely in keeping with the purpose of the Bill, and more specifically with the purpose of the introduction of the register of overseas entities.

Some of us have been advancing the cause of this register—some would say banging on about it—for some considerable time. I had the privilege of chairing the Joint Committee on a draft Bill. We recommended legislation as soon as possible. Unfortunately, it took the invasion of Ukraine for the Government to incorporate the necessary legislation into the last economic crime Bill.

During the taking of evidence by the committee in 2019, the need to avoid trusts being used to avoid the identification of the true owner of property was specifically brought to our attention. It then became part of our recommendations that the legislation, when it came before your Lordships’ House, should cater for this obvious loophole. The Government ignored the recommendation then and have now resisted the amendment passed by your Lordships’ House.

If there is concern about minors and keeping them ignorant about their status as beneficiaries, this could have been catered for by an appropriate provision. Instead, the Government, against whom the former Lord Chancellor voted in the other place on this issue, have resorted to “financial privilege” as a means of blocking the amendment.

Trust lawyers are going to be very busy, as foreign owners will set about frustrating the purpose of the register and the aspirations that we all share for this and related legislation. I hope the Government bear that in mind.4.00pm
Lord Garnier (Con)

My Lords, I had the privilege of being a member of the noble Lord’s committee. I agreed with what he had to say then, and I agree with what he has just said now.

Lord Fox (LD)

My Lords, in his opening dispatch the Minister praised those involved for the way in which the Bill has been modified and changed. The noble Lord, Lord Agnew, needs to take a lot of credit for how that modification has gone ahead, and the work that he has done and will have to continue to do in his role overseeing the Government’s response to this. I will not repeat anything that has already been said, other than to say that I agree.

The reason we are concerned about this issue is that the Government will rightfully say that they know who the names are in these trusts, but the issue we are talking about is the publication. It has been the role of civil society and journalists to uncover problems, and that has been very important in issues around this. If the Government can demonstrate that their commitment to enforcement, getting behind these trusts and exposing people who are using them to avoid issues is fully funded and fully backed by them, our relying on civil society—which we have had to do to date—would be less of an issue. That is why we support the quest by the noble Lord, Lord Agnew, on this, and will support him as he seeks to make sure that further steps are appropriate and that enforcement is at the heart of what we seek to achieve here.

Baroness Blake of Leeds (Lab)

My Lords, I start by thanking the Minister for the broader tidying up of the amendments in this group and by reflecting on the time, over several months, that we have been discussing these important issues. We must keep our eye on the scale of the issues that we are dealing with; they are immense, and they cost this country billions of pounds. We have a great deal to do to repair the UK’s reputation in the world, and I hope that we involved in this debate will all have our eyes on that prize.

I am pleased to say that we have seen some positive changes achieved through the passage of this Bill and a genuine appetite for change, as we experienced with our conversation with Companies House. We are going through an immense cultural change in the management of these affairs. As we know, it is the biggest shake-up for 170 years. I also pay tribute to everyone in the Chamber, and those who are not here today, for their diligence in the work that they have done, and to my colleagues in the other place, Dame Margaret Hodge and Seema Malhotra in particular. Months and months of work have gone into getting us to this place.

I am very grateful for the explanation that the noble Lord, Lord Vaux, gave. There is real recognition that there will be an ongoing need to scrutinise. I think we all accept the commitments in good faith, but we need to make it clear to Ministers and their officials that the interest is very live and that there will be close scrutiny as these matters roll up. Compromise has been reached on this—I accept that that is the reason we will not be taking the amendment to a vote—but we add our support to the ongoing scrutiny that will need to take place.
I also pay tribute to the noble Lord, Lord Agnew, for his persistence in this and his unique position having had experience in government, which has informed the approach he has taken and the concern that I think many would agree he has rightly raised. We are where we are—he has decided to accept the reassurances—but we also have an insight into those elephant traps that he referred to. I also reference the comments of my noble friend Lord Eatwell on the explicit need for vigilance.

With those comments, and thanking everyone for the spirit of compromise, I reassure everyone that we will look closely at this, and we very much hope that the measures being brought in today will be sufficient. We will look to those delegated powers that have been built in to make sure that, if change is necessary, it will indeed be made.

Lord Johnson of Lainston (Con)

I thank noble Lords for their contributions, including the noble Baroness, Lady Blake, for her extremely helpful and supportive comments about the overall debate. In her summation, she was right that we have, through a great degree of good faith among us all, come up with a very strong series of actions that will genuinely change the economic landscape in this country for the better.

I have had the privilege of working with my noble friend Lord Agnew for a number of months as we have come to today’s conclusion on these measures. I reiterate my personal commitment, and the commitment of this Government, to delivering on the thrust of his ambitions. On a process that came to light only recently—the issue of bulk data and its accessibility—I can commit that Companies House will do a review of how it can assess bulk data for the trusts’ information on the register of overseas entities once a consultation period has finished and it is deemed appropriate.

Ultimately, we are committed to greater transparency, and I am very grateful to my noble friend and noble Lords across the House for their understanding of our approach to how we can best achieve this without either endangering vulnerable minors or individuals or opening ourselves up to legal challenge which could derail many of the main principles of this part the Bill to which my noble friend is rightly keen to contribute.

Finally, I express my gratitude to the noble Lord, Lord Vaux, who, from the very beginning, has been a tireless collaborator in creating—with his input across the board in this section of the Bill—a truly powerful piece of legislation. It was my own personal pleasure and pride to work with him as we have come to this conclusion, and I am very grateful to him for his understanding, again, of how we believe that we can achieve our shared ambitions in what we think will be the right way.

We have made some clear further commitments today—to which I would be delighted to be held to account by my noble friend Lord Agnew and all noble Lords in the House today—to make the Economic Crime and Corporate Transparency Bill the most effective legislation it can be. I therefore invite the House to agree the government Motions in this group.
Lord Vaux of Harrowden (CB)

My Lords, I thank the Minister for his generous comments. I also thank noble Lords who have been so generous with their support throughout the passage of the Bill on these matters, which has allowed us to get to the point of achieving at least this compromise. With that, I beg leave to withdraw Motion A1.

Motion A1 withdrawn.

Motion A agreed.

Motion B

Moved by

Lord Johnson of Lainston

That this House do not insist on its Amendment 56 and do agree with the Commons in their Amendments 56A, 56B and 56C in lieu.

56A: Page 57, line 25, leave out subsection (3) and insert— “(3) After section 1067 insert—

“Who may deliver documents to the registrar

1067A Delivery of documents: identity verification requirements etc

(1) An individual may not deliver a document to the registrar on their own behalf unless—

(a) their identity is verified (see section 1110A), and

(b) the document is accompanied by a statement to that effect.

(2) An individual (A) may not deliver a document to the registrar on behalf of another person (B) who is of a description specified in column 1 of the following table unless—

(a) the individual is of a description specified in the corresponding entry in column 2, and

(b) the document is accompanied by the statement specified in the corresponding entry in column 3.

1

2

3

Description of person on whose behalf document delivered (B)

Description of individual who may deliver document on B’s behalf (A)

Accompanying statement

1

Firm

Individual who is an officer or employee of the firm and whose identity is verified (see section 1110A).

Statement by A—

(a) that A is an officer or employee of the firm, (b) that A is delivering the document on the firm’s behalf, and

(c) that A’s identity is verified.

2

Firm

Individual who is an officer or employee of a corporate officer of the firm and whose identity is verified.

Statement by A—

(a) that A is an officer or employee of a corporate officer of the firm,

(b) that A is delivering the document on the firm’s behalf, and

(c) that A’s identity is verified.

1

2

3

Description of person on

whose behalf document delivered (B)

Description of individual who may deliver document on B’s behalf (A)

Accompanying statement

3

Firm

Individual who is an authorised corporate service provider (see section 1098A).

Statement by A—

(a) that A is an authorised corporate service provider, and

(b) that A is delivering the document on the firm’s behalf.

4

Firm

Individual who is an officer or employee of an authorised corporate service provider.

Statement by A—

(a) that A is an officer or employee of an authorised corporate service provider, and

(b) that A is delivering the document on the firm’s behalf.

5

Individual

Individual whose identity is verified.

Statement by A—

(a) that A is delivering the document on B’s behalf, and

(b) that A’s identity is verified.

6

Individual

Individual who is an authorised corporate service provider.

Statement by A—

(a) that A is an authorised corporate service provider, and

(b) that A is delivering the document on B’s behalf.

7

Individual

Individual who is an officer or employee of an authorised corporate service provider.

Statement by A—

(a) that A is an officer or employee of an authorised corporate service provider, and

(b) that A is delivering the document on B’s behalf.

(3) In relation to a corporate officer that has only corporate officers, the reference in row 2 of the table to an individual who is one of its officers is to—

(a) an individual who is an officer of one of those corporate officers, or

(b) if the officers of those corporate officers are all corporate officers, an individual who is an officer of any of the corporate officers’ corporate officers,

and so on until there is at least one individual who is an officer.

(4) The Secretary of State may by regulations—

(a) create exceptions to subsections (1) or (2) (which may be framed by reference to the person by whom or on whose behalf a document is delivered or by reference to descriptions of document or in any other way);

(b) amend this section for the purpose of changing the effect of the table in subsection (2).

(5) Regulations under subsection (4)(a)—

(a) may require any document delivered to the registrar in reliance on an exception to be accompanied by a statement; (b) may amend this section.

(6) The Secretary of State may by regulations make provision requiring a statement delivered to the registrar under subsection (2) to be accompanied by additional statements or additional information in connection with the subject-matter of the statement.

(7) Regulations under this section are subject to affirmative resolution procedure.
(8) In this section “corporate officer” means an officer that is not an individual.””

56B: Page 59, line 9, at end insert—

“(7) The Secretary of State may by regulations amend this section for the purposes of changing who may deliver a document to the registrar on behalf of a disqualified person.

(8) Regulations under subsection (7) are subject to the affirmative procedure.”

56C:Page 129, line 37, after “regulations” insert “—

(a) amend this section for the purposes of changing who may deliver a document under a provision listed in subsection (4) to the registrar on behalf of another person;

(b) ”

Motion B agreed.

Motion C

Moved by

Lord Johnson of Lainston

That this House do not insist on its Amendment 115, to which the Commons have disagreed for their Reason 115A.

115A: 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.

Motion C agreed.

Motion D

Moved by

Lord Johnson of Lainston

That this House do not insist on its Amendment 117, to which the Commons have disagreed for their Reason 117A.

117A: 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.

Lord Johnson of Lainston (Con)

I beg to move.

Motion D1 not moved.

Motion D agreed.

Motion E

Moved by

Lord Sharpe of Epsom

That this House do agree with the Commons in their Amendment 151A.

151A: In subsection (1), after first “body” insert “which is a large organisation (see sections ((Failure to prevent fraud): large organisations) and (Large organisations: parent undertakings))”

The Parliamentary Under-Secretary of State, Home Office (Lord Sharpe of Epsom) (Con)

My Lords, I will speak also to Motions F, G, H and H1. We cannot agree to the proposed amendments for practical reasons, not least that the burdens they would place on business would not just be justified. It is for this reason, and not because of any intransigence or party-political reason, that we are unable to agree with the proposed Lords amendments. I will now talk specifically to the Motions in this group.

Motion E would reinsert the SME exemption for the failure to prevent fraud offence. I have of course noted Motion E1, tabled by my noble and learned friend Lord Garnier. I appreciate that he has moved closer to the Government’s position on this issue, creating his own threshold that would exclude microentities from the failure to prevent fraud offence. However, the Government remain extremely mindful of the pressures on companies of all sizes, including small and medium-sized enterprises, and therefore do not feel it is appropriate to place this new, unnecessary burden on more than 450,000 of them.

The analysis on this issue remains clear: even reducing the exemption threshold to only microentities would increase the one-off costs on businesses from around £500 million to £1.5 billion. Further, the annually recurrent costs would increase from £60 million to more than £192 million. Those costs would still be disproportionately shared by small business owners.

I know some noble Lords have expressed scepticism about the burdens, but the fact is that when a small business person hears that they may be liable to a new offence and significant fines if they are judged not to have taken action on something, they will worry. They will take time out of their business to scrutinise the guidance and, whatever it may say, there could be widespread overcompliance. Furthermore, they may well have to pay their accountant or lawyer to do it for them. While this burden is eye-watering in its own right, the issue cannot be taken in isolation. We must be aware of the cumulative compliance costs for SMEs across multiple government requirements or regulations. Furthermore, I can assure noble Lords that 50% of economic activity would be covered by the organisations in scope of this new offence with the Government’s threshold in place. It is of course already easier for law enforcement to attribute and prosecute fraud more easily in the smaller organisations that fall below the threshold.

I hope that noble Lords who feel strongly on this issue will be reassured that this is not the end of the debate. The Government have future-proofed the legislation by including a delegated power to allow them to raise, lower or remove the threshold altogether. Of course, as with all legislation, the Government will keep the threshold under review and will make changes if there is evidence to suggest that they are required. I therefore urge noble Lords to support government Motion E, rather than Motion E1.

I now turn to government Motion G, which disagrees with Lords Amendment 158. This was also tabled by my noble and learned friend Lord Garnier and seeks to introduce a failure to prevent money laundering offence. I am pleased that no amending Motions have been tabled for today, as I fear this amendment is entirely duplicative of existing regulations. Much like my noble and learned friend’s other amendment, it would therefore impose yet further unnecessary burdens on UK businesses. The UK already has a strong anti-money laundering regime in the form of the money laundering regulations, which require regulated sectors to implement a comprehensive set of measures to prevent money laundering. Corporations and individuals can face serious penalties, ranging from fines to cancellation of registration and criminal prosecution, if they fail to take those measures. What is more, those penalties will apply even if no actual money laundering has occurred. No knowledge of or intention to commit an offence has to be proved.

The money laundering regulations and the money laundering offences in the Proceeds of Crime Act are directly linked and can be seen as part of the same regime. A failure to prevent money laundering offence would therefore be highly duplicative of the existing regime. This is not just the view of the Government: in our conversations with industry, it has been very clear that duplication would create a serious level of confusion and unnecessary burdens on businesses. We should support legitimate businesses, rather than hamper them with overlapping regimes. I therefore hope that noble Lords will agree with the government Motion to disagree with the amendment from Report.

4.15pm

I turn finally to the Government’s Motion H, with which I will address Motion H1, tabled by the noble Lord, Lord Faulks. As I have discussed with the noble Lord, the Government’s position on this issue is that his amendments would be a significant departure from the loser pays principle, and therefore not something that should be rushed into without careful consideration. The effect that I believe he intends them to have would mean that the state could come after someone’s assets and lose the case, and then the individual—who will not necessarily be a Russian oligarch—would be left with a potentially ruinous legal bill. That would be the case even where the court decides that the property is not derived from unlawful conduct, although, as drafted, the noble Lord’s amendment would, in effect, achieve the opposite.

Furthermore, there is not the evidence that such changes would help achieve their intended aim of protecting enforcement budgets and increasing the number of civil recovery cost orders. There have been no adverse cost rulings against an enforcement authority carrying out this type of civil recovery in the past six years. Costs are just one of the many factors that determine whether law enforcement will take on a case. For example, the evidence available to pursue a case, particularly where evidence is required from overseas, often proves more vital to an operational decision.

I appreciate the noble Lord’s intentions behind Motion H1, which I think is intended to address some of these concerns, but I am far from convinced that it does. This amendment is not only a significant departure from the loser pays principle without clear benefits but it appears to make the starting point that the enforcement agency normally pays the costs to the respondent, regardless of the outcome of the case, unless the court decides that it is not in the interests of justice. Introducing legislation on costs that starts with the enforcement agency paying the respondent’s costs would swing the balance in favour of the respondent. This would expose the law enforcement agency to liability for costs even where it has won its case. It is not clear to me whether this was intended by the noble Lord, which in itself shows just how complex this area of law is.

Additionally, this would be a limited reform to economic crime offences, whereas the civil recovery regime applies to all kinds of unlawful conduct. Distinguishing which aspect of the underlying unlawful conduct was economic crime—for example, money laundering—and which was some other type of offence will be unworkable for law enforcement and the courts. In fact, the drafting of the amendment assumes that the property is recoverable, because it requires that the property has been obtained through economic crime. That suggests that a law enforcement agency must have satisfied a court that it derives from unlawful conduct, so it may well have won its case and recovered that property. However, the default would be that the agency pays the respondent’s costs. I do not think that was the intention behind the amendment.

I am keen to reiterate that civil recovery is a powerful tool that can result in the permanent depravation of someone’s home. The law in this area is well developed but relies on the discretion of the court to award costs, rather than the intervention of government to entirely remove the liability for costs of just one party except in certain circumstances. There are already a number of ways in which an enforcement agency’s liability to legal costs can be protected under the Civil Procedure Rules in England and Wales. For instance, Rule 44.2 gives the court discretion as to the payment of costs by either party, including whether they are payable to another party, the amount and when they are payable. In addition, a cost-capping order can be applied for under Rule 3.19 that limits any future costs that a party may recover under a later costs order. If we are to introduce further legislation, we must consider what gap this is trying to fill.

However, the Government recognise the strength of feeling on this issue and the potential merits in bolstering the system for all of civil recovery, not only economic crime offences. The Government would like the time, and more input from those affected, to be able to consider this issue further. That is why Motion H imposes a statutory commitment on the Government to review the payment of costs in civil recovery cases in England and Wales by enforcement authorities and to publish a report on their findings before Parliament within 12 months. This review will look in detail across all the available evidence, take account of key stakeholder views, analyse any potential legal issues and provide a view on whether and how any cost protection should be implemented. Given the need to ensure that any changes in this area are evidenced and workable, and the evident complications that can arise from rushed legislative changes, I urge noble Lords to therefore support government Motion E. I beg to move.

Motion E1 (as an amendment to Motion E)

Moved by

Lord Garnier

Leave out from leave out from “House” to end and insert “do disagree with the Commons in their Amendment 151A and do propose Amendments 151B and 151C in lieu—
151B: As an amendment to Lords Amendment 151, in subsection (1), after first “body” insert “which is a non-micro organisation or which is a large organisation (see sections (Section (Failure to prevent fraud): non-micro organisations), (Section (Failure to prevent fraud): large organisations) and (Large organisations: parent undertakings))”

151C: After Clause 180, insert the following new Clause—

“Section (Failure to prevent fraud): non-micro organisations

For the purposes of section (Failure to prevent fraud)(1) a relevant body is a “non-micro organisation” only if the body satisfied two or more of the following conditions in the financial year of the body (“year P”) that precedes the year of the fraud offence—

Turnover

More than £632,000 and less than £36 million

Balance sheet total

More than £316,000 and less than £18 million

Number of employees

More than 10 and less than 250.

(2) For a period that is a relevant body’s financial year but not in fact a year, the figure for turnover must be proportionately adjusted.

(3) In subsection (1) the “number of employees” means the average number of persons employed by the relevant body in year P, determined as follows—

(a) find for each month in year P the number of persons employed under contracts of service by the relevant body in that month

(whether throughout the month or not),

(b) add together the monthly totals, and (c) divide by the number of months in year P.

(4) In this section—

“balance sheet total”, in relation to a relevant body and a financial year—

(a) means the aggregate of the amounts shown as assets in its balance sheet at the end of the financial year, or

(b) where the body has no balance sheet for the financial year, has a corresponding meaning;

“turnover”—

(a) in relation to a UK company, has the same meaning as in Part 15 of the Companies Act 2006 (see section 474 of that Act);

(b) in relation to any other relevant body, has a corresponding meaning;

“year of the fraud offence” is to be interpreted in accordance with section (Failure to prevent fraud)(1).

(5) The Secretary of State may by regulations modify this section (other than this subsection and subsections (6) and (8)) for the purpose of altering the meaning of “non-micro organisation” in section (Failure to prevent fraud)(1).

(6) The Secretary of State may (whether or not the power in subsection (5) has been exercised) by regulations—

(a) omit the words “which is a non-micro organisation or” in section (Failure to prevent fraud)(1), and

(b) make any modifications of this section (other than this subsection) that the Secretary of State thinks appropriate in consequence of provision made under quotegraph (a).

(7) Before making regulations under subsection (5) or (6) the Secretary of State must consult—

(a) the Scottish Ministers, and

(b) the Department of Justice in Northern Ireland.

(8) Regulations under subsection (5) or (6) may make consequential amendments of section (Failure to prevent fraud: minor definitions).””

Lord Garnier (Con)

My Lords, I begin by referring to my interest as a barrister in private practice and informing the House that that practice includes economic and corporate crime.
I wish to acknowledge the genuine attempts of my noble friends on the Front Bench to understand my concerns, expressed over a good many years and, more particularly, during the passage of this Bill, not only in this Chamber and in Grand Committee but in meetings with them and their officials, most recently on Friday. My noble friend Lord Sharpe has had to bear the brunt of my concerns, but he has never dissembled nor lost his sense of humour, even when listening to my jokes. It is regrettable that he has not been permitted any discretion by Ministers in the other place and has had to stick to his instructions on a matter that has nothing to do with party politics or manifesto commitments.

I know that your Lordships are interested only in creating good, coherent and comprehensible criminal law that meets the needs of the modern economy and is in line with public opinion and morality. Thanks to the support of your Lordships’ House—I am grateful to noble Lords of all parties and none—the Bill we are dealing with was altered on Report to delete the SME exemption from the failure to prevent fraud offences regime, while money laundering was added to the failure to prevent regime introduced by the Government; by that, I mean the substantive money laundering offences under Part 7 of the Proceeds of Crime Act 2002, not to be confused with the due diligence requirements under the more recent money laundering regulations.

Last Monday, despite the powerful arguments of my right honourable and learned friends Sir Jeremy Wright and Sir Robert Buckland, the other place refused to extend the proposed new offence of failure to prevent fraud to 99.5% of the corporate economy and deleted money laundering from the failure to prevent regime. Having won the Division in the other place last week, the Government now seek to sustain that position in your Lordships’ House today. I accept that democratic politics is as much about arithmetic as it is about sound arguments; if a majority prefers to do something unsatisfactory, whether or not it has listened to the arguments and the evidence in support of them, that is what will happen. Even as they stand, these limited proposals are well overdue and have been in the making since 2010.

In the spirit of compromise, those of us who voted for the extension of failure to prevent to money laundering on Report have agreed not to press the money laundering extension today. We happen to think that it should be extended to money laundering—I happen to think also that there are other substantive offences, such as those listed in the deferred prosecution agreements schedule to the Crime and Courts Act 2013, that could be included—but, on the basis that the best is often the enemy of the good, and in an attempt to meet the Government a lot more than half way down the road, we will not take that matter further on this occasion. However, I invite the Government and the other place to reconsider the SME exemption, subject to a further concession to exempt micro-businesses; I hope that this will allay the fear, albeit unfounded, that extending the failure to prevent regime further than the Bill currently permits will stifle small businesses. Absent any agreement from my noble friend the Minister, I will seek leave to test the opinion of the House at the appropriate time.
On Report, I spoke in support of a number of amendments or proposed new clauses to the Bill—a Bill which has much to recommend it, even if it has been slow to arrive. The defects that I intended to correct related to the failure to prevent regime. No one needs reminding of this but that regime is not a new provision stealthily added to the criminal law in the past few months by an eccentric Back-Bench Peer. It was first introduced into our criminal law with cross-party support—indeed, without a vote—via the Bribery Act 2010, which began its passage through Parliament under Gordon Brown’s Labour Government and was enacted under David Cameron’s coalition Government. Failure to prevent bribery under Section 7 of the 2010 Act, supported by all three major parties, as well as the Cross Benches and others, is now a tried and tested criminal offence, with an easily understood and practical defence for companies and partnerships that I and many other practitioners have not found difficult to advise on or to apply in particular cases, whether we have been acting for the Serious Fraud Office or for defendant companies.

The objective of the 2010 Act was and is not to bring the full force of the criminal law to bear on well-run commercial organisations that experience an isolated incident of bribery on their behalf. Therefore, to achieve an appropriate balance, Section 7 provides a full defence. This is in recognition of the fact that no bribery prevention scheme will be capable of always preventing bribery. However, the defence was also included to encourage commercial organisations to put procedures in place to prevent bribery by persons associated with them. The failure to prevent bribery offence is in addition to, and does not displace, liability that might arise under Sections 1 and 6 of the Act for direct bribery here or of a foreign public official where the commercial organisation itself commits an offence.

That was well understood as the Act progressed through Parliament and I hope it is well understood now. So too are the special nature and parameters of the statutory defence of “adequate procedures”. Note that the defence requires “adequate procedures”, not perfect procedures. There is no practical difference between “adequate procedures” in the 2010 Act and “reasonable procedures” in the Criminal Finances Act 2017 and in this Bill. The law requires no more than a proportionate approach to the facts relevant to the company or partnership in question.

The alarmist suggestion that a failure to prevent fraud offences regime that does not include SMEs—that is, it does not exempt 99.5% of companies and partnerships—will impose unbearable cost burdens running into multiple billions of pounds on those organisations is absurd. There will be some cost but since the guidance under the 2010 Act has been available since 2011, it is well understood and can easily be adapted to the failure to prevent offences under this Bill. The Bribery Act guidance will easily translate to fraud offences and the sooner it is published, the better. The best estimates are that SME companies will need to spend between £2,000 and £4,000 to prepare themselves and some will need to spend nothing because of their low risk profile. These costs are a legitimate business expense but, to put this in proportion, Lesley O’Brien, a director of Freightlink Europe, said in June 2022 that it costs £20,000 per year to run one heavy-goods vehicle. No sensibly run business should be trading abroad without taking proportionate precautionary steps to avoid the risk of bribery or fraud committed by its associates.

In the guidance to the 2010 Act, published in 2011 by my noble friend Lord Clarke of Nottingham, the then Justice Secretary, he explained that “procedures” is used to embrace bribery prevention policies and the procedures that implement them. Policies articulate a commercial organisation’s anti-bribery stance, show how it will be maintained and help create an anti-bribery culture. They are therefore a necessary measure in the prevention of bribery but they will not achieve that objective unless they are properly implemented. Adequate bribery prevention procedures, I repeat, ought to be proportionate to the bribery risks that the organisation faces. The same applies to the prevention of fraud offences and, where the guidance refers to “bribery”, one could in the context of this Bill substitute “fraud”.

The guidance says:

“To a certain extent the level of risk will be linked to the size of the organisation and the nature and complexity of its business, but size will not be the only determining factor. Some small organisations can face quite significant risks, and will need more extensive procedures than their counterparts facing limited risks. However, small organisations are unlikely to need procedures that are as extensive as those of a large multi-national organisation. For example, a very small business may be able to rely heavily on periodic oral briefings to communicate its policies while a large one may need to rely on extensive written communication … The level of risk that organisations face will also vary with the type and nature of the persons associated with it. For example, a commercial organisation that properly assesses that there is no risk of bribery”—

substitute “fraud”—

“on the part of one of its associated persons will, accordingly, require nothing in the way of procedures to prevent bribery”—

substitute “fraud”—

“in the context of that relationship. By the same token the bribery”—

substitute “fraud”—

“risks associated with reliance on a third party agent representing a commercial organisation in negotiations with foreign public officials may be assessed as significant and accordingly require much more in the way of procedures to mitigate those risks. Organisations are likely to need to select procedures to cover a broad range of risks but any consideration by a court in an individual case of the adequacy or reasonableness of procedures is necessarily likely to focus on those procedures designed to prevent bribery or fraud on the part of the associated person committing the offence in question”.

4.30pm

It was not suggested by the Government then that the Section 7 offence or the failure to prevent facilitation of tax offences would not apply to SMEs or small partnerships. It is frankly laughable that we are, on the Bill’s current wording, about to exempt 99.5% of the corporate economy.

As I have indicated, Parliament criminalised the failure to prevent the facilitation of tax evasion via the Criminal Finances Act 2017. It was the next logical step in the extension of the failure to prevent regime and Parliament passed the relevant provisions without opposition. Of course, a number of professional lobbying organisations—paid for by those who thought that amending the law would be commercially inconvenient—approached the Government and parliamentarians, as they had in 2010, but their submissions did not attract support because most right-thinking people, in and out of government, recognised that things needed to change and that there was no good reason to accede to these narrow commercial interests. Similar attempts were made to prevent the corporate manslaughter and health and safety legislation in the early years of this century, on the basis, as now, that it would create unacceptable burdens on business. No one now sensibly countenances unsafe systems of work.

There have, within living memory, been those who thought it appropriate to prevent health and safety at work laws because they would create an unacceptable business cost. It was suggested that the deaths or injuries of scaffolders, ferry crews or steelworkers were rare and that, in any event, the proposed laws would be an unnecessary burden on business. The Government, it seems, have been persuaded by a couple of lobbying organisations—no doubt legitimately earning their fees by making the same arguments rejected in 2010 and 2017—that the laws we have unanimously passed in the past 13 years were wrongly enacted and should not be replicated in this Bill.

Let us be clear: there is no SME exemption in the Bribery Act or in the Criminal Finances Act, and Parliament did not think there should be. The criminal law applies to all and if the defence of adequate or reasonable procedures is available, there is no conviction—and often no prosecution. What other criminal offence defines liability based on the size of the defendant? A small thief is every bit as much a thief as a tall one, and as liable under the law if the evidence and the public interest in their prosecution are made out. The public interest in requiring a company with a small turnover and only a few employees to prevent its associates committing fraud for its benefit is no lesser than in a far larger company. To limit the failure to prevent fraud offence to corporates that have at least £36 million in turnover, £18 million in assets and more than 250 employees is both absurd and incoherent. The Government have been persuaded by these lobbyists that my amendment to make all companies and partnerships equal before the law would create an unacceptable burden on business—it will not. When I last looked, we make laws through Parliament, not by taking dictation from lobbyists.

Let me help my noble friend the Minister. Under the law of England and Wales, and Northern Ireland, we exempt children under the age of 10 from criminal responsibility; in Scotland I believe it is children under the age of 12. The child could have committed an offence in London for which, had they been aged over 10, they could have received a lengthy period in secure accommodation. For entirely civilised and sensible public policy reasons we do not prosecute children under the age of 10. On that basis, and by that stretched analogy, I propose that we should exempt only the very smallest and newest commercial organisations—micro-businesses—from the failure to prevent regime. You will find the definition of a micro-business by looking at page 18 of the Marshalled List and Amendment 151C, which gives the figures for non-micro-organisations. If you imagine a company that has smaller figures for turnover, balance sheet total or number of employees, you will work out what a micro-business is.

As Barry Vitou, a highly respected white-collar crime solicitor at London solicitors Holman Fenwick Willan, pointed out in an article in City A.M.last Friday, 8 September, by exempting SMEs from the failure-to-prevent regime, we will, ironically, be creating an unintended but foreseeable consequence that could lead to unfairness. Criminal liability, under the identification principle, is much easier to establish in small companies than in large conglomerates. If they are exempted from the failure-to-prevent regime, prosecutors will be tempted to prosecute them for a direct fraud. So we are robbing them of their defence of having put in place reasonable anti-fraud procedures.

I gently submit that the argument I make is not anti-Conservative. Indeed, this whole discussion is not a party-political argument, but one about making good, coherent and sustainable criminal law in a pragmatic way. After all, it was a Conservative-led Government who enacted Section 7 of the Bribery Act and a Conservative Government who enacted the 2017 Act. Surprising as it may seem to my noble friends, I am not a socialist dedicated to the downfall of capitalism, but a Tory interested in the growth of good and honest business. I therefore urge my noble friends on my own government Front Bench to recognise the compromises that I have spoken to and to accept them with the willingness with which they are offered. I beg to move.

Lord Faulks (Non-Afl)

My Lords, I will take this opportunity to speak to my Motion H1 in the same group, which proposes, as an amendment to Motion H, to

“leave out from ‘161’ to end and insert ‘, do disagree with the Commons in their Amendment 161A in lieu, and do propose”

the amendment listed at page 24 of the Marshalled List.

However, I should explain that there is a mistake in this amendment, which is no doubt my fault. There were various communications between me and the Public Bill Office on Friday afternoon, in order to get the amendment in the appropriate shape, and a “not” features in the wrong place. I will explain where the omission is and why I submit that it does not ultimately matter.

The intention behind this amendment, under “Civil recovery: costs of proceedings”, was to try to give some protection to the agencies in the case of adverse costs orders made against them. This amendment was passed by your Lordships’ House; it went back to the House of Commons last Monday and was rejected.

My amendment is a softening of the original amendment put down by the noble Lord, Lord Agnew, and me—softening because it had to be softened somewhat to comply with the rules. Proposed new subsection (2) should read:

“The court should not normally make an order that any costs of proceedings relating to a case to which this section applies … are payable by an enforcement authority to a respondent or a specified responsible officer in respect of the involvement of the respondent or the officer in those proceedings, unless it would be in the interests of justice”.

So the “not” should be inserted earlier and removed later on.

The amendment that was drawn to my attention today did not entirely reflect my intention. I have been in communication with the Public Bill Office as to whether it was possible to amend it. Although it is possible to table a manuscript amendment—see paragraph 8.172 of the Companion—it is inelegant and I am told that the better course is to explain the purpose of the amendment. Were the House to be in favour of the amendment, the matter can be amended at the House of Commons stage. That appears to be the position.

Now perhaps I can come on to the merits, as I see them, of the amendment. The Minister says that my amendment—which is really not much more than a nudge; it does not compel the court to do anything in relation to costs—is intended to prevent any disincentive being provided to the agencies, who may seek to recover the proceeds of crime, often against very well-resourced defendants. Unexplained wealth orders, brought in by the Criminal Finances Act, were to be a powerful weapon in seeking to obtain recovery, ultimately, from those whose wealth was not easily explicable. The agency tried on one occasion to do that and was unable to surmount the hurdle the court said was appropriate in these cases—and, indeed, which Parliament said was appropriate. The result was an order of £1.5 million-worth of costs against the agency.

Perhaps unsurprisingly, there has not been great enthusiasm to take up unexplained wealth orders on the part of the Serious Fraud Office. So your Lordships’ House, during the last economic crime Bill proceedings, very sensibly produced an amendment that, broadly speaking, reflected the amendment we are now discussing in relation to unexplained wealth orders, so as not to provide such a disincentive to the authorities seeking to obtain one of these orders. The rationale behind my amendment is precisely the same. The Minister says that this offends the “loser pays” principle. He is right that the starting point in most civil cases is that the loser pays—for very good reason. If A brings a claim against B that proves to be unjustified, and B has been put to expense thereby, why should B not recover his or her or its costs from A?

However, that rule is subject to many exceptions, as all those who are familiar with the law will know. For example, on some occasions the court orders each side to bear its own costs, having regard to the facts. Sometimes there will be no orders as to costs; sometimes there will be issue-based costs. There will be a variety of different orders to meet the justice of a particular case. Sometimes Parliament even specifically weights the cost in one particular direction. An egregious example is Section 40 of the Crime and Courts Act, which is a controversial issue but shows that Parliament is perfectly capable of deciding who should pay the costs in particular circumstances.

What will happen if this particular provision becomes part of our law? I suggest what will happen is that a judge looking at the end of a case will see that Parliament has decided that normally there should not be an order that the agency pays the costs. However, if the agency quite unreasonably, without proper evidence, seeks to pursue somebody for the proceeds of crime, there is of course the saving provision—“in the interests of justice”—which is part of our amendment. So a court is perfectly able, as it will always do, to look at the particular circumstances of the case and decide that, in this case, the agency has been inappropriately pursuing somebody, seeking a remedy when they should not have done. But this is a nudge towards the judge, and a very qualified exception to the “loser pays” principle.

It is, however, an important amendment. Those giving evidence towards the Bill Committee included Bill Browder, who may be well known to your Lordships for his particularly vigorous pursuit of justice in this particular area, and representatives of the Serious Fraud Office. I would be interested to know from the Minister what the approach of the agencies is to this. If he tells me firmly that they do not want this power, that is of course a powerful argument. It would be somewhat at odds with the evidence and the information I have, but I do not have a complete and total understanding of what their approach should be.

It seems to me that someone running the Serious Fraud Office or the NCA, when deciding whether or not to pursue somebody, would bear very much in mind their budget and the cost consequences of taking a particular course of action. If they knew that there was a degree of protection—and that is all this is, a degree of protection—provided in this, it would act as much less of a disincentive. If they thought that, should they fail to recover what they thought they were entitled to, there would be a very heavy hit on their budget, it might mean that they would not do so, which might be contrary to the interests of justice.

4.45pm

The Minister quite rightly says that it is complicated, but I suspect that we can trust our judges on this. With great respect to him, the Government’s response is that we should have a report. During the debate in the other place on Monday, when discussing the problem that I have outlined, the former Lord Chancellor, Sir Robert Buckland MP, said:

“We know that it is a problem. We know that it is a disincentive to the bringing of civil proceedings under the Proceeds of Crime Act 2002. We should just get on with it. The particular rules and proposals about costs are well reflected in other parts of legal procedure and other types of proceedings, so this is nothing new. I think that it is time that we grasped the nettle rather than having yet another report”.—[Official Report, Commons, 4/9/23; col. 108.]

Who—which stakeholders, as the Government are wont to call them—do we seek to involve? I dare say that those against whom these orders might be sought will be reluctant to have this amendment as part of the statute. Are they stakeholders? As to the agencies, I would need convincing that they would not be to some considerable extent assisted by this amendment. I am not sure that a report would help.

I respectfully submit to your Lordships’ House—and I will be testing the opinion of the House on this—that this amendment, once tidied up, would provide proper assistance to the agencies as well as proper protection, and would none the less provide an appropriate safety valve in case of circumstances where justice needs to be done.
Lord Agnew of Oulton (Con)

My Lords, I rise briefly in support of my noble friend Lord Faulks on this amendment. I am particularly grateful to him; I was involved in the earlier amendments, but I realised that it needed a premier division lawyer rather than a second division entrepreneur to get this through.

In our discussion with Ministers, we were often told that the enforcement agencies did not want this; that seemed disingenuous to me. I now have some information. For example, law enforcement agents have shown a strong appetite for cost protection and civil recovery. The chief capability officer of the Serious Fraud Office told the economic crime Bill committee that the SFO would like to see this, while the head of the National Economic Crime Centre told the same committee that they found cost protection “an attractive proposal”. I do not think that is a searing insight. Spotlight on Corruption has identified 60 high-risk cases, with the potential of £1 billion of frozen assets, and the chilling effect is palpable among them.

I respectfully disagree with the Government on this. I am grateful to my noble friends the Ministers who have spoken several times to all of us, but I think they are on the wrong side of logic.

Baroness Noakes (Con)

My Lords, I have some very real concerns about the impacts of the new failure to prevent offence on small and medium-sized entities. If my noble and learned friend Lord Garnier’s Motion E1 is agreed to, I think it could be very significant. I believe that the other place was wise to restrict the offence to larger companies only. Setting the threshold at the micro-entity level would still leave very many small and medium-sized entities within the scope of the offence.

I did try to find out how many companies would be affected. My noble friend the Minister said 450,000 companies would be brought within the net of the offence. According to Companies House statistics, around 3.1 million active companies filed accounts last year. Of those, 1.6 million were for micro-entities, and would therefore be excluded, but 1.4 million were for small companies that took advantage of the audit exemption. That, very broadly, is the group of companies that would benefit from the changes made by the other place; it is obviously rather more than 450,000. Whatever the number, there will certainly be regulatory costs for those companies, whether 450,000 or 1.4 million. My noble friend the Minister has given his estimate of what those costs will be. I have never placed much faith in estimates made by Governments of the direct costs of regulatory burdens that Governments try to impose. I generally put a multiplier against them to arrive at a more realistic figure.

However, I believe the most important cost is the opportunity cost that is imposed by regulation. Every time a new regulation is imposed, the people who run small businesses have to spend time away from thinking about their core activities, which should be wealth-generating. Every moment spent thinking about whether they have reasonable prevention procedures in place, or implementing those procedures, is a moment spent not thinking about how to grow the business or how to make it more profitable. Large companies have specialists to cope with all this. Small businesses often have no one beyond the proprietor of the business itself, but they are the very people who are supposed to be spending their time growing their businesses, thereby helping the UK economy to grow—and my goodness me, do not we need growth in our economy?

The cumulative effect of incremental regulation on individual businesses is huge, as any small businessman will tell you, but the cumulative opportunity cost for those businesses of missing out on that growth, and the impact that will have on UK plc, simply cannot be ignored when we are looking at any form of legislation that imposes burdens on businesses. I urge noble Lords to accept the pragmatic solution that the other place has put forward.

Lord Hope of Craighead (CB)

My Lords, I am greatly assisted by the correction made by the noble Lord, Lord Faulks; I had great difficulty in understanding the amendment on first reading. Now that he has corrected it, I would like to say from the point of view of a Scots lawyer that there is nothing startling in the proposition that is made. We in Scotland are quite used to the normal routine that law enforcement agencies are not liable in costs for the proceedings that have been taken, probably for the reasons that the noble Lord has clearly expressed.

Lord Fox (LD)

My Lords, we have benefited from two extremely detailed and learned speeches proposing Motions E1 and H1. On Motion E1, I am exercised by the idea that there is an opportunity cost in checking whether you are preventing or causing fraud. That seems to be a strange discussion. The analogy made by the noble and learned Lord, Lord Garnier, with HSE and health and safety, is a good one: yes, it is a cost to make sure that you are doing something safely but it is a much wider benefit. The notion that 95% to 98% of the business community should be allowed not to consider their impact on fraud because that would get in the way of their growth is strange, because that growth would then be predicated on very shaky circumstances. I am not persuaded by the counterarguments, but I have been persuaded strongly by the noble and learned Lord.

Similarly, on the Motion from the noble Lord, Lord Faulks, causing agencies to be too tentative and restricted in how they go about prosecuting people is an important issue. It is clear from what we have heard from the outside world that this gets in the way of prosecutions. It also causes the prosecuting authorities to go for low-hanging fruit—that is, easier propositions—and avoid harder and often more severe prosecutions. That is a chilling effect which we should be worrying about when we look at this issue.

These two important amendments have been trimmed in the light of the rejection of the last set by the House of Commons. Noble Lords and Baronesses on these Benches will be happy to support them, if and when they are moved to a vote.
Lord Coaker (Lab)

My Lords, we have been pleased to support the legislation, which overall we think is very good, and we have said that to the noble Lord, Lord Sharpe. Indeed, the Government have listened, as have all the Ministers on the Bill, and made significant changes. Now we are left with just two amendments, put forward by the noble and learned Lord, Lord Garnier, and the noble Lord, Lord Faulks, which deal with two issues that remain outstanding but are of significant importance and deserve our support and consideration.

I want to reference one or two points made by the noble and learned Lord, Lord Garnier, because he made them particularly well. It is a proportionate and reasonable amendment to ask of the Government. There are all sorts of regulations and legislation—the noble and learned Lord referenced them—to which we say small businesses should be subject to, because we believe that it is the right thing to do and the right climate in which those businesses should operate. When it comes to the failure to prevent, the Government point out that 50% are covered by their legislation, which of course leaves 50% that are not.

Throughout the passage of the Bill, many of us have sought to ensure that the failure to prevent—which is a good step forward—applies, as far as possible, to as many businesses as it possibly can. The noble and learned Lord, Lord Garnier, asked why we would exclude many small businesses when they are not excluded from other legislation that may be seen as a burden. The argument is hollow and does not cut through. For that reason, and because the noble and learned Lord has put forward an amendment that takes into account what was said in the Commons, it deserves our support. Should he put it to a vote, as I think he suggested he would, we will support him.

Similarly, the noble Lord, Lord Faulks, notwithstanding the correction he made to the amendment, brings forward a very important point indeed. One of the great criticisms that is often made about dealing with fraud is that somehow law enforcement agencies are frightened of taking on the people who are committing fraud. I always thought it should be the other way around; the fraudster should be frightened of the law enforcement agency. Yet, for some bizarre reason, it is that way around—that cannot be right. It is not something that any of us want to be the case. Through his amendment, the noble Lord, Lord Faulks, has tried yet again to push the Government to do better and to do more than what is currently in the Bill. His amendment says to the Government, “Surely we should do better”. Indeed, the Treasury itself should be confident in the work of the law enforcement agencies. Some have suggested that those agencies should be indemnified against any costs they may incur.

I go back to two simple points. First is the point in the amendment from the noble and learned Lord, Lord Garnier: why should small businesses be excluded from this legislation, other than the micro-businesses to which he referred, when we do not exclude them from other legislation that we think is important? Small businesses adhere to that legislation in the same way as other businesses. Secondly, the amendment from the noble Lord, Lord Faulks, gives us an opportunity to turn the tables and ensure that, rather than the law enforcement agencies being frightened of costs they may incur in ensuring that fraudsters are brought to book, the fraudsters are frightened. That is why, if the noble and learned Lord, Lord Garnier, and the noble Lord, Lord Faulks, put their amendments to a vote, we will certainly support them.
Lord Sharpe of Epsom (Con)

My Lords, I thank all noble Lords who have spoken in this debate. I will respond relatively briefly; I think I have rehearsed the majority of the arguments widely and frequently, and there is not much point in saying more to some of them. However, the precise point I was trying to make in my opening remarks is, in essence, about proportionality. My noble friend Lady Noakes referred to that extremely eloquently.

My noble and learned friend Lord Garnier oftens points out that 99.5% of business is exempted, but I repeat that this is very much a judgment call because 50% of economic activity is captured. My noble friend Lady Noakes referred to the opportunity cost and the noble Lord, Lord Faulks, suggested that perhaps this is about businesses not checking whether they in some way have the right procedures in place to prevent fraud, but it is not about that. It is about many other factors that do not involve the business at hand, as my noble friend Lady Noakes referred to. Those other burdens are obviously partially financial, but not fully.

5.00pm

My noble and learned friend Lord Garnier referenced the fact that there are different thresholds for this offence in the failure to prevent bribery or the criminal evasion of tax, to give two examples. The noble Lord, Lord Coaker, also referred to that. We considered the threshold in the light of the nature of fraud and the need to support struggling small businesses. The Law Commission identified a disparity, as it is easier to prosecute smaller organisations under the current law, which this failure to prevent offence will address. The new offence is less necessary for smaller firms. It is easier to prosecute individuals and businesses for the substantive fraud offence; it would therefore be disproportionate to impose the same burdens on them. As I pointed out in my opening remarks, the Bill also includes a power to amend the threshold via secondary legislation in future if evidence suggests that such a change would be appropriate.

I go back to the financial burdens. As I say, the Government recognise the need to consider the cumulative compliance costs for small and medium entities across multiple government regulations, rather than seeing these fraud measures in isolation. The cost of extending the measures to cover SMEs is significant: up to £4 billion from £487 million. The cost of reducing the threshold to cover only micro-entities, I repeat, would also be vast. It would increase the one-off cost on businesses from around £500 million to £1.5 billion. The annual recurrent costs would increase from £60 million to more than £192 million. I am afraid that the Government’s position has not changed; we regard this as disproportionate.

I thank the noble Lord, Lord Faulks, for his clarification on his amendment. He has partially provided an answer as to why we need a review, because it is a complex area of law. Looking at these things and amending them at speed can obviously have unintended consequences. We do not believe that there has been a chilling effect. No agency has told us that this is the case and, as I explained, it is the evidential burden that proves more of a barrier to prosecuting some of these cases, which are, by their very nature, exceptionally complex.

We worked with law enforcement in putting together the Bill, and the content included many of its key requests such as powers on crypto assets, changes to corporate criminal liability, more accurate Companies House data and greater pre-investigation powers for the SFO. All those agencies will have significantly more tools in their armoury to go after the people who are committing economic crime and, as I say, no agency has told us that this particular lack has a chilling effect.

The noble Lord, Lord Faulks, asked about unexplained wealth orders. They are an investigatory tool for law enforcement, so do not directly result in individuals being permanently deprived of their assets. UWOs are exceptional investigations that can be used only against PEPs or those reasonably suspected to be involved in serious crime, where there are reasonable grounds to suspect that they have assets that are disproportionate to their legally obtained income or have been obtained through unlawful conduct. UWOs can apply only to property that is more than £50,000 and are often used in complex, lengthy cases. Given this and the other factors that I have set out, it was deemed justified to introduce cost protection in UWO cases—but, as the noble Lord pointed out to me earlier today, they are used a lot less frequently than in other cases. Having said all that, I agree that it may well be in the interests of justice to look at this again, which is why we would like to do the review and report back to Parliament in 12 months. That is the right way to do it.

I urge all noble Lords to note the improvements that the Government have made to the Bill and I thank them for their extensive engagement on all these and other matters. We believe that these provisions strike the right balance between promoting economic growth and the all-important job of tackling economic crime, so I ask noble Lords to consider that when voting.

Lord Garnier (Con)

My Lords, I wish to press my Motion E1 and test the opinion of the House.
[Division 1
Division on Motion E1
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Motion E1 agreed.
Held on 11 September 2023 at 5.04pm](/Lords/2023-09-11/division/E876136D-DD0B-440C-B642-C72E228C6021/LordsChamber?outputType=Names)
5.15pm

Motion F

Moved by

Lord Sharpe of Epsom

That this House do agree with the Commons in their Amendments 153A, 153B and 153C.

153A: In subsection (1), after “(Failure to prevent fraud)(1)” insert “and (2)”

153B: In subsection (6), after “(Failure to prevent fraud)(1)” insert “and (2)”

153C: In subsection (7)(a), after “(Failure to prevent fraud)(1)” insert “and (2)(c)”

Motion F agreed.

Motion G

Moved by

Lord Sharpe of Epsom

That this House do not insist on its Amendment 159, to which the Commons have disagreed for their Reason 159A.
159A: Because the law already makes sufficient provision in relation to the prevention of money laundering.

Motion G agreed.

Motion H

Moved by

Lord Sharpe of Epsom

That this House do not insist on its Amendment 161 and do agree with the Commons in their Amendment 161A in lieu—

161A: Page 172, line 44, at end insert the following new Clause—

“Report on costs orders for proceedings for civil recovery

Report on costs orders for proceedings for civil recovery

(1) The Secretary of State must assess whether it would be appropriate to restrict the court’s power to order that the costs of proceedings under Chapter 2 of Part 5 of the Proceeds of Crime Act 2002 are payable by an enforcement authority and, if so, how.

(2) In carrying out the assessment, the Secretary of State must consult such persons as the Secretary of State considers appropriate.

(3) The Secretary of State must publish and lay before Parliament a report on the outcome of the assessment by the end of the period of 12 months beginning with the day on which this Act is passed.

(4) In this section “the court” means the High Court in England and Wales.”

Motion H1 (as an amendment to Motion H)

Moved by

Lord Faulks

Leave out from “161” to end and insert “, do disagree with the Commons in their Amendment 161A in lieu, and do propose Amendment 161B in lieu—

161B: After Clause 187, insert the following new Clause—

“Civil recovery of proceeds of crime: costs of proceedings

Civil recovery: costs of proceedings

After section 313 of the Proceeds of Crime Act 2002 insert—

“313A Costs orders

(1) This section applies to proceedings brought by an enforcement authority under Part 5 of the Proceeds of Crime Act 2002 where the property in respect of which the proceedings have been brought has been obtained through economic crime.

(2) The court should normally make an order that any costs of proceedings relating to a case to which this section applies (including appeal proceedings) are payable by an enforcement authority to a respondent or a specified responsible officer in respect of the involvement of the respondent or the officer in those proceedings, unless it would not be in the interests of justice.”””

Lord Faulks (Non-Afl)

My Lords, I wish to test the opinion of the House.
[Division 2
Division on Motion H1
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Motion H1 agreed.
Held on 11 September 2023 at 5.16pm](/Lords/2023-09-11/division/117F8691-F757-4BA9-8336-F00BE3499F3E/LordsChamber?outputType=Names)