The Law Commission has published its long-awaited proposals for reforming corporate criminal liability in the UK ("Options Paper"). Whilst anti-corruption campaigners, including Members of Parliament, have criticised it for not going far enough, the reforms canvassed in the Options Paper do represent a meaningful reinforcement of the existing law on corporate criminal liability and should cause companies to look afresh at their risk management procedures and internal controls.
"There is broad consensus that the law must go further to ensure that corporations – especially large companies – can be convicted of serious criminal offences, such as fraud.
It's imperative that we have the right mechanisms in place to allow companies to be effectively held to account for misconduct carried out in their name…the Government now has several viable routes to reform at its disposal"1
The Law Commission is a statutory independent body whose purpose is to monitor legislation and recommend legal reform. This Options Paper was requested by the Government and it sets out proposals as to how the Government may improve the law to ensure that corporates are effectively held to account for criminal conduct.
The general principle of criminal liability applied to corporations in English law is the "identification doctrine". In simple terms, this provides that where a mental state is a required element of an offence, only the mental state of a senior person representing the "directing mind and will" of an organisation can be attributed to a corporate.2 This may be an individual, a group of individuals or a board of directors. In practice, this has meant that prosecuting a corporate for a criminal offence can be challenging, especially for larger organisations, as there are evidential difficulties in attributing the mental element of the offence to the "directing mind and will" of a given organisation. The shortcomings of the identification doctrine were highlighted in SFO v Barclays.3 The case suggested that, in order to establish liability, it is necessary to demonstrate that individual defendants must either be a company's "directing mind and will" for all purposes, or the "directing mind and will" for the particular function in question. This is understandably a high threshold for any organisation other than very small operations.
The Bribery Act 2010 ("Bribery Act") and the Criminal Finances Act 2017 introduced specific "failure to prevent" offences for corporates - failure to prevent bribery and tax evasion, respectively. These are strict liability offences – the only defence is for the defendant corporate to demonstrate that it had adequate procedures in place to prevent the relevant offence.
Given the concern amongst UK authorities that the current framework does not enable corporations to be held to account, there have been demands for the Government to introduce a general "failure to prevent economic crime" offence. To the disappointment of campaigners,4 the Law Commission opposed the idea of introducing a broad "failure to prevent" offence, whether that be a "failure to prevent crime" or "failure to prevent economic crime" offence.
So what does the Options Paper say?
The Options Paper
With a particular focus on economic crimes such as fraud, tax evasion, bribery and money laundering, the Options Paper provides 10 proposals for legislative reform. Those are:
- No change – i.e., retention of the identification doctrine as at present.
- A. Allow conduct to be attributed to a corporation if a member of its senior management engaged in, consented to, or connived in the offence. This means that a member of senior management would be any person who (at the very least) plays a significant role in the decision making of the whole or a substantial part of an organisation.
B. As above, but with the addition that chief executives and chief financial officers would always be considered members of an organisation's senior management.
- Introduce an offence of failure to prevent fraud by an associated person (either an employee or agent) who commits an offence of fraud to benefit the organisation. Such an offence would not extend to conspiracies or attempts to commit fraud. There would be a defence where an organisation could prove its prevention procedures were reasonable.
- Introduce an offence of failure to prevent human rights abuses.
- Introduce an offence of failure to prevent ill-treatment or neglect.
- Introduce an offence of failure to prevent computer misuse.
- Make publicity orders available (i.e. requiring the corporate offender to publish details of its conviction) in all cases where a corporation is convicted of an offence.
- Introduce a regime of administratively imposed monetary penalties.
- Introduce civil actions in the High Court based on Serious Crime Prevention Orders but involving a power to impose monetary penalties.
- Introduce a reporting requirement for public interest entities on anti-fraud procedures or, in the alternative, introduce a reporting requirement based on the Modern Slavery Act 2015 for large corporations to report on their anti-fraud procedures.
Reforming English law relating to corporate criminal liability has been debated for some time. Successive directors of the SFO have argued that the UK should adopt the US principles of vicarious liability. Lisa Osofsky, the current director of the Serious Fraud Office ("SFO"), has been a key advocate for extending the "failure to prevent" offence to encompass all areas of economic crime. Speaking before the House of Lords Bribery Act 2010 Committee in November 2018, Osofsky stated that, in adopting a vicarious liability approach "[the SFO] might make better progress against some of the larger, fair-fight opponents of the SFO".5
The Law Commission previously reviewed the identification doctrine in 2010 and found that there was "no pressing need for statutory reform or replacement of the identification doctrine" particularly in the wake of Meridian6¸ which the Law Commission believed could have instigated a consistent and fairer approach to attributing corporate liability.7 It is the Law Commission's view that the reverse has happened, as establishing liability under the identification doctrine is even more challenging for prosecutors than was believed to be the case.8 Instead of a wholesale shift in approach, the Law Commission has proposed in its Options Paper that the identification doctrine is better modified to enable conduct of senior management to be attributed to a company if they engaged in, consented to, or connived in an offence.
As noted above, the Law Commission specifically rejected a general "failure to prevent" offence, instead proposing a number of targeted "failure to prevent" offences. The Law Commission was concerned that it may be too broad; and it was of the view that any such "failure to prevent" offence should only be introduced for offences where there is a good reason to expect corporations to have put in place reasonable prevention procedures. For this reason, the Law Commission limited itself to one economic crime offence by proposing an offence of "failure to prevent fraud" (see item 3 in the list above). Similarly, the Law Commission rejected that various liability principles would be a suitable alternative to the identification doctrine. Such reluctance is down to an alleged lack of stakeholder support and practical concerns regarding insufficient "prosecutorial safeguards".
The Options Paper now sits with the Government to decide on potential reform to the law surrounding corporate criminal liability. The timeframe for any legislative developments is not yet clear. Of note, the Economic Crime (Transparency and Enforcement) Act 2022 was expedited through Parliament in response to Russia's invasion of Ukraine, and at the time the Government promised a second economic crime bill would follow. There may therefore be scope for the Government to include any reform of corporate criminal liability in that second bill. However, by way of illustration, there was nearly a three year lag between the date in which the Law Commission published its recommendations on reforming bribery9 and July 2011, when the Bribery Act came into effect.
Corporates should review their compliance programmes, and in particular their risk assessments, internal controls, whistleblowing programmes and investigation procedures to give boards comfort that they are able to meet the range of legislative reforms heralded by the Options Paper.
1 Professor Penney Lewis, Law Commissioner for Criminal Law – https://www.lawcom.gov.uk/law-commission-sets-out-options-to-government-for-reforming-how-companies-are-convicted-of-criminal-offences/
4 See, e.g., The Guardian, 10 June 2022, "Anti-money laundering proposals 'uninspired and insipid', say MPs" https://www.theguardian.com/business/2022/jun/10/anti-money-laundering-proposals-uninspired-insipid-mps-law-commission-review-corporate-criminal-liability