UK corporate criminal liability reform

Why is reform being considered now?

For a long time prosecutors have called for reform, to make it easier to prosecute large companies.

Currently, the general rule for attributing criminal liability to a company is the “identification principle”. This requires that where a mental state is an element of an offence (such as dishonesty), only the mental state of those representing the “directing mind and will” of a company can be attributed to the company. This may be an individual, group of individuals or the board, depending on the authority bestowed by the company for the performance of the function in question.

It is often easier for this test to be met in small companies, rather than large companies, because in small companies it is easier to attribute the directing mind and will to senior wrongdoers.  In contrast, the corporate governance structures of large institutions can often mean that the autonomy required to be regarded as the “directing mind and will” for a particular transaction or series of events is not an individual; authority is often retained by the board or delegated to a group of individuals in a committee.

There are some notable exceptions to the identification principle, including the “failure to prevent bribery” and “failure to prevent facilitation of tax evasion” offences. There are also strict liability criminal offences in consumer protection, health and safety and environmental laws.

In 2020, responding to a 2017 consultation on economic crime, the UK Government said there was no clear consensus on what corporate liability offences should be created if the identification doctrine was replaced, and that there was no new or significantly persuasive evidence submitted to support the case for a change to the law.

Since then, however, calls for reform by the SFO have continued unabated. The flames were fanned by a recent collapse at trial of its prosecution of an institution, when the court confirmed that the identification principle was not met by the prosecution simply relying on the alleged involvement of very senior individuals in the alleged wrongdoing.  This was because, the court said, the company’s governance structures meant that these individuals did not have the requisite authority to conclude the transactions in question.

What are the different options for reform?

The Law Commission’s June discussion paper does not give formal options at this stage. However, from its Terms of Reference, the tenet of its questions in the consultation paper, and the 2017 consultation on economic crime, we can expect to see at least the following options being considered:

1. Whether the ‘identification doctrine’ is fit for purpose when applied to organisations of differing sizes and scales of operation.
2. Other legal options to impose corporate liability, such as vicarious liability: whereby the company is generally criminally liable for the acts of any of its employees. This is common in U.S. federal law, and has been a driver of mega fines and enforcement activity.
3. Amend the identification principle: by extending it to senior management or allowing fault to be attributed to a company where the corporate culture encouraged, tolerated or led to non-compliance.
4. Expanded regulatory powers on a sector-by-sector basis: the financial services sector is an example of a sector which already has sector-specific criminal offences (for example, under the Money Laundering Regulations 2017).
5. New failure to prevent offences: the focus may be a general “failure to prevent economic crime” offence or could be even broader. The failure to prevent model has been used in relation to bribery and tax evasion. There is no definition as such of economic crime, but it would be likely to include offences such as money laundering, fraud, false accounting, fraudulent trading and breach of financial sanctions or counter-terrorism measures. As with bribery and tax evasion, such an expanded offence would likely have an “adequate procedures” or “reasonable procedures” defence.

Considerations for corporate bodies and their stakeholders

Relevant issues to consider include:

1. Is there a need for reform? Are there corporate wrongs which are currently going unpunished?
2. Is it the threat of corporate liability that drives good compliance? Alternatively, are there stronger drivers, such as the threat of individual liability?
3. The failure to prevent model:

• How much of an additional compliance burden would result if the failure to prevent model is broadened to any type of economic crime? Alternatively, do existing compliance procedures and systems largely deal with these types of misconduct?
• How confident would a corporation feel about designing processes to reduce the risk of these harms? How confident would corporations feel about implementing these policies for third parties who act on their behalf?
• Should a corporation be held liable for a failure to prevent offence even where the corporation has not benefitted, or has only indirectly benefitted (ie the primary benefit was for the perpetrator)?
• Would there be more pressure on corporations to settle rather than fight failure to prevent offences, even if the “institution” has done nothing wrong?
• What type of guidance would be required on “adequate procedures” to deter these economic crimes?

What is next? 

The Law Commission published a discussion paper in June. Responses are due by the end of August. Supporters of reform will point to recent failed prosecutions as evidence that wrongdoing, at a very senior level, currently can go unpunished.  Companies should ensure that their voices are heard in this debate.

We are happy to incorporate clients' concerns and comments in the Allen & Overy response.  If this is of interest, please contact Amy Edwards or your normal Allen & Overy contact.

Once this stage of the Law Commission’s work has concluded, expected to be later this year, the UK Government will evaluate it alongside the impact of the recent reforms it has made to inform any future decision in this area.