21 Nov 2023

Redefining responsibility: the evolution of corporate criminal liability in the UK

To use a uniquely British expression, reforms of corporate criminal liability are like London buses – you wait decades for one, then two arrive at once.

It may surprise readers that the current premise of corporate criminal liability in the UK is based on a 1971 House of Lords decision concerning the alleged false advertising of discount soap powder. While it was doubtlessly not intended thus, the doctrine of Tesco Supermarkets v Nattrass [1972] AC 153 that corporate criminal liability arises only in respect of the actions of those who represent the “directing mind and will” of the organisation has remained good law ever since. In the case of Tesco v Nattrass, this meant that the corporate body operating a nationwide supermarket chain could not be held criminally liable for the actions of its employee managing an individual store.

Perhaps unsurprisingly, the high bar set by Tesco v Nattrass in respect of proving the relevant culpability of senior officers or employees has meant that prosecutions of corporate defendants (particularly very large organisations and/or those which are part of broader corporate structures) have been rare.

However, it is only in recent years that pressure has mounted for reform. Sir David Green, the former Director of the Serious Fraud Office, first suggested in September 2012 that the corporate “failure to prevent” offence created in respect of bribery by the Bribery Act 2010 (and later in respect of facilitation of tax evasion by the Criminal Finances Act 2017) should be extended to all financial crime.

The previous director, Lisa Osofsky, picked up the baton once again in the wake of the collapsed prosecution of Barclays in 2018, complaining in 2020 that “…we have a very antiquated system… In fraud cases I’ve got to have the controlling mind of a company before I can get a corporate in the dock. That’s a standard from the 1800s, when Mom and Pop ran companies. That’s not at all reflective of today’s world.”

Clearly someone was listening and the action that followed was extraordinarily prompt, at least by UK law reform standards. A consultation by the Law Commission (responsible for researching and recommending changes to UK legislation) in 2022 led to the announcement in April 2023 that the Economic Crime & Transparency Bill – which received Royal Assent on 26 October 2023 – would include a new offence of failure to prevent economic crime, modelled on the equivalent bribery and facilitation of tax evasion offences. The new offence will create criminal liability where an employee (or other “associated person” such as an agent) commits certain specified offences for the benefit of an organisation, unless the organisation can demonstrate that it had reasonable procedures in place to prevent the same. Predictably, this found favour with Ms Osofsky, who described it as a “game changer for law enforcement.”

A further surprise was in store, when in June 2023 the Government announced that the Bill would also reform the identification doctrine, expanding the scope for corporate criminal liability from those representing the “directing mind and will” to “senior managers”, which are in turn defined as an individual who plays a significant role in either:

  • the making of decisions about how the whole or a substantial part of the activities of the body corporate or (as the case may be) partnership are to be managed or organised.
  • the actual managing or organising of the whole or a substantial part of those activities.

Like failure to prevent, reform of the identification doctrine for economic crime is not without precedent: the test is modelled on the offence of Corporate Manslaughter created by the Corporate Manslaughter and Corporate Homicide Act 2007, which made it easier for companies to be held criminally liable for fatal health and safety breaches.

While the introduction of corporate manslaughter has generally been regarded as a success in enabling companies to be held properly accountable for fatal accidents, it has not resulted in the conviction of any household names. Rather, it has been focused on smaller organisations, and so Ms Osofsky’s complaint about a disproportionate number of “Mom and Pop” defendants may not be addressed by the new reforms.

The increasing prevalence of Deferred Prosecution Agreements – particularly for very large multinational organisations – since their introduction in 2014, should also be acknowledged when considering the potential impact of reforming corporate criminal liability.

Inevitably, the uncertainty that will be introduced by the new offence and the extended scope of the identification doctrine will incentivise companies to take a commercial view on whether to seek cooperation and settlement at the early stages of an investigation and increase prosecuting agencies’ bargaining power on the other side.

Whether an increase in negotiated agreements, rather than trials and potential convictions, for corporate crime is a good outcome is open to debate, particularly given the SFO’s dismal track record in related prosecutions of individuals. As with all such things, the devil will be in the detail, and in particular the statutory guidance on “reasonable procedures” that will accompany the new failure to prevent offence.

Although it has now become law as the Economic Crime and Corporate Transparency Act 2023, the bill’s unsteady journey through parliament demonstrates the lack of consensus as to exactly how the new provisions should take effect and against whom. As originally drafted, the bill would have created liability only for large commercial organisations and only for specified fraud and false accounting offences.

The House of Lords (the UK’s upper Parliamentary chambers) subsequently introduced amendments that would have imposed liability on all organisations regardless of size, and also brought money laundering offences into scope. Both were rejected by the House of Commons. In response, the Lords conceded the point on the exclusion of money laundering but voted (by a relatively narrow margin) to hold fast on a compromise amendment that would impose failure to prevent liability on all but the smallest micro-organisations. The Commons subsequently exercised its ultimate veto and reinstated the original draft, excluding money laundering and restricting the scope to a small pool of large organisations. Thus, the majority of UK companies will be shielded from both the risks and increased compliance costs of the new regime.

Political flip-flopping confirms what those in the business already knew – there is no obvious solution to addressing corporate criminal liability for financial crime, particularly where the goal is to attribute the mental state of natural persons (whether that be dishonesty or intent) to the legal persons they represent, as opposed to merely imposing liability in a quasi-regulatory fashion for failure to ensure reasonable compliance procedures.

While it is inevitable that the proposed reforms will result in some increase in corporate prosecutions and Deferred Prosecution Agreements, it remains to be seen whether they are of the type or scale hoped for by those frustrated by the current state of corporate criminal liability in the UK, and whether the increased compliance burden on large UK businesses is regarded as a worthy trade-off

This article was originally published in Solicitors Journal on the 21st November 2023.

 

 

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