Corporate criminal liability – how can corporate accountability for serious crime be improved?

An examination of criminal corporate liability in light of the Law Commission’s June 2022 Options Paper.

Introduction

Improving the law to ensure that corporations are effectively held to account for committing serious crimes has always been a thorny issue.  Indeed, it is an issue that the Law Commission has extensively grappled with.  It has been felt for a while that the general rule (known as the identification principle (explored further below)) for attributing corporate liability has not adequately dealt with corporate wrongdoing. 

As such, in November 2020 the Government asked the Law Commission to examine the issue and provide options for reform. In response, the Law Commission produced an options paper in June 2022.  Indeed, some of the proposed options can be said to be far-reaching, including specific failure to prevent offences.

With this in mind, this blog will initially examine how the criminal law has developed in an attempt to hold corporations to account for their criminal wrongdoing.  As will be seen, in fact, the criminal law has developed gradually in this regard. 

In light of this background and whilst conducting this examination, this blog will also examine the several challenges to establishing criminal corporate liability which have arisen, and the previous attempts to overcome these.  In this vein, the blog will conclude with a look at the Law Commission’s latest proposals for corporate crime reform, how effective these might be, whether they stand a chance of being implemented and what could be some of the implications.

Background

There are currently three ways in which corporations[i] may be held to account for potential criminal behaviour:

• statutory offences that ascribe specific corporate liability, inter alia, failure to prevent offences in section 7 of the Bribery act 2019;

• vicarious liability, limited to strict liability offences, inter alia, those created under health and safety legislation; and

• the identification principle, which includes offences requiring a mental element.

However, it has generally been felt that the framework has been falling short in adequately holding corporations to account.  As a result, in November 2020 the Government requested the Law Commission to address “the challenges faced by the criminal justice system under the current law relating to corporate criminal liability” and explore routes for reform that would not pose “disproportionate burdens upon business”.

This crystalised on 10 June 2022, when the Law Commission published an options paper on “Corporate Criminal Liability” (the “CCL paper”).

The CCL paper devotes Chapter 8 to the “failure to prevent” offences in relation to economic crime, and the options for widening this regime. The Law Commission’s stance is clear: it endorses the introduction of new “failure to prevent” offences and highlights the need for reform of the identification doctrine. If the latter were to be retained as at present, the need for new “failure to prevent” offences would be “more compelling”.

The identification doctrine

For criminal offences that require a mental element, the House of Lords decision in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 ruled that a corporation can be convicted of a criminal offence if the natural person who committed the offence represents “the directing mind will” of the corporation and had requisite state mind. Lord Diplock clarified that the starting point should be the corporation’s constitution, memorandum and blogs of association, and the decisions taken by the directors or by the corporation in general meeting. Therefore, criminal liability will only be established if the person committing the offence is to be regarded as the corporation, that is to say, exercising the powers vested in them. The person’s status within the corporation alone will not suffice to constitute the corporation’s directing mind and will. The person needs to have also the authority to engage in the relevant conduct, as decided in SFO v Barclays plc and another [2018] EWHC 3055 (QB)[ii].

Limits of the identification doctrine

However, there are limitations to this.  Prior to the decision in Barclays, the identification doctrine had been criticised by Pinto and Evans[iii], who noted that it failed to “encourage those officers who might be identified with it to involve themselves in the general management of the company”. The Court’s narrow application of the identification doctrine in Barclays fails to reflect the modus operandi of corporations, and results in larger corporations being more readily absolved from criminal responsibility than smaller corporations due to devolution and delegation of functions. From the Law Commission’s perspective, the disproportionate impact that it has on small companies in contrast to larger companies “is likely to be seen as unfair and could diminish confidence in the criminal law”.

Undoubtedly, as observed by Davies LJ, it is a “practical necessity” for the governance of large corporation to delegate to ensure efficient “decision-making and discharge of responsibilities”. It would be erroneous to assume that “devolved structures” are purposefully implemented in order “to avoid corporate responsibility, criminal or otherwise”. This view is shared by the Law Commission.

Dsouza contended that it “offers little legal certainty, lacks principled foundations, and is based on questionable doctrinal logic”.[iv] The Law Commission summarises the key criticism as follows:

• It is too narrow.
• It does not reflect the reality of decision-making in complex organisations.
• It makes it too difficult to convict companies for offences committed for their benefit.
• It is unfair between small and large companies.
• It does not always bring certainty.
• It does not incentivise good corporate governance and may disincentivise it.

In practice, the identification doctrine makes it extremely difficult to prosecute larger corporations in the UK. By way of an illustration, in 2019former Barclays executives were acquitted of conspiracy to commit fraud[v] during the 2008 Financial Crisis. The charges related to alleged payments in the amount of £322 million to Qatar to secure investment of approximately £4 billion for Barclays and avoid taking up the Government package of support for British banks. The Court ruled that they could not be regarded as Barclays’ directing mind and will, as the relevant responsibility and authority remained with the Barclays Board.

David Green, who was the Director of the SFO at the time of the investigation into Barclays, articulated “it is almost impossible to find a controlling mind and prove that controlling mind is complicit in any criminality”[vi]. Mr Green’s words resonated with the CPS’s articulation in 2015 following their decision not to bring charges against News Group Newspapers over the phone hacking scandal: “The present state of the law means it is especially difficult to establish criminal liability against companies with complex or diffuse management structures.”[vii]

In the CCL paper, the Law Commission emphasises the need for reform of the identification doctrine, which currently is an obstacle for holding large corporations to account for their wrongdoing. Additionally, in the event of retention of the identification doctrine as it currently stands, it stresses the importance to implement new “failure to prevent” offences.

New “failure to prevent” offences

“Failure to prevent” offences attribute criminal liability to companies that have failed to prevent “employees or associates” committing bribery or the facilitation of tax evasion. When considering creating new offences of this type, Law Commission conducted a consultation.

Risk of overregulation, lack of specificity and undue compliance burden on companies were the reasons for those opposing the extension of the regime. It is par for the course that among the respondents to the Law Commission’s discussion paper in favour of creating new “failure to prevent” offences were the prosecution agencies, Serious Fraud Office and Crown Prosecution Service.

In the CCL paper, after a careful consideration of all the answers provided, the Law Commission articulated the below principles that “failure to prevent” offences should reflect:

• Organisations should generally only be liable for failure to prevent commission of an offence that was
  • Intended to confer a business advantage on the organisation, or
  • Intended to confer a benefit on a person to whom the associated person provides services on behalf of the organisation,

But the organisation should not be liable under the second of these where the conduct was intended to cause harm to the organisation.

• Organisations should have a defence available on the basis of “reasonable” rather than “adequate”, procedures to prevent commission of the underlying offence(s).
• There should be provision along the lines of section 45(2)(b) of the Criminal Finances Act 2017 to the effect that it might be reasonable in the circumstances not to have any procedures at all.
• The burden of proving that the organisation had put in place reasonable prevention procedures, or that it was reasonable not to have any such procedures, should lay with the defence.
• There should be a duty on Government to publish guidance on the procedures that organisations can put in place to prevent commission of the underlying offence(s).
• There should be a power for Government to publish additional guidance on prevention procedures for particular sectors or issues.
• There should be a power for Government to approve guidance on prevention procedures published by third parties.
• Whether failure to prevent offences should extend to extra-territorial commission of the underlying offences should be considered on a case-by-case basis.
• Failure to prevent offences should only extend to substantive criminal offences, and not to inchoate offences such as attempts and conspiracies.

Regarding “failure to prevent economic crime” offences, the Law Commission considers that they should be restricted to a constricted group of fraud offences, indicating that not all the offences featuring in the list of Schedule 17 of the Crime and Courts Act 2013 should be included in any such offence because they are (i) “duplicative of offences in respect of which organisations can already be held liable where the offence is committed by an employee under administrative penalties” or (ii) “ancillary offences”, where “imposing corporate liability for failure to prevent could be unfair and counterproductive”.

Conclusion

A reform of the criminal law to hold corporations criminally responsible is, of course, in the interest of justice, and more broadly, society as a whole. Holding corporations to account is beneficial because it functions as a deterrence mechanism and as an incentive for good corporate governance, which, in turn, builds public trust and the reputation of the UK as an international financial hub.

The Law Commission’s proposed options include the retention of the identification doctrine as at present.  In addition, allowing conduct to be attributed to a corporation if a member of senior management engaged in, consented to or connived in the offence.  Also, introducing specific offences of failure to prevent fraud, human rights abuses, ill treatment or neglect, computer misuse and civil actions in the High Court with a power to impose monetary penalties. 

Whether the new proposal will actually be implemented is a different matter.  It goes without saying that the widening of scope for the failure to prevent offence would have huge consequences for all relevant corporations, not least a massive increase in the regulatory and compliance burden.  The fact that corporates would be directly accountable for the actions of their employees, not just with regards to strict liability offences, but also offences which now require a mental element to be established, could be very hard to corporates to police.

Indeed, and as discussed above, the introduction of the “failing to prevent” offence has already had dramatic impact on corporate criminal liability.  Not least in the ability to impose deferred prosecution agreements, which have so far involved a failing to prevent bribery offence.  The further widening of this scope will no doubt have unforeseen and drastic consequences which must be properly considered.   

Only time will tell whether the proposal will be implemented, as it is now for Parliament to consider the CCL paper and legislate should they so wish. 

In the meantime, compliance professionals and all those involved in the prevention of corporate financial crime should keep a close ear to all the latest developments in order to move swiftly should that be required.  Vigilance is as always key.

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The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.

©Gherson 2022

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[i] As defined by the Law Commission, a “corporation” is “a legal entity distinct from the natural persons comprising it”, and a type of corporation is a “company”, which is “a legal entity formed by a group of persons usually to engage in business”.

[ii] https://www.judiciary.uk/wp-content/uploads/2020/02/sfo-v-barclays-judgment-12-11-18.pdf

[iii] A Pinto and M Evans, “Corporate Criminal Liability”, 2008, p 55.

[iv] Mark Dsouza, “The Corporate Agent in Criminal Law” (2020) 79 Cambridge Law Journal 91

[v] R v John Varley, Roger Jenkins Thomas Kalaris and Richard Boath [2019] EWCA Crim 1074.

[vi] Caroline Binham and Jane Croft (9 March 202) “Barclays: the legal fight over a company’s ‘controlling mind’” Financial Times, retrieved from https://www.ft.com/content/f666b592-5a4b-11ea-abe5-8e03987b7b20 (Accessed 13 June 2022)

[vii] Caroline Binham and Jane Croft (9 March 202), “Barclays: the legal fight over a company’s ‘controlling mind’” Financial Times, retrieved from https://www.ft.com/content/f666b592-5a4b-11ea-abe5-8e03987b7b20 (accessed 13 June 2022)

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