A sea change in the prosecution of corporate economic crime?

April 2014 | LEGAL & REGULATORY | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

In recent years, policymakers, practitioners, the press and the public have debated how corporations can be held accountable for economic wrongdoing. Increasing emphasis has been placed on bringing criminal prosecutions to act as a deterrent to firms tempted to sacrifice principles of good corporate governance and proper risk management in favour of sales and profitability.

The United States’ successful record of effective enforcement action against corporations has been viewed with envy by investigation and prosecution agencies around the world. The likelihood of securing a conviction and the huge level of fines mean that the prospect of conviction provides a strong deterrent factor to corporations prepared to engage in or turn a blind eye to misconduct.

In the UK, the growing appetite to prosecute corporations together with a clear desire to emulate the US enforcement model is likely to make corporations in this country significantly more vulnerable to prosecution. This article will look at how the landscape is changing and whether these changes are likely to increase the number of prosecutions of corporate entities.

The basis for corporate criminal liability

A key difficulty in the successful prosecution of corporations in the UK is the requirement to establish corporate criminal liability by applying the ‘identification doctrine’. To establish corporate liability, it is necessary to show that an individual of sufficient seniority so as to be identified as the company was involved in the relevant criminal conduct (actus reus) and had the required level of knowledge (mens rea). In reality, this generally means that a prosecutor has to prove that a board member, managing director or other very senior officer of the company themselves committed a criminal act.

Conversely, in the US, corporate liability is established by applying the respondeat superior doctrine. This provides that a company may be held criminally liable for the acts of any of its agents who commit a crime within the scope of their employment, with the intent to benefit the corporation. The effect is to make corporations vicariously liable for the actions of their employees, thereby increasing the likelihood of successfully prosecuting the corporation for misconduct.

The Bribery Act 2010 was a landmark piece of legislation which altered the basis for establishing criminal liability against corporations in relation to bribery offences in the UK. Under section 7 of this Act, commercial organisations are criminally liable where their employees or agents are involved in bribery unless they can show that they had adequate procedures in place to prevent bribery. This removes the need to establish liability by applying the identification doctrine.

Since mid-2013, David Green QC (Director of the Serious Fraud Office) has been advocating further changing the basis of corporate criminal liability in the UK in relation to a wide range of economic misconduct. In February 2014, Mr Green QC indicated that he intends to achieve this by extending section 7 of the Bribery Act 2010 to make it an offence for a corporate to fail to prevent acts of financial crime by its employees.

Deferred prosecution agreements

On 14 February 2014, UK prosecutors gained an additional, powerful tool with which to hold corporates to account: deferred prosecution agreements (DPAs).

Used by American prosecutors in the corporate context since the 1990s, DPAs recognise some of the problems inherent in prosecuting corporates. For the state, such proceedings are likely to be fraught with difficulty. They are lengthy, complex and carry a significant litigation risk. A conviction may also cause collateral damage, harming innocent employees and shareholders, and shaking wider market confidence. For corporates, a criminal trial poses the risk of conviction and disbarment from public contracts, as well as reputational harm. DPAs recognise that in some (but not all) instances of corporate offending, a consensual resolution will be more appropriate.

Where a corporate is suspected of economic wrongdoing, the prosecutor will decide whether a DPA is appropriate, by reference to criteria set out in a recently published Code of Practice. If so, a prosecution will be deferred in return for the corporate signing up to terms which may include an admission of liability, the payment of financial penalties, restitution to victims, the removal of culpable board members or the appointment of corporate monitors.

Self-reporting

Corporate self-reporting is also a key feature of successful enforcement action in the US, providing a steady stream of cases and removing many of the obstacles to successfully investigating and prosecuting corporate crime. American companies are incentivised to confess wrongdoing at an early stage as a means to obtaining a DPA, thereby avoiding the most adverse consequences of a prosecution.

In the UK, companies have historically been reluctant to self-report. There has been limited (if any) perceived upside, with the significant potential downside of drawing an enforcement agency’s attention to something which it might not otherwise uncover. With the adoption of the UK’s own DPA scheme, the position is now very different. Whether a corporate self-reported is a key factor for a prosecutor contemplating offering a DPA, which may see more companies making a positive approach to the SFO in the hope of securing favourable treatment.

Sentencing guidelines for corporations

Introduced in parallel with the new DPA scheme, the UK’s Sentencing Guidelines Council has published, for the first time, definitive guidelines for sentencing fraud, bribery and money-laundering offences for corporate offenders. The Guidelines establish robust, American-style financial penalties with a view to punishing and deterring corporate criminal misconduct. In some cases, courts may impose fines of up to four times the value of the benefit the corporate obtained through its wrongdoing. In cases of, for example, obtaining a lucrative contract through bribery and corruption this is likely to represent a substantial figure. Of course, in addition to substantial fines, corporates may also be called upon to make significant payments by way of compensation to victims and the confiscation of benefit.

The potential impact of the changes

There can be no doubt that corporate entities are facing increased vulnerability to prosecution. Prosecutors and policymakers are increasingly looking to the criminal law as a means to regulate the conduct of business.

The introduction of DPAs provides a genuine incentive for corporates to self-report wrongdoing as a means to avoiding a criminal prosecution. However, it remains to be seen whether DPAs will have much application outside the section 7 Bribery Act offence. In relation to other offences, many corporations may take the view that the likelihood of the prosecutor successfully establishing liability applying the identification doctrine is too low to merit self-reporting. The introduction of the new sentencing guidelines with very substantial fines may provide a further incentive to self-report.

The real sea change is likely to come if and when the basis for establishing criminal liability changes in relation to all economic misconduct. Should Mr Green QC’s proposed changes to the Bribery Act 2010 become a reality, the likelihood of a successful conviction will increase. This will make more corporates self-report to avoid prosecution. Firms will also look at ways to improve corporate governance and systems and controls in order to establish an adequate procedures defence in relation to economic misconduct by their employees and agents.

Hannah Laming is an associate and Nicholas Querée is a trainee solicitor at Peters & Peters Solicitors LLP. Ms Laming can be contacted by email: hlaming@petersandpeters.com. Mr Querée may be contacted by email: nqueree@petersandpeters.com.

Hannah Laming and Nicholas Querée

Peters & Peters Solicitors LLP