Companies in the dock – how the law on corporate criminal liability in the UK is facing changes

December 2021  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

December 2021 Issue

What criminal offences can a company commit? Which acts should count as the company’s? Whose conduct is the company criminally responsible for? These questions have long vexed prosecutors seeking to prosecute companies for certain offences.

The issue of corporate criminal liability has received renewed government focus amid the perceived lack of corporate accountability and difficulties encountered by prosecutors in bringing companies to book. The Law Commission, which is mandated to review current laws and, where necessary, advise the UK government on how to improve them, is undertaking a review of laws surrounding corporate criminal liability. The results are expected to be published at the end of 2021. It is anticipated that the Commission will recommend changes to the current regime.

Current law

Like individuals, companies can be guilty of criminal offences, such as economic crimes. For offences requiring fault, the primary rule for attributing criminal liability to companies is through the “identification principle”, as per Tesco Supermarkets v. Nattrass, which provides that a company will only be criminally liable if the conduct (and necessary intent) can be attributed to a small number of individuals, such as the directors or senior executives, who represent the company’s “directing mind and will” (DMW).

In recent years, several statutory offences, aimed at companies, were enacted which removed the need and associated evidential difficulties to prove the DMW’s guilt. These include corporate manslaughter, and, more recently, failure to prevent (FTP) offences, such as the failure to prevent bribery, or facilitation of tax evasion. Under section 7 of the Bribery Act 2010, a company is criminally liable for failing to prevent bribery if a person associated with it (e.g., employee, agent) commits a bribery offence intending to obtain or retain business or an advantage for the company. It is a defence, and for the company to prove, that there were adequate procedures in place designed to prevent the bribery.

Despite the relatively small number of prosecutions, the Bribery Act has been widely held as an exemplary piece of legislation, providing an effective deterrent to bribery, and incentivising companies to self-report and improve their corporate behaviour, not least to avail themselves of the adequate procedures defence should they be prosecuted. The Serious Fraud Office (SFO) has lobbied to extend the FTP model to other economic crimes, such as fraud, given the impact that section 7 has had on corporate compliance.

Criticisms of the law

The identification principle has been criticised for making it harder for larger companies to be prosecuted, owing to their complex and diffuse management and governance structures. Even if the DMW can be identified, they will often be removed from the conduct in question, shielding the company from any allegations of knowledge or complicity in the offending, in comparison with small or medium businesses, which are typically managed by one individual.

This perceived unfairness came to the fore in the failed prosecution of Barclays by the SFO in 2018. The bank and four individuals were indicted for, among others, conspiracy to commit fraud relating to Barclays’s capital raising arrangements with Qatar. The case against the bank was dismissed on the basis that the individuals, including the chief executive, could not be said to be the DMW with respect to the capital raising function because they did not have the relevant authority to act on the bank’s behalf, with that authority having been reserved to the board and certain committees. In reaffirming Tesco, the court made the identification principle more restrictive by holding that it was not simply enough to identify the particular individual’s status within the company, but to look at the particular authority bestowed onto them by the company in relation to the performance of the function in question said to give rise to the company’s criminal liability.

The SFO claims that, reeling from Barclays, the current law makes it very difficult to hold companies with complex governance structures to account. They have pointed to other examples including the lack of prosecutions of financial institutions following the convictions of a number of individuals relating to LIBOR and EURIBOR manipulation.

Recent developments

In 2010, the Commission reviewed the identification principle and concluded that there was no pressing need for reform. However, the assumptions on which that conclusion is based no longer hold true, it states.

In January 2017, the Ministry of Justice published a ‘Call for Evidence’, enquiring into whether the identification principle should be replaced with some form of an FTP offence for certain economic crimes offences. The response was held to be inconclusive but signalled the government’s intention for reform.

In November 2020, the Commission was asked to re-examine the issue and, among others, consider whether the identification principle was still fit for purpose. The Commission published its discussion paper in June 2021 inviting views on whether, and how, the law could be improved. The Commission has so far kept its powder dry and not revealed any leaning toward one option or the other.

Notably, in January 2021, two amendments were proposed during the debate of the Financial Services Bill (now enacted), which sought to create additional criminal offences for FCA-regulated bodies, for facilitating or failing to prevent fraud, false accounting or money laundering. Although the amendments were ultimately opposed by the government, on the basis that the Commission was already looking into the issue, and it was believed that the issue was best reviewed within a broader context, the episode nonetheless indicates the political impetus to reform the laws surrounding corporate criminal liability.

Wither the identification principle?

Removing the identification principle will require legislative, rather than judicial, change. Any proposed legislative reform will likely be modelled on current FTP offences. In doing so, the Commission would need to consider: (i) which specific substantive offences would be covered (the list of offences for which a deferred prosecution agreement is available, has been suggested as a template); (ii) whether the defence of “adequate” or “reasonable” prevention procedures, which exist for current FTP offences, should operate and how this would work; (iii) whether the offence should be limited to the conduct of associated persons or whether it might be appropriate to expect some institutions to prevent crime being committed using their services; and (iv) the role of government guidance in relation to such procedures.

A new FTP offence or offences could compromise the following substantive offences: (i) fraud – i.e., fraud by false representation, fraud by failing to disclose information and fraud by abuse of position; (ii) false accounting; or (iii) money laundering, such as offences concerning the possession, concealment, conversion, transfer or making of arrangements relating to criminal the proceeds.

Notably, the number of prosecutions of fraud offences vastly outweigh those of bribery. A new FTP fraud offence would no doubt ensnare a vast range of corporate conduct and failures and would need to be considered in terms of its impact on enforcement, and additional regulatory obligations for smaller companies, which are at greater risk of encountering and failing to prevent fraud.

Around 40 percent of all fraud encountered by companies (roughly £190m a year), is committed by staff, typically payroll, expenses or procurement fraud (an employee setting up a false company generating fraudulent invoices which are then paid by the company). It is not clear to what extent an FTP fraud offence would be limited to employees or associated persons who commit fraud with the intention of obtaining or retaining business or a business advantage for that company, or applied to a wider set of circumstances, whereby the intention was personal gain (such as in the example).

In terms of a new FTP money laundering offence, there are already a wide array of offences and regulations that concern anti-money laundering, particularly in relation to the regulated sector. For instance, the Money Laundering Regulations 2017, which NatWest recently admitted breaching (the first prosecution of its kind against a company), makes it an offence to contravene a relevant requirement of the regulations such as having appropriate risk management systems and procedures. It is not clear what, if anything, a new FTP money laundering offence would add, in terms of corporate compliance.

In deciding its recommendations, the Commission will need to ensure that it balances the public interest in holding companies accountable while ensuring the regulatory burden does not fall disproportionately and unnecessarily on law-abiding businesses. The Commission may, of course, choose to recommend retaining the identification principle and introducing a new FTP offence only for specific offences.

Conclusion

The current law on corporate criminal liability needs reforming, a view widely shared by the respondents to the Commission’s consultation, not just by hamstrung prosecutors. The political will, which is a key driver for any reform, is palpable. While the details are still to be published, the mood music suggests that there is likely to be an expansion of the FTP model to other offences, such as fraud or money laundering. The scope and guidance of any new offences, however, would need to be clearly defined, given the issues identified above. Whatever is recommended will likely add another layer of regulation, scrutiny and potential liability for companies. Companies would do well to ensure that their fraud and other economic crime prevention policies and procedures are in place and up to date, given that the prosecutorial goalposts are likely to move once more. Directors and senior managers will also likely be exposed to potential individual liability as any additional corporate offences will be enacted alongside secondary consent and connivance offences, which apply to certain senior officers within a company.

 

Eamon McCarthy-Keen is an associate at Peters & Peters. He can be contacted on +44 (0)20 7822 7733 or by email: emkeen@petersandpeters.com.

© Financier Worldwide

BY

Eamon McCarthy-Keen

Peters & Peters

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