Corporate Crime In Sport – How The Economic Crime & Corporate Transparency Act Impacts Sports Organisations

By Jim Sturman KC and Jeremy Summers of Osborne Clarke

This article was written for and originally published by LawInSport.And can be viewed at Corporate Crime In Sport: How The Economic Crime & Corporate Transparency Act Impacts Sports Organisations – LawInSport

The Economic Crime and Corporate Transparency Act 2023 (the Act) received royal assent on 26 October 2023. Among its many provisions are changes intended to make it easier to secure the successful prosecution of commercial organisations. The new law appears likely to represent the biggest change to the corporate criminal enforcement landscape for several decades.

The government believes that there is “clear evidence” that corporate structures are being used by criminals to conduct economic crimes such as bribery, fraud and money laundering[1]. Like all business sport is not immune from such practices. For example if a football manager met with an agent to pay a “bung” (vernacular for a “bribe” in any other walk of life) in order to secure the signature of a Player for his Club, it is quite likely that The Bribery Act would be engaged, and it is possible that both the manager and his Club could be prosecuted under the new act. If a sporting organisation’s directors or senior managers agreed with a star player to pay a certain proportion of his or her wages offshore for “image rights” (thereby minimising the star’s tax bill) when there was in fact no lawful basis to pay any sums offshore then the Act would render the Club – and the star – potentially liable for offences of fraud and money laundering[2].

For decades the authorities have been convinced that bribery and tax fraud has been rife in sport and that sport has been used to launder money. Whether or not the old cliches about “bungs’ and “boot money” payments are in fact true in 2023 it is the view of the authors that the Serious Fraud Office (SFO), the National Crime Agency and the Crown Prosecution Service would see a high-profile prosecution of a Club as a momentous prosecution. In addition, the financial penalties – and confiscation orders – made against a Club in the event of a conviction would far outweigh those that could be made against individuals.

This article analyses:

• What the new law does
• How it could impact on the sports industry
• How the risks that the new law presents can be mitigated.

The new law

The corporate failure to prevent fraud offence in the Act, which largely mirrors the failure to prevent bribery offence in the Bribery Act 2010, has been extensively covered[3] by legal commentators but the changes to the “controlling mind” test, which are intended to enable the prosecution of companies for direct criminal conduct are of no less significance and have perhaps to date been less well reported.

Announcing this change during the Act’s passage through parliament Tom Tugendhat, the UK security minister made the following observation:

 “This reform is a major reset that is urgently needed. Our current system for holding corporations liable for conducting crime is based on legislation that has become antiquated. We must adapt to the challenges posed by modern practices and sophisticated criminality.”[4]

Currently, with the exception of the corporate failure to prevent offences and corporate manslaughter offences, it is only possible for a commercial organisation to be held liable for a criminal offence if the individual responsible for the underlying conduct is sufficiently senior within the organisation to represent the directing mind and will of the organisation, often referred to as the “controlling mind” test[5].

Prosecutors in the UK have frequently complained publicly that, in the modern world of complex international business, this test renders it too hard – if not impossible – to prosecute companies because of the difficulty in finding an evidential trail implicating those at the very top of an organisation. This was perhaps most clearly illustrated by the complaints made after the failure of the SFO to prosecute the bank itself in SFO v Barclays Plc[6], where the SFO was unable to adduce any sufficient evidence to find anyone at the highest level of the company had criminal knowledge. No single individual had been the company’s “directing mind and will” for all purposes, nor had there been any delegation to any individual of all the company’s functions.

Whilst prosecutors would no doubt have welcomed the government adopting the American position[7] whereby any employee, no matter how lowly, can confer criminal liability on his or her employer, a halfway house has now been arrived at in the UK with the Act providing that “senior managers” are capable of satisfying the controlling mind test.

Section 196 (1) of the Act provides:

If a senior manager of a body corporate or partnership (“the organisation”) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force, the organisation is also guilty of the offence.

Who is a senior manager?

The definition of a “senior manager”, which is taken from the Corporate Manslaughter and Corporate Homicide Act 2007 is as follows[8]:

“senior manager”, in relation to a body corporate or partnership, means an individual who plays a significant role in—

(a) the making of decisions about how the whole or a substantial part of the activities of the body corporate or (as the case maybe) partnership are to be managed or organised, or

(b) the actual managing or organising of the whole or a substantial part of those activities.

Accordingly, the focus is on the roles and responsibilities of an individual and the level of managerial influence they exert, rather than on their job title. This reflects more modern company structures where directing minds may be operating in various functions of the business.

What offences will this new definition apply to?

Schedule 12 of the Act sets out an extensive list of offences that, if committed by senior managers, would also render the organisation that employs them guilty of the same offence.

The list, which can be amended by the Secretary of State, currently includes the following offences that might be of most relevance to the sports industry:

• Cheating the public revenue (tax evasion).
• Conspiracy to defraud.
• False accounting.
• Fraud (contrary to the Fraud Act 2006).
• False statements by company directors.
• Fraudulent trading.
• Fraudulent evasion of VAT.
• Money laundering.
• Sanctions violations.

Of real significance, in an era of increasing foreign ownership of sports clubs in the UK, if foreign owners or administrators commit any of these crimes abroad, the new offence will enable their organisations to be prosecuted, even if no relevant conduct took place in the UK, provided the conduct would have been criminal in the jurisdiction where it occurred.

If convicted, a company can be subject to an unlimited fine and confiscation of related profits (in addition to any sentences imposed upon the individuals who are also found guilty of the same offence(s)). Confiscation orders[9] after conviction are often draconian, with the concept of “benefit” not necessarily being limited to the “profit” from a crime and a sports organisation with massive turnover would inevitably be exposed to the risk of confiscation orders at a level far higher than, for instance, fines imposed by the Premier League, EFL or UEFA for breach of financial fair play regulations.

As with the failure to prevent bribery and failure to prevent the facilitation of tax evasion offences, the government must publish guidance before the offence comes into force. We anticipate that the new guidance will largely mirror the guidance issued for those offences and be based on the six principles of: proportionality; top level commitment; risk assessment; due dilligence; communication; monitoring and review

Enforcement agencies have been quick to point out the increased firepower that the new law will provide to prosecutors, with Nick Ephrgave QPM, the newly appointed Director of the Serious Fraud Office stating:

“This is the most significant boost to the Serious Fraud Office’s ability to investigate and prosecute serious economic crime in over 10 years.”

How the new law could impact on the sports industry

Sport at the elite level is a global and highly profitable industry. The pressure to remain at the top is relentless, and whilst players may use gamesmanship to achieve an unfair competitive advantage, if management commit a crime whilst trying to gain an advantage, such misconduct could now lead to the organisations being criminally prosecuted.

There have been many high-profile prosecutions of leading individuals in the world of sport, with sporting bodies – to date – having not been the subject of criminal prosecution even when their officers have been. The new law has the potential to change that position; how prosecuting authorities might seek to deploy the senior manager provision in a sporting context remains to be seen (and might depend upon the government’s Guidance[10]), but we believe that the following hypothetical scenarios could see the new law come into play.

Scenario 1 – False accounting

UEFA’s Financial Fair Play Regulations (broadly) prevent professional football clubs spending more than they earn. In a similar vein, salary caps set a maximum amount that can be paid to find and sign players (in the US, caps are applied in American football, soccer, basketball, and ice hockey). Financial Fair Play Rules also impose restrictions on spending by football clubs in the Premier League and EFL.

Were the directors of a club in either League to collude with an accountant (or a sponsor) to “massage the books” or make a false statement about the level of sponsorship to get around these rules a prosecution for false accounting of the directors under the Theft Act might be brought, notwithstanding that no one director could be said to have controlled the club. Further, FAPL Rule E65 imposes an obligation to only enter into a transaction at “Fair market Value”[11]. Inflating the value (or suppressing the value) of such a transaction could plainly amount to false accounting and potentially render the Club liable to criminal prosecution under the new act.

False Accounting is an offence contrary to section 17 (1) (a) Theft Act 1968. The maximum penalty is 7 years imprisonment, although the approach of a court to the appropriate length of any sentence is guided by The Sentencing Council Definitive Guidelines[12]. A serious crime prevention order can be imposed upon any person convicted. Such orders can impose prohibitions and restrictions on a convicted person or a convicted corporate body, partnership or unincorporated association. (Serious Crime Act 2007 section 1 to 16) Such an order may include – see section 5 – a wide range of restrictions, prohibitions and requirements in relation to the full range of business and financial dealings of any person, corporate body etc convicted.

Scenario 2 – Fraudulent trading

A rugby club continues to trade and compete in circumstances where it knew it was insolvent. If in doing so individuals who would be caught by the senior managers test committed an offence under the Companies Act 2006 section 993 (or made false representations in breach of the Fraud Act 2006) the corporate entity controlling the club could also face prosecution.

Scenario 3 – Bribery

A manger makes an undisclosed payment to an offshore account held by a player’s agent to ensure the player signs for his team during the transfer window. Whether or not the club knew of the payment, if the manager was acting within the scope of his/her authority if an offence was committed by the manager contrary to the Bribery Act 2010 the club could also be prosecuted for the same offence. The maximum sentence for an individual convicted is ten years for offences under sections 1, 2 and 6 Bribery Act. Any other person can be sentenced to an unlimited fine, and consequential confiscation and/or compensation orders.

Without the senior manager provision, it is unlikely the club could have been prosecuted for the bribery itself, although it might have been at risk for failing to prevent the bribery contrary to section 7 Bribery Act 2010.

Scenario 4 – False statements by company directors/false accounting

Several English League Clubs have changed hands recently (EFL and Premier League) and the EFL has updated its guidance on acquisitions[13] As part of the process, the EFL investigates the financial standing of buyers, before clearing the purchase. The Rules require any Person seeking to acquire control to provide signed declarations, and “Future Financial Information” – Rule 10.1.1 (c). Sadly, there are innumerable possible ways in which buyers might falsify financial information or their source of funds, thus potentially triggering the commission of an economic crime listed in in the Act[14] (see above in relation to false accounting). In the event of successful prosecutions of individuals director disqualification orders could be imposed.

Scenario 5 – Tax evasion

A professional cricketer is paid additional sums for his “image rights” by his club to improperly reduce his tax. The scheme was put together by the Director of Cricket and members of the finance team without any involvement by the board. If the senior manager test were satisfied by the individuals involved, the club could be prosecuted. That would also be the position if a director also colluded in the wrongdoing who, given the structure of the organisation, might not have been found to have represented its controlling mind. Whilst the corporate offence of failure to prevent the facilitation of tax evasion has existed since the Criminal Finances Act 2017 the new act provides a further string to the investigators bow. The maximum sentence for fraudulent evasion of income tax is 7 years and once again The Sentencing Council Definitive Guidelines set out the range of sentence appropriate in all the circumstances.[15]

Scenario 6 – Money laundering

A leading set of stables accepts a “sponsorship deal” which it knows, or reasonably suspects was being paid with funds that were criminal in their origin. As with the preceding scenarios, the deal may have been put together by individuals below the controlling mind level, but if they were senior managers as defined, the organisation could also be prosecuted. Under the Proceeds of Crime Act 2002 the various money laundering offences that can be charged (depending on the facts) all carry substantial sentences of imprisonment in the event of the conviction of an individual.

Scenario 7 – Bogus agreements

A Player and his agent enter into a bogus “image rights” agreement that is no more than a device to avoid tax. Were an officer of the Club to be knowingly involved in such an agreement (perhaps to enable the Club to stay within Financial Fair Play Rules or simply to minimise the Player’s tax) the Act would be engaged.

Potential offence engaged in this scenario would include fraud by false representation (section 2 Fraud Act 2006) and cheating the public revenue (contrary to common law). Conviction for either offence would expose the Club do an unlimited fine and confiscation of relevant profits.

How can the risks be mitigated?

The substantial sums of money involved in sports-related deals and activities inevitably has the potential to attract fraudsters and criminal opportunists. Organisations in the sector need to be alert to the possibility of their own employees colluding in, or instigating, the commission of economic crimes.

Not only could the organisation face large fines and confiscation orders if they fail to address the risks the new law presents, but they could also face severe reputational damage if prosecutions are brought (whether or not convictions are obtained). Whilst no particular approach can be guaranteed to eliminate all risks, companies in the sports sector should act now to put policies, procedures and training in place to mitigate the risk of senior managers engaging in conduct that could expose the organisation to criminal liability.

Organisations should adopt measures that are proportionate to their size and the risks that they face. These could include but will not be limited to:

• Reviewing or undertaking an economic crime related risk assessment including flagging and identifying high risk transactions and activities.
• Having a zero-tolerance approach to economic crime that is publicly stated and clearly and regularly communicated by the board to all employees.
• Drafting and implementing appropriate internal policies to ensure that the risk of criminal activity is reduced. For example, ensuring that no senior employee can act independently on deals worth above a certain amount.
• Adopting robust HR policies, with full vetting of anyone who might be given authority to enter into agreements with third parties.
• Ensuring internal audit is given adequate remit and resource to uncover potential impropriety.
• Requiring the involvement of independent professional advisers in higher risk transactions.
• Conducting adequate due diligence on counterparties to transactions.

Conclusion

The sports industry has frequently lagged behind other businesses in introducing risk mitigation and compliance measures and often lacks the almost standard precautions that organisations in other sectors routinely have in place. The new law will be seen as a powerful new tool in the prosecutor’s toolbox. If those in the business of sport do not review their processes, they risk leaving an open goal, and watching the likes of the SFO slamming the ball into the back of the net may not be a joyful experience.

References

[1] See ‘Factsheet: Economic Crime and Corporate Transparency Bill overarching’, 26 oct 2023, last accessed 15 Nov 2023, https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-economic-crime-and-corporate-transparency-bill-overarching

[2] Cynics have often posited the theory that some “image rights” deals are little more than the modern day equivalent of “boot money” – extra money paid in cash slipped into the players boots on match day and therefore tax free – paid to players in the 1960’s and 1970’s

[3] Pamela Reddy, Naomi Miles, ‘What sports organisations need to know about the new failure to prevent fraud offence’, LawInSport, 19 September 2023, last accessed 14 Nov 2023, https://www.lawinsport.com/topics/item/what-sports-organisations-need-to-know-about-the-new-failure-to-prevent-fraud-offence

[4] Factsheet: identification principle for economic crime offences, https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-identification-principle-for-economic-crime-offences (last accessed 15 Nov 2023)

[5] For the leading authorities this point see Tesco Supermarkets Ltd v Nattrass [1972] AC 153 and R. v Andrews Weatherfoil [1972] 56 C.App.R. 31

[6] [2018] EWHC 3055, https://www.judiciary.uk/wp-content/uploads/2020/02/sfo-v-barclays-judgment-12-11-18.pdf

[7] Doctrine of Respondeat Superior see New York Central & Hudson River Railroad, 212 U.S 481 (1909).

[8] S.196 (4) of the Act.

[9] As provide for under sections 6-8 Proceeds of Crime Act 2002.

[10] Unpublished as at the date of this article.

[11] FA Premier League season 23/24 handbook Page 136, https://resources.premierleague.com/premierleague/document/2023/08/31/132475d9-6ce7-48f3-b168-0d9f234c995a/PL_Handbook_2023-24_DIGITAL_29.08.23.pdf

[12] The Sentencing Council Definitive Guidelines, https://www.sentencingcouncil.org.uk/

[13] See the Rules on Acquisition of Control at page 402 et seq of the 2023/24 EFL handbook.

[14] See EFL v Rochdale AFC (2022) SR/093/2022.

[15] See Footnote 11