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Why Corporate Accountability for Criminal Behavior Makes Due Diligence More Crucial Than Ever
The U.K. Economic Crime and Corporate Transparency Act 2023 (“the Act”), passed in October 2023, strengthens the U.K. Government’s efforts to compel companies to weed out fraud, corruption, and other criminal activity. The Act, aimed in part to prevent “companies and others from carrying out unlawful activities, or facilitating the carrying out by others of unlawful activities” by promoting “corporate transparency and fight fraud, money laundering and other crimes in the UK’s corporate, real estate and business sectors,” is a significant move by U.K. authorities to protect consumers and corporate victims.
One of the key aspects of the Act is broadening the scope of who can be held criminally liable for corporate criminal and fraudulent activities. Now, prosecutions can extend beyond decisions made by “senior manager[s]” and include acts by “associated person[s],” such as “employees, agents, subsidiaries and any person who otherwise performs services for or on behalf of the company, as well as employees of subsidiaries of a company.” Additionally, the Act’s focus on “large” organizations, and its extraterritorial reach when the criminal act “causes harm in the UK,” serves as a powerful tool against corporate corruption and illegal behavior.
The passage of the Act in the U.K. continues a pattern of governments seeking to strengthen the rule of law and hold corporations accountable. In the United States, the Department of Justice has placed new emphasis on enforcing “individual responsibility” in the corporate arena as outlined by Deputy Attorney General Lisa Monaco in what is now known as the “Monaco Memo.” While the Act targets organizations rather than individuals, both governments are taking measures to prevent companies from shielding employees from the consequences of their actions and avoid responsibility.
Increasing Corporate Accountability by Increasing Responsibility
Whether it is the Act or the Monaco Memo, the U.K. and U.S. governments are encouraging and incentivizing corporations to develop, strengthen, and enforce compliance programs to defend themselves. These pro-active steps, including showing that “reasonable fraud prevention procedures” were in place can serve as “mitigating” factors when it comes to enforcement/prosecution. In the case of the Act, it will reportedly “be a defence to the failure to prevent economic crimes offence if the organisation can prove that it had reasonable prevention procedures in place.” Included in these “reasonable procedures” is the process of “due diligence.”
This amplified focus of governments on corporate malfeasance places additional importance on companies to conduct proper due diligence on who they are hiring and partnering with. The focus of companies can no longer be limited to c-suite and other executives but must also include third party consultants and advisors. These parties whose decisions and actions can now open an organization up to liability, and in the United Kingdom an “unlimited fine” if their actions are deemed criminal, can now be viewed as a threat to the company if not properly vetted. This due diligence cannot be a cursory glance into a company, a consultant, or a contractor as a means to move forward in a working relationship, but an in-depth investigation to understand who they are partnering with and ensure that partnerships align with the company’s long-term interests. Proper due diligence requires focused public records research that scans for criminal history, civil litigation, judgments, scandal, allegations, reputation, and other indicators that may show the partner company, third-party consultant, vendor, or contractor has a pattern of unethical behavior that may pose a risk to the company. In some cases, it may also require moving beyond open sources to identifying knowledgeable human sources to speak with in an effort to determine whether a partnership is in the best interest of the company.
The Key Takeaway
Governments are sending a clear message: they’re serious about prosecuting corporate wrongdoing when it crosses into criminal territory. Companies should heed these warnings and understand that proper due diligence on the front end, before engaging in a business relationship to understand who you are working with, can protect companies from prosecution, financial penalties, reputational damage, or worse.
Corporations that lack the in-house expertise and/or bandwidth to conduct the kind of thorough due diligence required to protect against potential risks should seek assistance. Hiring an expert investigations consultant, like Guidepost, ensures a deeper level of scrutiny, helping safeguard your company from legal exposure and mitigate potential risks
Ian Pillinger
Director
Ian Pillinger is a Director in the New York office of Guidepost Solutions. A former state prosecutor and federal government official, Mr. Pillinger focuses his work at Guidepost on complex and multi-jurisdictional investigations, compliance, and security matters for organizations and individuals.
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