Reform of corporate criminal liability for economic crime
16 January 2017
On 13 January, the UK Ministry of Justice issued a Call for Evidence on the reform of corporate criminal liability for economic crime. This follows statements by the UK government in 2016 about extending corporate criminal liability for economic crime. The Call for Evidence raises important questions for corporates.
Any extension of criminal liability risk for a company would have significant ramifications as it would likely require a company to effect changes to corporate governance, assess its risk of exposure to economic crime by employees and those who provide services on its behalf, and to implement measures across its operations to mitigate this risk. Many companies have already been through a similar process as a response to increased liability risk under the UK Bribery Act 2010.
Our team of corporate economic crime specialists will be analysing the proposals and discussing them with clients in order to formulate a response to the Call for Evidence which reflects both legal and commercial viewpoints.
Identification doctrine difficult to apply to large companies
At present, a company can be held criminally liable for the acts of an individual or individuals who is/are the ‘directing mind and will of the company’. This is known as the identification doctrine, and derives from the leading case of Tesco Supermarkets Ltd v Nattrass. Some prosecutors, academics and lawyers regard the Tesco v Nattrass test as being inadequate as a means of holding companies liable for criminal wrongdoing, particularly large companies with complex management structures. Critics argue that it encourages companies to decentralise responsibilities to avoid liability, making it difficult to identify a senior individual who is in charge of a particular operation.
A partial response to this issue came in the form of s7 Bribery Act 2010 which makes a company criminally liable if it fails to prevent bribery by someone (employee or third party) acting on its behalf. This is a strict liability offence, subject only to the defence of having adequate anti-bribery procedures in place. There is also draft legislation currently being considered in the UK Parliament which makes it a corporate criminal offence to fail to prevent the facilitation of tax evasion by a person acting on the company’s behalf. Both of these are inroads into the identification doctrine.
Options for reform
The Call for Evidence seeks views on a number of different options to reform the law, these are described as follows:
Option 1: Amendment of the identification doctrine
Legislation could amend the identification doctrine by broadening the scope of those regarded as a directing mind of a company. However, this does not appear to be a favoured option as the consultation states that ‘retaining the identification doctrine in any form...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 U.S. has a similar doctrine.
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.
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. This option is considered further below.
Option 5: Investigate the possibility of regulatory reform on a sector by sector basis
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 may be applicable more broadly.
The ‘failure to prevent’ model
The Call for Evidence covers the failure to prevent model (Option 4) in more detail – and is certainly the option that was discussed by the UK Government in 2016.
The Government’s starting position, stated in the Call for Evidence, is that the offence should initially apply to a short list of the most common serious economic crime offences, which could be added to if necessary by secondary legislation, e.g.
- the common law offence of conspiracy to defraud;
- the offences at section 1 of the Fraud Act 2006;
- the offence of false accounting at section 17 of the Theft Act 1968;
- the money laundering offences at section 327 to 333 of the Proceeds of Crime Act 2002.
The Call for Evidence also states that the formulation of a defence appropriate for economic crimes other than bribery and the facilitation of tax evasion and the extent to which it would have similar policy benefits would also need to be carefully considered.
The deadline for responses to the Call for Evidence is 24 March. Allen & Overy will be submitting a response. Anyone wishing to discuss the consultation should contact Lawson Caisley, Jonathan Hitchin or Michelle de Kluyver at Allen & Overy.