U.K. companies could soon be held to account for the criminal wrongdoing of their employees, agents, and representatives under reforms being considered by the U.K. government on how to improve its response to corporate economic crime.
The Ministry of Justice last month began its long-awaited consultation process over proposals to reform corporate liability for economic crimes—such as fraud, false accounting, and money-laundering—in the United Kingdom. Under current law, in order to secure a criminal conviction against a company for a serious offense, prosecutors need to prove that the individual who actively participated in the wrongdoing was senior enough within the company to be considered the “directing mind and will”—a legal theory also known as the “identification doctrine.”
Officials with the Serious Fraud Office have long criticized this enforcement approach as being too difficult to criminally prosecute large companies for economic crimes. Such an approach may even be encouraging prosecutors to focus on small- and medium-sized enterprises (SMEs) with their centralized operations, as opposed to large, multinational companies with their complex management structures. In fact, SMEs—Smith and Ousman, Mabey & Johnson, and Innospec, for example—have featured prominently in SFO enforcement actions in recent years.
To mend this gap in the law, the Ministry of Justice published a “call for evidence,” seeking views on “the extent to which the identification doctrine is deficient as a tool for effective enforcement of the criminal law against large modern companies.” It is also seeking views on the cost implications for companies concerning the implementation of prevention procedures. Comments are due by March 24.
“In recent times, public trust in business has been dented by the disclosure of fraudulent, dishonest, and harmful activity by banks, international organizations, and manufacturers at home and abroad,” Sir Oliver Heald, Minister of State at the Ministry of Justice, said in a statement accompanying the call for evidence. “It is important that firms are properly held to account for criminal activity that takes place within them, or by others on their behalf and at their behest.”
“It is important that firms are properly held to account for criminal activity that takes place within them, or by others on their behalf and at their behest.”
Sir Oliver Heald, Minister of State, Ministry of Justice
“It is equally important to foster and promote economic crime prevention as part of corporate good governance,” Heald added. “Good corporate governance is a means to create a business environment of trust, transparency, and accountability in order to promote investment, financial stability, and sustainable economic growth.”
The call for action is both a carrot and a stick for the corporate governance world. “I have little doubt that the call for evidence will lead to increased criminal liability being imposed on companies,” says Jeremy Summers, a U.K. partner and head of business crime at law firm Osborne Clark. Although this inevitably will lead to an increased compliance burden, “this should be seen as a prudent investment that will be significantly lower than the penalties that will result if a company is prosecuted, in effect, because it did not have adequate procedures in place,” he says.
In the consultation, the government has set out five options for consideration:
Amend the identification doctrine. Under this model, the scope of those regarded as a “directing mind” of a company would be broadened.
Create a strict (vicarious) liability offense. Similar to the approach taken in the United States, companies would be held strictly liable of the substantive offense committed by their employees, representatives, and agents, without the need to prove any fault element, such as knowledge or complicity at the corporate level.
Create a strict (direct) corporate liability offense. Under this model, a company could be convicted without proof of any fault element—not of the substantive offense, as with vicarious liability, but of a separate offense akin to a breach of statutory duty to ensure that economic crime is not used in its name or on its behalf.
Establish “failure to prevent” as an element of offense. Under this model, prosecutors must prove not only that the predicate offense occurred, but also that it occurred as a result of a management failure, either due to negligent conduct or systemic inadequacies.
Reform regulations on a sector-by-sector basis. This option would focus on deterring misconduct through strengthening individual accountability of senior executives through sector-by-sector regulation, rather than amending corporate criminal liability, similar to the Senior Managers Regime in the financial services industry.
CORPORATE LIABILITY FOR ECONOMIC CRIME
Below are the five options the Ministry of Justice has set out for expanding corporate economic crime.
Option 1: Amendment of the identification doctrine
The suggestion that the common law rules are the principal difficulty faced by prosecutors when seeking to hold large companies to account for economic crime committed in their name or on their behalf begs the question: is it possible and desirable to overcome the difficulties by legislating to amend the common law rules? Common law offences are abolished by Acts of Parliament. A recent example is the abolition of the common law offence of bribery by the Bribery Act 2010. This reform is different in nature to legislation designed to amend or replace a judge made rule employed to determine the scope of liability for criminal offences. The government is interested to receive views on the advantages and disadvantages of such an approach. Legislation could for example amend the identification doctrine by broadening the scope of those regarded as a directing mind of a company. Retaining the identification doctrine in any form would perpetuate the notion that a company can commit a criminal offence. It would encourage corporate efforts to limit potential liability through the adoption of evasive internal structures. It would not promote the prevention of economic crime as a component of corporate good governance.
Option 2: Strict (vicarious) liability offence
The creation of a strict liability offence based on the principles of vicarious liability would make the company guilty, through the actions of its employees, representatives or agents, of the substantive offence, without the need to prove any fault element such as knowledge or complicity at the corporate centre. The principles of vicarious liability are well established in UK civil law. As has already been noted, in the United States corporate criminal liability is governed by vicarious liability expressed as the doctrine of respondeat superiore (“let the master answer”), which is generally regarded as an effective and just means of attributing liability. If the solution is to create such a new statutory form of vicarious liability, one needs to consider whether it should be subject to a due diligence type defence if it is to be effective as a means of incentivising economic crime prevention as part of corporate good governance.
Option 3: Strict(direct) liability offence
A strict direct corporate liability offence would focus on the responsibility of a company to make sure that offences are not committed in its name or on its behalf. A company would be convicted without the need for proof of any fault element, not of the substantive offence, as with vicarious liability, but of a separate offence akin to a breach of statutory duty to ensure that economic crime is not used in its name or on its behalf. By focussing on a failure to exercise supervision over the conduct of those pursuing acompany’s business objectives, this model may more accurately target the real nature of corporate culpability. As with the strict vicarious liability option it is necessary to consider whether direct strict liability should be subject to a due diligence type defence. The government’s view is that if it is to be effective as a means of incentivising economic crime prevention as part of corporate good governance such a defence is required. This combination of a strict direct liability offence and a due diligence type defence is the model that is employed at section 7 of the Bribery Act, where it is entitled failure to prevent liability. This model is discussed in detail in the next section. In this model the due diligence type defence is expressed in terms of adequate procedures in place to prevent the predicate offence occurring. The defence carry the legal burden of proving that the defence applies, albeit to the lower civil standard.
Option 4: Failure to prevent as an element of the offence
In this option the concept of a failure on the part of those managing the company to prevent the occurrence of the relevant offending is an element of the offence. It is for the prosecution to prove not only that the predicate offence occurred but also that it occurred as a result of a management failure, manifest either as negligent conduct or as systemic inadequacies in the mechanisms that the company relies on to prevent the relevant predicate offences occurring. In effect this model takes the principles of option 3 but places on the prosecution the burden of proving that the company had not taken adequate steps to prevent the unlawful conduct occurring rather than placing the burden on the defence to prove that the company had done so.
Option 5: Investigate the possibility of regulatory reform on a sector by-sector basis
As noted above, there has been significant reform in the regulation of the financial services industry in order to deter misconduct through strengthening individual
accountability, particularly at senior manager level. There is the potential for lessons to be learned from the experience of strengthening the regime for financial services which maybe applicable more broadly.
Source: Ministry of Justice
“The uncertainty around the scope of some of the proposals is a key concern,” says Matthew Bruce, a partner at law firm Freshfields in London. “If the government decides to pursue any of the options, it will need to think quite carefully about how the offense might operate in practice.”
Questions around jurisdictional scope; what “reasonable” prevention procedures or a “due diligence” offense might actually entail for each of the predicate offenses; and how the reforms would interact with existing laws and regulations—these all need careful thought and clarification, Bruce says.
Among all of the options being considered, the establishment of a strict liability offense through a “failure to prevent” model appears to be the likely front-runner, many legal experts say. The U.K. government is already applying this same “failure to prevent” model to the facilitation of bribery under the Bribery Act and has further taken steps under the draft Criminal Finances Bill to apply the “failure to prevent” model to the facilitation of tax evasion.
For the government, adopting a “failure to prevent” model makes sense. The adoption of such a model, with a defense of “reasonable prevention procedures” (or similar) pushes the burden of cleaning up business practices and culture onto the companies themselves, says Thomas Webb, director of the fraud and white-collar crime team at independent U.K. law firm Burges Salmon. “For that reason, I could see how this might prove to be quite a tempting opportunity for the government,” he says.
For compliance officers, however, the expansion of the strict liability “failure to prevent” offense model to all economic crime would impose yet further significant compliance burdens on businesses operating in the United Kingdom. “Businesses that already have to carry out risk assessments, develop and monitor policies and procedures, and train staff in respect of bribery and tax evasion risks, would also need to do so in relation to all other forms of economic crime,” Webb says. “That is not an inconsiderable task.”
Compliance and cost implications. No matter what option the U.K. government chooses, “companies can certainly expect to spend time and money enhancing or introducing anti-money laundering and anti-fraud compliance regimes, which will complement their anti-bribery systems and controls if the reform is ultimately implemented,” says Joanna Harris, an associate at law firm Berwin Leighton Paisner in London.
Expanding the scope of corporate criminal liability to economic crimes creates cost implications, as well. Many compliance teams are already struggling to do more with less. “This is just another bit to potentially add to that,” says Christopher David, counsel in the London office at WilmerHale.
Especially for U.K. companies, the compliance and cost burdens are significant. “When it comes to anti-corruption or anti-money laundering, many U.K. companies are further behind than their American counterparts,” says Jason Hungerford, a corporate compliance and investigations lawyer at Norton Rose Fulbright, based in London.
U.S. companies increasingly have grown accustomed to the reality that if one of their employees engages in criminal activity on their watch, the company could be held responsible. “That’s a big change for U.K.-based companies that are used to holding individuals responsible but the corporate as a whole is protected by this ‘identification doctrine,’ ” Hungerford says.
The new legal risk it would pose also wouldn’t be insignificant. “It would effectively add a criminal risk to what I suspect many companies do anyway—look to prevent fraud—but if you could suddenly be charged with a criminal offense if you don’t prevent fraud, that ups the stakes quite significantly,” David says.
Rolls-Royce case study. Clearly, however, the debate to expand corporate criminal liability in the United Kingdom has been revived with a big bang, further evidenced by the third and largest deferred prosecution agreement (DPA) that the SFO secured in January 2016. In that case, Rolls-Royce entered into a DPA with the SFO following a four-year investigation into bribery and corruption. Rolls-Royce senior executives are still being questioned in that investigation.
The indictment covers 12 counts of conspiracy to corrupt, false accounting, and failure to prevent bribery. The conduct covered by the U.K. DPA took place across seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China, and Malaysia.
After a series of defeats in the white-collar space, the SFO is just now “getting back on its feet,” Hungerford says. Following the Rolls-Royce DPA, “they definitely have their momentum back,” he says.
The U.K. government, on the other hand, is already facing significant turmoil at the moment with Brexit. Thus, whether reforming corporate liability for economic crime is a high priority right now still remains uncertain, says Jonathan Grimes, a partner at law firm Kingsley Napley in London. “We are probably at the beginning of what will be a pretty long process before there is any change that will have a real impact on companies either in the U.K., or anywhere else.”