In November 2020, following years of lobbying by the SFO and civil society, the UK Government asked the Law Commission to review the law on corporate criminal liability in England and Wales. The Law Commission has now produced an Options Paper and accompanying Summary.
The Law Commission’s work was limited to considering the various potential regimes rather than looking at the overall case for change. While it stops short of making specific recommendations, the option that appears to have been favoured by the Law Commission is the introduction of an offence of failure to prevent fraud by an associated person.
We look here at how the Law Commission’s “routes to reform” might fit within the existing corporate crime landscape in the UK, which already includes a number of enforcement options (both civil and criminal) in relation to economic crime.
Background
Other than in the cases of bribery, facilitation of tax evasion and some health and safety contexts (where there are statutory exceptions), it is necessary to satisfy the ‘identification doctrine’ in order to attribute criminal liability to a company. This requires an individual who constitutes the ‘directing mind and will’ of the corporate, usually at the board of directors or equivalent level, to have the necessary mental state to complete the offence in question.
The identification doctrine has been criticised, particularly in the context of the challenges it presents when attempts are made to prosecute larger companies, where the distance between conduct ‘on the ground’ and knowledge at the top of the company is greater. Calls for reform have been made by successive SFO Directors (in 2013 the then director of the SFO – Sir David Green CB QC – proposed the creation of an offence of failing to prevent crimes of dishonesty or fraud by employees or agents).
In the Options Paper, the Law Commission considers various legal mechanisms to address the view that the “the law must go further to ensure that corporations – especially large companies – can be convicted of serious criminal offences such as fraud”, whilst seeking to avoid “disproportionate burdens upon business”.
The US position is rejected
Amongst the options that the Law Commission rejected was the US doctrine of respondeat superior (‘let the master answer’), which effectively makes the corporate entity vicariously liable for the acts of its employees and agents, whether senior people are aware or not. The Law Commission recognised that this “would represent a fundamental change in corporate criminal liability in England and Wales” and, for a range of reasons, concluded that it was not a suitable alternative to the status quo.
The options considered
The options that the Law Commission has proposed can be grouped into four buckets:
1. The identification doctrine itself (Options 1 and 2) – i.e. maintaining the status quo or extending it to senior management with – potentially – actions of the CEO and CFO themselves being deemed to be sufficient to create liability for the company, even without the knowledge or delegation of the full board.
2. Failure to prevent offences (Options 3 – 6) – which may be the most likely direction of travel, as discussed below.
3. Civil and administrative options (Options 8 and 9) – which are likely to face considerable challenges for a range of reasons.
4. Publicity and reporting requirements (Options 7 and 10) – which are unlikely to satisfy those seeking reform, other than as a useful adjunct to one of the other options.
As regards the failure to prevent offences, the Law Commission considers there is a case for a failure to prevent fraud offence, but not for a broader “failure to prevent economic crime” offence. The offences which would be captured are: fraud by false representation, obtaining services dishonestly, cheating the public revenue, false accounting, fraudulent trading, dishonest representation for obtaining benefits and fraudulent evasion of excise duty. While there was some support for including money laundering (e.g. in a broader failure to prevent economic crime offence), it was considered that including it within scope of a new offence would be duplicative of the current money laundering regime, which will be welcome news to financial institutions worried about having to deal with parallel regimes.
To the extent that any new offences are introduced, the Law Commission expressed the view that offences should generally (i) include a requirement to benefit the company (to avoid situations where companies who are victims of fraud perversely also attract a liability); (ii) not be expected to have extraterritorial effect or, if so, there should be a demonstrable need for the same; and (iii) the appropriate defence should be to have in place procedures which were “reasonable in all the circumstances”, or that it was reasonable not to have procedures in place, rather than the Bribery Act’s concept of “adequate procedures”.
While it received submissions in support of other failure to prevent offences, such as failure to prevent human rights abuses and failure to prevent computer misuse, the Law Commission considered that more work would be required on the scope of such offences. For example, careful consideration would need to be given to the application of any failure to prevent human rights abuses to conduct that takes place overseas.
Will we get a new failure to prevent offence?
That will be a matter for Parliament, and so contingent on the political will, and legislative space, to deliver any change. The Law Commission states that it is “not making recommendations”, but does note that “in the absence of reform to the identification doctrine itself, we conclude that the case for additional measures to tackle economic crime such as failure to prevent offences, would be even more compelling” so it does feel as though at least at that level, there is a sense of necessity for change. Another reason for perhaps concluding that this is the direction of travel is the fact that there are already two other ‘failure to prevent’ offences on the statute books:
- The s. 7 Bribery Act 2010 offence of failure to prevent bribery; and
- The ss. 45 and 46 Criminal Finances Act 2017 offences of failure to prevent the facilitation of tax evasion.
While it was around five years from the introduction of the offence of failure to prevent bribery before a successful prosecution was brought and, as yet, no prosecutions have been brought for failure to prevent the facilitation of tax evasion, the creation of these offences has brought about a focus on prevention measures and pushed the issues higher up the corporate agenda, and most would agree that there has been a commensurate, and positive, change in behaviour as a result. The success of the legislation therefore cannot necessarily be measured solely by reference to the number of convictions achieved.
Interestingly, shortly before the publication of the Law Commission’s Options Paper, the House of Lords’ Post-Legislative Assessment of the Fraud Act 2006 noted that support for the expansion of the ‘failure to prevent’ model was raised in many of the responses received from contributors (comprised of investigators and prosecutors such as the CPS, the SFO and the City of London Police).
Of course, it remains to be seen how the UK Government will respond to the Law Commission’s Options Paper and where reform of this area of the criminal law sits in its list of legislative priorities. This political football has been kicked around in the UK before, and there are strong views on both sides of the case, so while the topic is live again, we are not at a concrete point of change.
How this fits into the broader enforcement landscape
There are public policy reasons, increasingly being adopted internationally, in favour of having an effective regime for holding companies liable for criminal conduct – it helps drive good corporate behaviour and promotes co-operation and engagement with regulators and prosecutors. In the case of the UK, there is already a complex enforcement landscape that includes several elements aimed at achieving these policy aims.
Regulators and prosecutors already have a range of options available to them to help shape, and where necessary punish, corporate wrong-doing, including through existing offences and civil penalties, for example under the Money Laundering Regulations and, most recently, with the introduction of strict civil liability for sanctions breaches in the Economic Crime Act 2022, which came into effect on 15 June 2022. The question, therefore, is whether lawmakers decide that the status quo is sufficient, or that change of the type canvassed by the Law Commission would represent a consistent direction of travel, and have the support necessary to deliver it.
