Crackdown on white collar crime?
Corporate Crime analysis: Ministers are reportedly considering new legislation to crack down on white collar crime. Sangeeta Bedi, associate at Corker Binning, explains the background to this development and considers how any new laws could be enforced.
Ministers are considering new laws that could ensure company boards face prosecution for offences perpetrated by employees. What crimes are likely to be included in this legislation?
A number of high profile scandals such as the London inter-bank lending rate (LIBOR) and the leak of the ‘Panama Papers’ have led to intense media and governmental scrutiny around corporate governance and whether, more generally, companies can be regarded as ‘good corporate citizens’. As a result of these issues and public calls for greater transparency and accountability, proposals have been put forward for a new offence of failing to prevent economic crime.
During a symposium on economic crime in Cambridge earlier this month the Attorney General, Jeremy Wright QC, further emphasised the government’s strategy to crack down on white collar crime, commenting that
‘When considering the question “where does the buck stop?” and who is responsible for economic crime, it is clear that the answer is to be found at every level from the boardroom down’.
The news comes following the disclosure that three former Tesco executives have been charged with fraud following the Serious Fraud Office (SFO) investigation into the retailer’s accounting scandal in 2014. No decision has yet been made about whether the company itself will face some form of criminal sanction.
The plans for a new offence are yet to be officially unveiled, but are likely to include measures to ensure that company boards face prosecution for a range of offences perpetrated by employees or others ‘associated with the company.’ It is not yet clear what might constitute ‘economic crime’ but it is believed that the definition will encompass the offences for which a deferred prosecution agreement (DPA) can be obtained. This would incorporate those outlined in in part 2 of schedule 17 of the Crime and Courts Act 2013 such as Fraud Act 2006 offences, theft, forgery, false accounting, money laundering, destroying company documents and a range of offences under the Financial Services and Markets Act 2006 and Companies Act 2006.
Another offence of the same type being considered is the new corporate offence of failure to prevent the facilitation of tax evasion which is expected to be the subject of legislation in 2017.
How would the government enforce such legislation? How can prosecutors accurately determine liability?
The present corporate crime regime makes it difficult to hold corporate boards to account for misconduct, something that the SFO has noted on numerous occasions. In relation to offences requiring knowledge of wrongdoing, a company’s criminal liability is determined according to the identification principle—it can only be held liable for the criminal acts or omissions of individuals if those individuals can be identified as the company’s directing mind and will or ‘controlling mind’, ie, directors and officers who carry out management functions and/or are of sufficient seniority. Historically, therefore, it has proved difficult to ascribe criminal liability to larger corporations where decision-making can sometimes be difficult to trace up to board level.
The proposed legislation is therefore a departure from the current identification principle and is likely to result in criminal culpability for a company, even in situations where no one at board level has any knowledge of the conduct.
However, the effectiveness of any new legislation, is ultimately assessed on how it is enforced. A ‘failure to prevent economic crime’ offence is likely to shift responsibility for the prevention of financial crime onto companies and would significantly increase the prosecutor or regulator’s reach in cases where a corporation should be held to account for the conduct of its employees or people associated with it. Moreover, the definition of ‘economic crime’ is arguably broad and while some may agree with or appreciate the sentiment behind this proposed new offence, a number of issues such as the practicality of enforcing such legislation needs to be looked at. It is worth remembering that the number of Bribery Act 2010 (BA 2010) prosecutions remains relatively low—only five individuals having been charged in the five years that BA 2010 has been in force. Moreover, the corporate offence of failure to prevent bribery has been prosecuted on only one occasion, perhaps reflecting the difficulties in bringing such cases before the courts.
Despite the issues noted above, the potential repercussions on individuals and corporations of a failure to prevent offence could be very significant. In terms of penalties and by way of example, under BA 2010, s 11, companies found guilty of a relevant offence under BA 2010 can be penalised by an unlimited fine, debarment from competing for public contracts and disgorgement of profits. Moreover, individuals who are convicted face up to ten years’ imprisonment as well as an unlimited fine. In the present climate, with the Financial Conduct Authority (FCA) also engaged in the accountability of senior managers, the ramifications for board members could therefore be substantial.
Who will be liable?
Associated persons
If implemented, the proposed legislation (which may cover a range of offences) is likely to resemble BA 2010, s 7, by making companies criminally liable for acts of their ‘associated persons’. An ‘associated person’ can include an employee, agent or third party who provides services for or on behalf of the company anywhere in the world. Perhaps equally relevant for corporations operating in several jurisdictions or sectors is that subsidiaries can also be included in this definition. The mere existence of a parent and subsidiary relationship is not sufficient in itself to establish that the subsidiary is performing services for and on behalf of the parent. A detailed analysis of all relevant features of the relationship is essential as a subsidiary can be, and often is, a distinct entity undertaking wholly different operations from the parent company.
The only conviction to date under BA 2010, s 7, provides a clear example of BA 2010 extraterritorial reach and the court’s approach in defining a subsidiary as an ‘associated person’. On 19 February 2016, Sweett plc, a UK-based construction and professional services company was convicted for failing to prevent its subsidiary Cyril Sweett International (CSI) from paying bribes in the United Arab Emirates on its behalf.
In this case, it was found that although CSI was a separate and distinct legal entity, it was in effect operated by Sweett plc as part of its operations in the Middle East. It was therefore impossible for Sweett to distance itself from CSI’s established bribery and, by virtue of the guilty plea, accepted it as being for the benefit of Sweett. However, there was no suggestion that the CSI bribery took place with the knowledge or agreement of Sweett.
The proposed offence will therefore be of significant interest to all corporations with a nexus to the UK. Companies are likely to be made liable for the acts of their associated persons, wherever in the world the criminal conduct occurs. For large organisations, this is likely to include considerable numbers of subsidiaries, employees and agents in several jurisdictions, some of whom may be difficult to oversee.
Non-executive directors (NEDs)
Another pertinent issue is the status of NEDs under the legislation. A NED is typically an objective individual who can provide an independent perspective for the board. They owe a similar level of fiduciary duty to the company as directors but do not make any executive decisions nor do they have responsibility for the day-to-day operations. Crucially, they may not be privy to the same level of sensitive and/or confidential information as the rest of the board.
The UK Corporate Governance Code sets out key elements of the role of NEDs including satisfying themselves that systems of risk management are robust and defensible. Under the government’s new plans, it will be of interest to see whether NEDs will be held to be equally accountable as executive directors. Will their independence now mean that they are the unofficial overseers of compliance issues and will ultimately be held responsible?
Perhaps in an attempt to address the concerns in this area, the Business, Innovation and Skills department (BIS committee) recently launched an inquiry on corporate governance. In the wake of high-profile corporate failings such as BHS, the inquiry focuses on three distinct areas:
- director’s duties—including consideration of whether the current state of company law is sufficiently clear on the roles of directors and non-executive directors and whether those duties are the right ones
- executive pay
- composition of boardrooms
The deadline for submissions was 26 October 2016 and we await the outcome of the consultation.
Professional advisers
The government will need to consider the role of third parties in defining any failure to prevent criminal offences. Take, for example, the recent spate of cases involving the prosecution of individuals who had invested in film tax schemes, on the advice of professional advisors and investment scheme promoters. These tax schemes ultimately failed, but under a failure to prevent the facilitation of tax evasion or other economic crime offences proposed, how would the role of professional advisers, who interpret complex tax laws and advise on tax planning be determined? The current guidance is unclear and new proposals for heavy civil fines for advisers in failed tax avoidance schemes makes the situation more uncertain.
How will the legislation tackle what Theresa May is calling ‘boardroom excess’?
This is by no means a new issue. As far back as 2009, the European Commission recommended that states should issue guidelines to curb ‘boardroom excess’, such as excessive pay and inflated bonuses. It has therefore long been on the European agenda but, with Brexit looming, Theresa May has made it a priority in the UK. The push for legislation to extend the corporate crime framework is one of several measures that will be announced by the Prime Minister to curb corporate wrongdoing but separate legislation will be needed to address placing limits on corporate pay. It will be interesting for corporations and lawyers to observe the outcome of the BIS committee’s inquiry into corporate governance noted above and its potential impact, if any, on the forthcoming legislation.
There are similar pre-existing laws relating to bribery. How effective are these laws? Are there any problems with this legislation?
The BA 2010 has left the identification principle undisturbed but creates a new offence under BA 2010, s 7, whereby a commercial organisation can be held liable if it fails to prevent persons associated with it from committing bribery to obtain or retain a business advantage on its behalf.
A company will only have a defence to the BA 2010, s 7, offence if it can show that it had in place ‘adequate procedures’ that were ‘designed to prevent’ bribery by associated persons. It is probable that any new offence of failure to prevent economic crime will benefit from the same defence. However, government ministers should be encouraged to avoid and/or address the problems experienced with BA 2010 when drafting the new legislation.
What are ‘adequate procedures’?
The main difficulty with BA 2010 is assessing the ‘reasonableness’ or ‘adequacy of procedures’ adopted by a company to prevent wrongdoing. What may be considered as ‘reasonable’ measures for one company to undertake may not be considered as such for another. In these circumstances it is a balancing exercise which will need to be mindful of a company’s size, resources and the sector or industry within which it operates.
As required under BA 2010, s 9, the Ministry of Justice has published official guidance setting out six key principles that a company should bear in mind when establishing an appropriate compliance programme for the purposes of BA 2010, s 7. Briefly these are:
- policies and procedures that are proportionate to the risks identified
- demonstrable board level commitment and ‘tone from the top’
- a detailed risk assessment
- the need for due diligence in relation to third parties
- communication and training
- monitoring and review
Companies are entitled to take a proportionate, ‘risk-based’ approach to their compliance programme for the purposes of BA 2010, s 7. A similar approach is likely to be adopted in relation to the proposed new offence.
The US has enforced similar laws to tackle white-collar crime. How successful are the US legislators in holding company boards to account? Has the legislation proved successful in the US?
An increased emphasis on holding senior individuals and corporations to account has long been the focus of prosecutors in the US. However, rather than implementing ‘failure to prevent’ offences, the US has increasingly developed its focus on corporate self-disclosure and cooperation.
The Sarbanes-Oxley Act 2002 imposed a complex set of certification and self-disclosure requirements on corporate officers, directors and counsel. The US Securities and Exchange Commission (SEC) announced in 2010 that it was implementing a series of measures to further strengthen its enforcement programme by encouraging greater co-operation from individuals and companies in the agency’s investigations and enforcement actions. More recently the US Department of Justice (DOJ) announced a one-year pilot programme to encourage companies to voluntarily self-report misconduct under the US Foreign and Corrupt Practices Act 1977. The Enforcement Plan and Guidance (the guidance) issued by the fraud section of the DOJ on 5 April 2016, also outlines an additional framework to support this strategy, such as increasing the resources at the investigative and prosecutorial stage and an intention to work more closely with foreign law enforcement to investigate corruption matters. The pilot programme, which received considerable critical attention, has been implemented to promote the disclosure of conduct that may have gone undiscovered. It also seeks to provide greater transparency around the requirements to obtain co-operation credit and the resulting benefits of that co-operation. Companies that self-disclose on violations will be eligible for a wide range of incentives including the DOJ declining to prosecute.
In this regard, the guidance simply reflects existing practice and incorporates the standards for individual liability and prosecution, as set out in the Yates Memorandum published in September 2015. However, while the DOJ remains extremely keen to hold individuals accountable for misconduct, the guidance represents a rare attempt to clarify and quantify the potential rewards to companies for providing information allowing it to do so. Critics of the programme have noted that the qualifying requirements set out within the guidance are high hurdles for a company to overcome.
Deferred prosecution agreements (DPAs)
As part of their enhanced enforcement strategy, the US has led the way in utilising non-prosecution agreements, something their UK counterparts will no doubt monitor closely. DPAs as they are known in the UK, were introduced in February 2014 to enable the SFO to deal with criminal culpability of a company. DPAs require a greater level of judicial supervision than their counterpart structure in the US. The UK regulators must submit the DPA to the court for a declaration that its terms are in the interests of justice and are fair, reasonable and proportionate.
At the time of their introduction, it was expected that DPAs would encourage more self-reporting under BA 2010. Although there have been only two such DPAs to date, it could be said there is a similar level of expectation that economic misconduct under the new offence could encourage self-reporting and/or be resolved by way of this method.
However, while it certainly appears that prosecutors on both sides of the Atlantic share common policy goals, the mechanisms and resources available in the UK are arguably nowhere near as developed as in the US.
First, it is the SFO’s policy not to ‘give any advice on the likely outcome of a self-report until the completion of that process’. Although each case should be considered on its own particular facts, a balance should be maintained between flexibility and a corporate’s request for clarity of consequences in the event of a self-report and potential non-trial outcome.
Second, and perhaps critically for a corporation, the incentives for self-disclosing in the UK are not remotely as generous as those proposed by the DOJ in its pilot programme. For example, corporations who self-report in circumstances where a resolution is appropriate by way of a DPA can only expect a one deeper third discount in financial penalty in the UK—the equivalent to the discount offered if a corporation chooses to plead guilty at the earliest opportunity.
Ben Morgan, the joint head of bribery and corruption at the SFO made reference to this issue in his recent speech in New York, while discussing the increased emphasis on co-operation and dialogue from corporations during investigations. He noted that the second DPA was illustrative of the fact that in the ‘right circumstances’ the court would support a greater discount up to 50%, and separately, might take into account other relevant financial matters. He went on to comment that
‘if taken together with the other benefits of a DPA, these have the effect of more companies coming forward, then that can only be a good thing in the overall interests of justice. We [the SFO] fully support it and in the right cases would look to build overall resolutions that include more than one third discounts on the financial penalty component.’
This begs the question as to what the distinguishing features of the ‘right cases’ are. Ultimately the SFO’s prime role is that of prosecutor and, in the absence of guidance and certainty, would a company board believe it to be more of a risk than reward to self-report misconduct?
If the government passes these laws, what would this mean for lawyers and their clients on a practical level? Is there anything lawyers should do to prepare for these laws?
As the details of the new offence(s) have not yet been unveiled, it is too early to comment on the extent of board liability and what steps should be taken to prepare for these laws. However, it is clear that corporations are likely to face a heavy compliance burden (and the associated costs, administration and management resource that this involves) and greater scrutiny into their corporate governance. While we await the government’s draft bill and further consultation, companies would do well to focus on their existing compliance controls and to demonstrate the six principles outlined in BA 2010, guidance above:
- proportionality of reasonable procedures
- top-level commitment
- risk assessment
- due diligence
- communication (including training)
- monitoring and review
One of the most important of these principles is the risk assessment. Once this step has been completed, a company can then take a proportionate view on what training and procedures it needs to put in place and which elements of the business it needs to pay closer attention to.
Are there any other points worth mentioning?
In order to deter criminal misconduct within corporations, the government will need to provide targeted and specific guidance as to the new policies that companies will need to have in place. There have been several attempts to introduce similar offences in the recent past and, while it is clear that some adjustment of the current framework is necessary, the legal mechanisms for effecting such change will need to be balanced alongside its potential commercial impact to ensure its continuing success. There is a real sense of over-burdensome legislation being proposed to achieve perceived political benefits which may yet prove illusory.
Interviewed by Alex Heshmaty.
This article was originally published in LexisPSL and can be found here, behind a paywall.