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16 Mar 2017

Why reform of corporate criminal liability is necessary and the best means of achieving it

Section 7 of the Bribery Act was implemented in July 2011. Its effect on the law concerning corporate criminal liability connected to corruption has been dramatic. It has led directly to the prosecution and plea of guilt of one multinational, Sweett Group PLC. More importantly, following the introduction of Deferred Prosecution Agreements (DPAs) in 2014, it has caused three other companies, including Rolls Royce PLC (RR) and a FTSE 100 listed household name, to self-report complicity with bribery and enter into such an agreement.

A vivid illustration of the transformation of this corner of criminal law since 2011 is obtained by comparing the 2017 RR DPA with the 2010 settlement of the SFO’s second biggest (RR is larger) and longest-running bribery investigation into British Aerospace (BAe). Similar to RR in size and prestige, BAe was also suspected of systemic bribery of foreign public officials. Hamstrung by an antiquated statutory anti-corruption law and impeded by a prevailing common law doctrine of criminal corporate liability fashioned in 1915, BAe’s obduracy resulted in a humiliating settlement for the SFO and a profound defeat for the interests of justice. In 2010, BAe was able to dictate the terms of the SFO’s surrender; a plea of guilt to an obscure books and records offence buried away in the Companies Act, the payment of a trifling gratuity to faraway governments at BAe’s discretion and an everlasting immunity for all its employees who had conducted and overseen the bribery.

Seven years later in its settlement done in the shadow of s7, RR admitted its systemic corruption and paid a penalty of £500m to HM Treasury. Instead of seeking immunity for its erstwhile employees, RR has committed itself to assisting the SFO in its investigations of them. That is just s7’s direct effect.

As the pre-Bribery Act legacy cases of historic corruption typified by BAe and RR fade into history, the ramifications of its enactment will be more fully appreciated. Its galvanising effect is due to the fact that it is an offence which reflects changing public attitudes. In this instance towards the accountability of companies and corporate social responsibility. S7 reflected, and continues to reflect, a zeitgeist concerning the fixing of corporations – especially multinationals – with legal responsibility for serious harm inflicted whilst in pursuit of their economic objectives.

The offence of corporate manslaughter was enacted in 2007 in similar circumstances. Its objective was to remedy the common law’s inability to punish those corporations responsible for causing death by negligence. The new offence of facilitating tax evasion, mainly aimed at companies and spawned by last year’s Panama Papers scandal, shows that the public’s support for the view that errant companies should be prosecuted has not abated. RR could have prevaricated with the SFO over whether its DPA should exclude alleged pre-Bribery Act (i.e. pre-2010) acts of bribery. Wisely it did not pursue this course. To have done so would probably have ruined the company’s attempt to portray itself as a changed organisation, having firmly put its murky practices behind it. RR is not unique is eschewing potential legal defences in order to “move on” and demonstrate change. Another major company which cannot presently be identified has recently pleaded guilty to corruption ostensibly for the same reasons.

S7 has, in tandem with changed public standards, achieved endemic reform in the culture within organisations concerning a genuine prohibition of bribery anywhere and especially where the risk is still highest, of public officials in emerging markets. This is an achievement for which the SFO, the prime mover behind s7, deserves credit.

It is unsurprising that, flushed with this success, the SFO is now seeking to persuade the MoJ to extrapolate s7 to all offences which it is primarily responsible for prosecuting. The MoJ’s reaction to this lobbying is cautious; its consultation paper is reminiscent of a Law Commission call for evidence and it is scrupulous in not committing itself to favouring legal reform. The MoJ’s restraint presumably manifests its concern about the potential uncertainty which might be created by such an extension of criminal liability. Uncertainty about liability for the serious offences which the SFO prosecutes would be undesirable and the MoJ is right to proceed slowly.

Caution notwithstanding, there is a pressing need for statutory intervention in order to overhaul the law on this subject. In contrast to the civil arena, where judicial activism has sought to frame principles of liability attuned to the structures of modern corporations (for example Chandler v Cape [2012], which held that liability can flow upwards from a subsidiary to parent company, thus recognising this now common disaggregated arrangement within group companies), the common law in the criminal arena has remained constant. Some would say stagnant. It has resolutely remained transfixed to the doctrine of identification, or “directing mind” doctrine, as held by the House of Lords in Tesco Supermarkets v Nattrass [1971]. An insistence on a guilty directing mind constitutes the narrowest attribution of liability of the acts of an individual to a company.

Attempts since then to supplant this doctrine and to impose liability based on a different model have failed. In St Regis Paper [2012], the Court of Appeal reasserted in the face of trenchant criticism from inter alia the Privy Council in Meridian Global Funds [1995], that for any offence with a mens rea element, the doctrine applied.  The MoJ’s consultation paper is correct to cite Tesco as still the leading authority.

The paper (pages 12-15) adequately summarises the widespread criticism of the doctrine and it is unnecessary to repeat it here. The impression of the paper is that current Whitehall thinking is unsure as to whether the defects of this test are best cured by regulatory or criminal law reform. The former being possibly a welcome pretext for prevarication, in that it can be argued that the relatively new Senior Managers Regime (SMR) needs several more years before its impact on curtailing bad behaviour by senior executives can be assessed.

It is submitted that the MoJ does not need further time to consider the impact of the SMR in assessing the need for law reform. This is for three reasons. First, the SMR is necessarily limited to businesses which are regulated by the FCA. The SFO regularly investigates suspected criminality executed via companies where there would be no corresponding regulatory offence. Secondly, repeating the zeitgeist point previously made, the public expects criminal law to apply to all and to deter or punish corporate misbehaviour which would be criminal if done by an individual. Lastly, it is obvious that the usage of s7 in the Sweett prosecution and the three DPAs has had effects concerned with prevention which would never have been gained had these cases instead been presented as failures to maintain standards or adequate controls.

In attempting to find a better alternative to the identification doctrine, one readily appreciates the reason for its longevity. Every alternative contains its own inherent problems. Consider two examples. First, the test propounded in the Corporate Manslaughter and Corporate Homicide Act 2007. Its insuperable difficulty is that it is founded upon the company (or organisation) having and breaching a duty of care to the deceased. It is arguable that HBOS owed such a duty to its stricken borrowers, which was breached when its middle managers preyed upon them, as shown in the recent trial R v Scourfield. It is relatively easy to infer causation and breach in those circumstances. This duty would become meaningless and imprecise as to its parameters if it were to be held that RR owed a duty of care to the people or nation of Indonesia amounting to not to corrupt their civil servants. A second alternative is the approach favoured in the Meridian Funds case by Lord Hoffman; that courts should treat the question of corporate criminal liability as a matter of statutory interpretation and thus such an exercise may rebut the presumption that the identification doctrine applies. The problem is that this approach is necessarily piecemeal, essentially pragmatic and lacks a clear statement of principle which would enable sufficient certainty or predictability. If the optimum is to impose criminal liability on companies for the acts of their employees in certain circumstances, it is better that this is done by the application of an intelligible and predictable law instead of by the exercise of judicial discretion.

The formulation of such a law is no easy task. However, the s7 model is the one which comes closest. Whilst it offends the principle that serious criminal offences should not be caught by strict liability and that the accused should not bear the burden of disproving their alleged criminality, these drawbacks are ameliorated. First, a company can only be fined, never imprisoned. Second, for individuals the burden of proof remains on the Crown. Third, the model places the burden of ensuring that pursuit of a company’s objectives does not involve fraud on a company’s management, which would not usually be unreasonable. A “tone from the top” which uproots and deplores an “end justifies the means” mentality is an aspect of corporate governance which the law should encourage. Fourth, a due diligence defence is available, satisfied by the civil standard. Lastly, s7 has already proved its effectiveness and social utility in terms of promoting the implementation of measures by companies to combat bribery.

There is no reason to believe that the same beneficial consequences would not be achieved were it to be extended as the SFO desires. Moreover, there are potentially selfish yet beneficial outcomes for the company, as the HBOS case shows. If HBOS had adequate procedures in place instead of the lax environment which allowed the abuse of its SME customers to be perpetuated, it would probably have saved itself from being a victim of a £245 million fraud and an orgy of civil litigation against its hapless rescuer, Lloyds Banking Group.

This article was also published in Thomson Reuters Practical Law.

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