Related People: Ese Overo-Tarimo1
The Government published its "Economic Crime Plan, 2019 to 2022" on 12 July 2019 – a policy paper that proposed strategic action plans for tackling economic crime2. The Government has now asked the Law Commission to commence a review to examine corporate criminal liability and consider options for improving the law. Recommendations from the review are expected to be communicated in late 2021, suggesting further delay to the anticipated legal reform for corporate crime.
- The limitations of the "identification doctrine" and the extension of the "failure to prevent" model continue to remain at the forefront of discussions concerning corporate crime laws in the UK.
- The Government's consultation in 2017, regarding a call for evidence on corporate criminal liability for economic crime, produced "inconclusive" results.
- The Law Commission's review is required before the Government introduces legislative changes and the project is likely to specifically examine whether: a) the "failure to prevent" offence should be extended; and b) the "identification doctrine" is fit for purpose.
Extending the UK's laws on criminal corporate liability laws has been long-debated
Lisa Osofsky, the director of the Serious Fraud Office ("SFO"), has strongly advocated the case for extension of the "failure to prevent" offence since she took over as director in 2018. In her most recent speech (9 October) she put an extension of the "failure to prevent offence" at the top of her "wish list" – "The need for change in this area became more acute in light of the Barclays Qatar judgment, which confirmed a narrow application of the "controlling mind" test, making it very difficult to hold companies with complex governance structures to account for their fraudulent conduct….I will be watching developments with interest". Her predecessor, Sir David Green QC, was no less vehement. Reform has been further advocated by the former President of the Queen's Bench Division of the High Court, Sir Brian Leveson in his evidence to a House of Lords committee on the 2010 Bribery Act.
The initial "failure to prevent" offence under the Bribery Act 2010 and its extension in the Criminal Finances Act 2017 established separate strict liability offences for corporates concerning failing to prevent bribery or tax evasion, thereby avoiding the restrictions imposed by the "identification doctrine". Under English Law, this doctrine determines that a company is deemed criminally liable if the offence can be ascribed to an individual who was the "directing mind and will" behind the company at the relevant time. Typically, the "directing mind" is limited to senior management, such as executive officers and directors, which creates a barrier to prosecuting large corporations with complicated structures. Advocates for a broader failure to prevent economic crime, extending for instance to fraud, false accounting and money laundering, point out that this would lead to companies reinforcing internal controls and fraud risk management. As this would require senior management to engage in designing and implementing such controls, this would (it is argued) drive an anti-fraud mindset in corporates "from the top down".
The Government's publication on 4 November 2020 was a response to its call for evidence
The call for evidence consultation commenced in January 2017 and concluded at the end of March 2017. The Government suggested five potential options:
- Replace the current legislation by introducing new laws that cast a wider net for establishing corporate criminal liability beyond the "identification doctrine" in corporations.
- Establish a new vicarious liability similar to the US model by expanding the scope for corporate bodies to be found guilty via actions of individuals in the company. This excludes the requirement to verify the presence of a "directing mind".
- Introduce a new strict liability offence by broadening the "failure to prevent" offence to encompass other economic crimes beyond tax and bribery evasion.
- Modify the "failure to prevent" model by shifting the burden of proving inadequate procedures on the prosecution. In addition to evidencing the substantive offence, the prosecution would also need to demonstrate the company management's failure to prevent the offence.
- Examine the possibility for additional regulatory reform by conducting a sector based review, to explore whether regulations in the financial services sector could be applied more extensively.
As the Government's call for evidence was "inconclusive", the Law Commission's input is needed before amending any legislation
On 4 November 2020, nearly four years after the call for evidence consultation started in January 2017, the Government has declared that the submitted evidence "produced no new significant examples that clearly illustrated the extent of the reported problems with economic crime law and the identification doctrine. There was equally no convincing majority on a preferred way ahead." With little clarity on how to proceed, the Ministry of Justice has now asked the Law Commission to launch a further investigation, before contemplating additional legislative changes.
Whilst some remain optimistic that the Law Commission's review signifies realistic prospects of change, others assert that it merely delays the process. The Law Commission's findings will not be released until late 2021, such that legislative reform is unlikely before 2022, possibly 2023.
Law Commission review aside, companies should be following closely the Government's response to the 2019 Brydon Review3 which inter alia recommends that "the Government gives serious consideration to mandating a UK Internal Controls Statement consisting of a signed attestation by the CEO and CFO to the Board that an evaluation of the effectiveness of the company's internal controls over financial reporting has been completed and whether or not they were effective". This, if implemented, together with the likely ISA 240 amendments also recommended in the Brydon Review will serve to provide an alternative but powerful impetus for senior management to address and reinforce internal controls and fraud risk management pending any change in the criminal law arising from the Law Commission process.
2 Please see our previous alert for further information on the “Economic Crime Plan, 2019 to 2022”: UK Government's Economic Crime Plan – where are we going?
3 "Assess, assure and inform: Improving audit quality and effectiveness: Report of the independent review into the quality and effectiveness of audit", Sir Donald Brydon CBE, December 2019, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/852960/brydon-review-final-report.pdf