08 Feb 2017

Corporate Liability – Where Will it End?

Published on Friday the 13th, there is something unsettling, if not actually spooky, about the government’s latest proposals to extend corporate criminal liability. Whilst the past two decades have seen reform in this area, the latest proposals envision a radical extension of the state’s ability to pursue companies for acts committed by individuals they are associated with. Whereas the Bribery Act and the legislation on cartels attempted to tackle relatively narrow areas of activity, any of the alternatives published in the consultation paper would expose companies to prosecution for any “economic crime”.

In short, the government wants to abolish or nullify the effect of the identification principle (the rule that a company cannot be found guilty of an offence unless it is proved that an individual who was the directing mind and will of the organisation possessed the necessary mental element of fault for the crime to be committed). The consultation paper proposes several ways to achieve this – abolishing the principle by an Act of Parliament, better regulatory enforcement, or the creation of a new criminal offence that would catch companies whose employees were involved in economic crime (three variants of this last option are provided).

Before examining the alternative proposals in more detail, it is worth examining the context which has led the current administration to propose such an alteration to established legal principles.

This consultation paper flows directly from last year’s Anti-Corruption Summit and expresses Whitehall’s enthusiasm for tightening the screws on companies associated with crime. The government is clearly set on expanding the scope of corporate liability and does not consider “do nothing” an acceptable option.

Nevertheless, this wave of eagerness should not be allowed to rock the boat. Implementing any of the proposals would be a significant change in focus of criminal law in this area and the government would be wise to approach it with considerable caution. Other ventures into the landscape of corporate criminal liability have not always gone smoothly (the very low rate of prosecutions under the corporate manslaughter legislation is just one example).

Whilst the extension of corporate liability in itself is unlikely to significantly affect trade, any reforms must be clear and well planned in order to have minimal impact on law abiding corporations. Fortunately, the government recognises this and has included elements within the proposals that shield responsible corporations from conviction.

One driver behind the proposals seems to be a perceived need for consistency. Currently, specific legislation deals with corporate offences of bribery and measures are about to be introduced in relation to facilitating tax evasion. All other offences are dealt with only through the identification principle. Extending corporate liability in areas not already specifically covered would have the effect of putting all economic offences on an equal footing. However, tidiness is probably not worth the price. In practice, the proposed measures would be an unwarranted extension of the criminal law which may end up punishing innocent companies and shareholders who are the victims of fraud.

Turning to the specific proposals, the consultation paper’s five options essentially boil down to three, one of which could be done in three different ways.

Option one is simply to abolish the identification principle via primary legislation. This would be a blunt instrument since an Act of abolition would do nothing to give guidance to the industry on precisely what the state of play would be in the future. Parliament would make a hole in the law and leave the courts to fill it in on a case by case basis. A brief reading of the High Court’s judgment in the Brexit case shows how unclear the border of statute and the common law can be.

The fifth option in the consultation paper is to ramp up regulatory enforcement. It is not clear precisely what this would entail and such measures may be less likely to attract the press and public attention necessary for justice to be seen to be done. The process of imposing such non-criminal sanctions may well be a more proportionate approach than the imposition of full criminal liability.

The remaining three options all involve the extension or introduction of a criminal offence.

One option (the second in the consultation) would be a strict liability offence based on the principles of vicarious liability. Under this measure the civil law principles of vicarious liability would be applied in the criminal setting and companies would thus be criminally liable for offences committed by their employees, officers and directors. This would put companies in the same position vis-à-vis criminal employees as they are to negligent sub-contractors in the civil setting (i.e. they take the blame). This would be a vast extension of the criminal law, introducing potentially widespread criminal liability for companies which could stifle economic activity. Be careful what you wish for!

An alternative measure contemplated in the proposals is the introduction of a strict liability offence of failing to prevent economic crime being committed on behalf or in the name of the company. Unlike the introduction of vicarious liability, this option would place emphasis on the failure to prevent crime rather than labelling the corporate as guilty of the substantive offence.

One benefit of this arrangement is that the offence committed by the company would be conceptually distinct from that of the main actor. This reflects the fact that corporations are, always, acting through living individuals and lack the mental intention associated with most economic crime. However, this option would do nothing to discourage individuals from committing fraud but might well require firms to implement expensive preventative measures, thereby inhibiting their contribution to the economy.

The final “offence” option would be similar to creating a new strict liability offence, the key difference being that the prosecution would bear the burden of proving a failure on behalf of the corporate’s management instead of the defence having to prove that adequate measures were in place to prevent crime.

One benefit of this final option is that it maintains the general principle of criminal law in that the burden of proof is on the prosecution, and is therefore preferable to the other two options. It seems unjust to hold corporates to a different standard under the criminal law than ordinary citizens. Of course, a company cannot be imprisoned, but the consequences of conviction for individuals associated with a firm can still be serious and life-ruining. For these reasons, the burden of proof should lie with the prosecution, as it normally does.

Given the political climate, it is likely that corporate liability will be extended in some significant way (whether as outlined in the Consultation Paper or otherwise). However, the government has made clear that the proposals in this paper are not mutually exclusive and that it is currently only gathering evidence. It is therefore quite possible that some of the more objectionable parts of the proposals could be removed from any final legislation. Watch this space.

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