Reforming corporate liability

Introduction

There has long been debate around the ability to successfully prosecute companies for criminal offences in England and Wales. Doing so under the current legal framework requires identifying that an individual who constituted the ‘directing mind & will’ (or “DMW”) of the company committed the offence, whose criminal liability can then be attributed to their employer. This issue was the subject of a call for evidence by the Ministry of Justice in March 2017. The Government is yet to publish its response, though the Economic Crime Plan released in July 2019 stated that it would do so ‘shortly'.

Meanwhile, the debate has raged on. In early February 2020, the director of the SFO, Lisa Osofsky, described the UK’s fraud laws and approach to attribution of corporate liability as “antiquated”, “not at all reflective of today’s world” and in need of reform. The topic has continued to be the subject of much commentary following the release of judgments dismissing fraud charges against Barclays a few weeks later.

However, when viewed through the prism of existing mechanisms for addressing corporate misconduct and ongoing criticism of the SFO for its failure to secure convictions of individual defendants, the case for reform is far from convincing.

The debate

Osofsky is not alone in her views: successive directors of the SFO have argued that the current law sets too high a threshold for the establishment of corporate criminal liability and does not take into account the reality of increasingly complex and often global corporate structures. In the words of former SFO director, David Green, “the email trail has a strange habit of drying up at middle management level”. This has the effect of creating a scenario where SMEs can be more easily prosecuted than large corporates: Osofsky told parliament last year that, without reform, she could, “go after Main Street, but I can’t go after Wall Street”.

Osofsky has suggested implementing US-style vicarious liability for fraud in the UK to address this or, failing that, a ‘failure to prevent’ offence. This second option is the more widely favoured alternative, gaining traction since the 2017 call for evidence. Last year the House of Lords Bribery Act Committee called for a decision without delay on whether to introduce a failure to prevent fraud offence, and the Treasury Committee requested that the Government consider introducing a new offence of failing to prevent economic crime, stating that “it is wrong and potentially dangerous to not reform this area.” This proposal would, in effect, extend the model of corporate liability introduced for bribery and tax evasion - whereby companies are automatically criminally liable for an offence carried out by any associated person unless they can show that they had adequate procedures in place to prevent such offending - to other economic crimes including fraud.

Lord Justice Davis addressed the apparent consequences of the current legal framework in a judgment dismissing an application by the SFO to reinstate charges against Barclays, noting that the criticisms made “[do] not necessarily represent the whole story”. He emphasised that “devolution and delegation, as a matter of corporate governance… becomes a practical necessity in order to improve decision-making and the discharge of responsibilities. It therefore would be quite wrong to presume that such devolved structures are put in place as a device to avoid corporate responsibility, criminal or otherwise” (SFO v Barclays, [2018] EWHC 3055, at [101]).

The outcome in that case supports the view that a broad failure to prevent economic crime offence would not offer the SFO the solution it is looking for: as all of the individuals charged with fraud offences were ultimately acquitted, there was no criminal offending that the bank could be said to have ‘failed to prevent'.

The SFO’s failure to successfully prosecute individuals in this case is not unique: we have now seen a number companies agree Deferred Prosecution Agreements (DPAs) on the basis of attributed individual liability (applying the ‘failure to prevent’ and DMW models), where the underlying individuals have gone on to be either acquitted or not prosecuted at all. This trend undermines the argument that introducing a broad failure to prevent offence would lead to more just outcomes in corporate economic crime cases as it creates inconsistency or incoherence in the treatment of companies and individuals. It should of course be recognised that introducing a lower liability threshold could well lead to an increase in DPAs, which, in view of the levels of financial penalties achieved in recent cases, may be a key incentive for the SFO in favouring this approach. Any such growth however risks increasing the potential for incoherent and unjust outcomes as between corporates and individuals.

What next?

There has been no further news from the Government as to when (if at all) we should expect to see any concrete proposals for reform in this area and, perhaps understandably, it does not appear high up the list of priorities. What is clear though is that this debate is likely to continue to run for some time.

In our view, a sufficient case has not been made for reforming the law on corporate criminal liability in England and Wales, including by introducing a broad failure to prevent economic crime offence. Our full response to the 2017 call for evidence addresses this and can be found here but, in light of recent events, there are few key points to highlight:

• there is not a single recent case where it is possible to say that a corporate prosecution failed because the SFO could not establish that its DMW was involved in criminal offending: even if it had been possible to prove that the senior executives charged with fraud offences in the SFO’s case against Barclays constituted the DMW for the purposes of the transactions in question, that prosecution still would have failed when those individuals were acquitted;

• introducing a broad failure to prevent economic crime offence risks compounding the current inconsistency in outcomes for corporates and individuals accused of criminal offending, and ultimately creates unfairness for individuals who are acquitted or not prosecuted, but carry the reputational consequences of being named as complicit in a DPA statement of facts;

• it is not appropriate to use the ‘failure to prevent’ model for all economic crime offences and particularly fraud, which is a broad offence capturing a large range of conduct that may encompass almost any employee behaviour. This is in stark comparison to bribery and tax evasion, where compliance procedures to prevent such offences can be targeted to particular types of high-risk business activity; and

• there are other more effective means of addressing and deterring corporate misconduct particularly in the financial sector, including an extensive regulatory regime, the risk of civil action and, where there is sufficient evidence in support, individual criminal liability. In those circumstances, any additional benefit arising from prosecuting the company may be questionable.