Why corporate responsibility for criminal conduct makes due diligence more important than ever | Guidepost Solutions LLC

The UK Economic Crime and Corporate Transparency Act 2023 (“the Act”), passed in October 2023, reinforces the UK government’s efforts to compel companies to combat fraud, corruption and other criminal activities. The Act, which aims, among other things, to “prevent companies and others from carrying out unlawful activities or facilitating the carrying out of unlawful activities by others” by “promoting corporate transparency and combating fraud, money laundering and other crime in the UK corporate, property and business sectors”, is an important step by the UK authorities to protect consumers and corporate victims.

One of the most important aspects of the law is the expansion of the scope of criminal liability for criminal and fraudulent activities of companies. Prosecutions can now extend beyond decisions made by “senior managers”.[s]” and include actions by “associated persons[s]”, such as “employees, agents, subsidiaries and any person otherwise providing services for or on behalf of the company, and employees of subsidiaries of a company.” Furthermore, the Act’s focus on “large” organizations and its extraterritorial reach where the offence “causes harm in the United Kingdom” is an effective tool against corruption and illegal conduct in companies.

The passage of the law in the UK continues a pattern of governments seeking to strengthen the rule of law and hold companies accountable. In the United States, the Justice Department has placed a new emphasis on enforcing “individual responsibility” in the corporate sphere, as outlined by Deputy Attorney General Lisa Monaco in the document now known as the “Monaco Memo.” Although the law is aimed at organizations rather than individuals, both governments are taking steps to prevent companies from shielding their employees from the consequences of their actions and evading responsibility.

More responsibility through more responsibility

Whether it is the Act or the Monaco Memo, the UK and US governments encourage and incentivise companies to develop, strengthen and enforce compliance programmes to protect themselves. These proactive steps, including demonstrating that “reasonable fraud prevention procedures” were in place, can serve as a “mitigating” circumstance if enforcement/prosecution occurs. In the case of the Act, it is intended to be “a defence to failure to prevent financial crime if the organisation can demonstrate that it has put in place adequate prevention procedures.” Among these “reasonable procedures” is the process of “due diligence”.

This increased focus by governments on corporate misconduct makes it even more important for companies to conduct due diligence when hiring and working with them. Companies’ focus can no longer be limited to senior management and other executives, but must also include outside consultants and evaluators. These parties, whose decisions and actions can now make a company liable and, in the UK, result in an “unlimited fine” if their actions are deemed criminal, can now be seen as a threat to the company if not properly vetted. This due diligence cannot consist of a cursory glance at a company, consultant or contractor to advance a working relationship, but of a thorough investigation to understand who they are working with and ensure that partnerships are aligned with the company’s long-term interests. Proper due diligence requires a targeted search of public records, looking for criminal records, civil lawsuits, judgments, scandals, allegations, reputation, and other indicators that may indicate that the partner company, outside consultant, supplier, or contractor has a pattern of unethical behavior that may pose a risk to the company. In some cases, it may also be necessary to go beyond public sources and identify knowledgeable human sources to speak with to determine whether a partnership is in the best interest of the company.

The most important things to take away

Governments are sending a clear message: they are serious about prosecuting corporate misconduct when it crosses criminal boundaries. Companies should take these warnings seriously and understand that doing due diligence up front to understand who you are doing business with can protect companies from prosecution, fines, reputational damage, or worse.

Companies that lack the internal expertise and/or bandwidth to conduct the type of thorough due diligence needed to protect against potential risks should seek assistance. Engaging an experienced investigative consultant will ensure a more thorough review and help protect your company from legal issues and mitigate potential risks.