Companies that fail to stop fraud and dishonesty by their staff and agents could face prosecution under a new plan floated by the U.K. Serious Fraud Office.
Britain's top corporate fraud prosecutor says it wants to take the idea of holding companies responsible for corporate crimes committed by employees, a concept that is familiar in the United States but is relatively new in the United Kingdom, and apply it to more offenses than bribery. When it became law three years ago the U.K. Bribery Act criminalized companies that failed to prevent their staff and third parties from paying bribes or corrupting officials.
Lawyers and compliance executives in the United Kingdom, however, are pushing back on the plan. They say the idea of extending the country's controversial Bribery Act to all financial crime makes no sense and wouldn't work.
“Of course, it makes no sense,” says Geoff Cruikshanks, executive vice president of legal services, risk, and compliance at global logistics company DHL. Cruikshanks argues there's a big difference between bribery and other financial crime. An employee might think paying a bribe will help their employer, and there are times when it would. But a fraud is more likely to benefit the perpetrator personally, leaving the employer a victim. “In these situations, it would be a bit like prosecuting homeowners for being burgled,” says Cruikshanks.
To address that concern, SFO director David Green said, as with bribery and corruption, companies would avoid prosecution if they could prove they had “adequate procedures” in place to stop the offenses—even if those procedures failed.
The new offense would “sharpen corporate vigilance around compliance,” Green told a recent conference on economic crime, adding it was “high on my wish list.”
Green wants the new offense on the statute book because the SFO has a poor record of convicting companies, compared to U.S. prosecutors. He blamed the requirement under English law to prove that “the controlling mind” of a company was complicit in criminality.
This is a higher bar than in the United States, where a company can be liable for the actions of its agents and employees when they act “within the scope of their employment,” regardless of their seniority.
Green said proving top-level executives knew about wrongdoing is hard because “the e-mail trail has a strange habit of drying up at middle management level.”
But Green's fix could make things worse, says Andrew Taplin, a partner at solicitors Nabarro. If a company faced prosecution for failing to prevent dishonesty, it could be less inclined to help a prosecutor build a case against the individuals involved, Taplin argues.
“With the specific bribery offenses, one can focus on specific risks and behaviors … But fraud and dishonesty could capture a much wider range of criminal behavior—and it's difficult to know exactly what offenses the SFO would hope to cover.”
—James Went,
Senior Associate,
Manches
Crimes like fraud and dishonesty are also much harder for companies to police and prevent than bribery, Taplin adds. “At a practical level, it's far harder to record or prevent an individual from making, for example, a dishonest statement to secure a contract than it is to prevent that person using corporate funds to pay a bribe to secure it,” he says.
“The practicalities of policing this issue—such as by never letting just one person attend a meeting—could potentially lead to significant increases in costs,” says Taplin.
Companies could probably adapt their Bribery Act procedures to make them adequate, but it would take a lot of work, says James Went of law firm Manches. One reason for that is that Green's plan would create a “vague offense,” he believes.
“With the specific bribery offenses, one can focus on specific risks and behaviors, such as high-risk jurisdictions and transaction types,” Went says. “But fraud and dishonesty could capture a much wider range of criminal behavior—and it's difficult to know exactly what offenses the SFO would hope to cover.”
It's also not clear whether the new offense would have the same international reach as the Bribery Act, which catches any company or individual connected to the United Kingdom. “I think it would be difficult for companies to know exactly what they should be doing and whether that is enough. I don't think this is an idea that stacks up,” Went says.
Kyrill Farbmann, Brussels-based chief EMEA compliance and ethics manager at International Paper, says further extending corporate criminal liability is not a good incentive for companies that want to tackle fraud. “If the compliance program really functions and is not just good intentions on paper then a company should have adequate procedures to protect itself,” he says. “While I don't think an extension of the Bribery Act should be cause for concern, we already have so much reporting, auditing, and compliance, and this would only add to the burden.”
The Big Stick
Green has flagged a problem with English law, but his solution is wrong, believes Tony Woodcock, head of regulatory litigation at solicitors Stephenson Harwood. Holding companies to account is hard because the “controlling mind” can be difficult to establish, Woodcock says, but the answer is to find a way of making that principle work better in practice, not to abandon it.
CRIMES OF DISHONESTY
Below is an excerpt from SFO Director David Green's recent speech calling for a rule on “crimes of dishonesty.”
I am delighted that the old SFO's tendency to leak to the media has abated. But we are seeing a new phenomenon of individuals and corporates of interest to the SFO trying to spin their way to the result they desire by judicious use of the media. We have seen instances where such spin has been swallowed without much examination or challenge.
I am well aware that all our cases are high profile and therefore high risk. When it comes to prosecutions of corporates, the SFO's performance is often compared unfavorably to that of U.S. prosecutors. The key reason for this is the much higher bar that we in the SFO face in proving corporate criminal liability. Currently, in order to prove corporate liability, we have to prove that the controlling mind of the corporate was complicit in the relevant criminality.
In practice, the e-mail trail has a strange habit of drying up at middle management level. Why not extend the principle encapsulated in S7 of the Bribery Act, and have a corporate offense of a company failing to prevent crimes of dishonesty or fraud by its servants or agents, subject to a statutory adequate procedures defense? The approach is there already, and echoed in Health and Safety legislation.
It is usually argued that this would have the effect of punishing a corporate for negligence. To that I would say that we are talking about a very high degree of negligence, and such an offense would sharpen corporate vigilance around compliance.
It is said that conviction of the corporate adds nothing to the conviction of the individuals, where they are prosecuted. To that I would say that there will be cases where a company should be marked with a conviction for failing to prevent fraud by its employees. This is particularly so where the company has profited from the dishonest activity.
If the public interest requires more corporate prosecutions, then such a change is high on my wish list.
It is my intention to recharge the SFO's corporate self-respect and to bring it to the top of its game as a specialist investigator and prosecutor of the topmost tier of serious and complex fraud, bribery and corruption. The SFO's problems are not over, but we are set firmly on an upward trajectory.
Source: SFO.
“I don't think Mr Green's idea would be top of my priorities,” he says. “The SFO has some big investigations going on at the moment, and there is the drive to make the Bribery Act work. This is hugely resource intensive.'
Green's idea is “a big stick that on the face of it would give a lot of power to the SFO,” Went says. “In practice, though, I'm not so sure it would have a big impact. I'd say we should see if the SFO can demonstrate its credentials as an effective prosecutor in enforcing existing offenses before creating a new one like this.”
He believes there's “next to no chance” that the government would back the idea. The Bribery Act was a response to embarrassing international criticism that the United Kingdom was soft on corruption. “But the need for this new offense is much less obvious and there would be vociferous complaints from all sectors of the business community about the compliance burden,” he says.
The SFO says it is discussing its idea with government and wants a debate with companies, lawyers, and academics.
There have been voices of support, from those who say the idea could help companies improve anti-fraud measures and other safeguards. “A realistic prospect of criminal prosecution would be a powerful incentive for companies to invest significantly in effective systems and controls,” argues Elly Proudlock of law firm WilmerHale. “In that respect, lowering the bar for establishing corporate criminal liability may be just the right catalyst for a positive shift in corporate culture,” she says.
In his speech Green said people would argue against his idea because it punished companies for negligence. But he countered: “To that I would say that we are talking about a very high degree of negligence.”
He also addressed the question of whether the conviction of a company added anything if the people involved in the crime were convicted. “There will be cases where a company should be marked with a conviction for failing to prevent fraud by its employees,” Green said. “This is particularly so where the company has profited from the dishonest activity.”
An SFO spokeswoman accepted the prosecutor had “work to do to explore the issues from the various points of view, to develop any proposals, as well as make the case for them.”
Asked whether the new offense would have the same international reach as the Bribery Act, she added: “It is too early to say. We are articulating an issue and looking to engage with others to develop the way forward.”
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