The common theme running through the recent changes to legislation and guidelines on sentencing is that big businesses must step up their efforts to improve their regulatory compliance – or pay the hefty price.
In the past, less serious regulatory offences were tried in the magistrates’ courts, where the cap on fines at £20,000 proved to be a mere slap on the wrists for big businesses. But the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) now gives magistrates powers to issue unlimited fines. This alone should be sufficient to strike fear into the hearts of large organisations with poor track records for regulatory compliance. In relation to environmental offences, the recent Court of Appeal case, R v Thames Water Utilities Ltd EWCA Crim 960, demonstrates the new, tougher sentencing that judges are willing to impose. In this case, the court at first instance found Thames Water to have been negligent in its failure to replace faulty pumps, which led to the discharge of untreated sewage into a National Trust nature reserve. Although Thames Water appealed the judgment, it was upheld by the Court of Appeal.
This case was the first of its kind to come before a court since the Sentencing Council published its new Definitive Guideline for Environmental Offences (the Guideline) in July 2014. The Court of Appeal judgment rejected the mechanistic approach used by the court in the first instance to calculate the appropriate fine to impose on Thames Water, classified as a 'very large' organisation by virtue of its £1.9 billion turnover, with £364 million profits in the year ending 2014. Instead, it adopted a more holistic approach, focusing on the purposes behind sentencing, as set out in the Criminal Justice Act 2003. In particular, s164 requires the court to consider the financial circumstances of the offender before determining the appropriate fine, ensuring that the level of the penalty reflects the serious nature of the offence.
Mr Justice Mitting highlights the relevance of this provision when dealing with very large organisations, observing that the penalty imposed should bring home to the management and shareholders the need to protect the environment. An interesting parallel is drawn with similarly steep fines for regulatory breaches within the financial sector. Just as penalties are imposed to demonstrate the vital importance of trust, confidence and good faith within the financial services market, fines of this magnitude are a necessary and proper consequence of the importance we must attach to protecting the environment.
The judgment indicates that fines of up to 100% of a company's pre-tax net profit for the relevant year may be appropriate. Indeed, one of the closing observations is that there would have been no hesitation in upholding a very substantially higher fine than the £250,000 which was approved.
AGGRAVATING AND MITIGATING
The second important point from the judgment to highlight is the consideration of both aggravating and mitigating factors. Weight will be given to previous convictions as relevant aggravating factors. The intended message here is clear: companies that repeatedly fail to invest adequately in compliance measures must now toe the line.
In relation to mitigating factors, there are certain ways in which companies can behave which will significantly reduce the level of penalty imposed. These factors include: prompt and effective measures to rectify harm caused, and prevent reoccurrence; frankness and co-operation with the authorities; prompt payment of full compensation; and a prompt guilty plea. Significant expenses voluntarily incurred in reparation for the public harm done should also be taken into account. It is clear that companies are expected, now more than ever, to hold up their hands following any wrongdoing and face the consequences of their actions.
So what does this mean for big businesses in terms of their attitude to regulatory compliance? These changes in sentencing for regulatory offences are far-reaching in terms of both size and scope and seem to set the tone for what is to come. The Definitive Guideline published by the Sentencing Council on Health and Safety, Corporate Manslaughter and Food Safety, which comes into force in February 2016, follows a similar approach. As set out in the consultation document, the Council has highlighted that one of the reasons for its decision to produce updated guidance in this area was that fines imposed on larger organisations, in particular, were not fulfilling the purposes of sentencing.
It is now increasingly clear that it is in the financial interests of big businesses to invest in modernising and improving their regulatory compliance systems, whether this means strengthening and consolidating existing internal compliance teams, or outsourcing this role. Not only must a company's systems be sufficiently robust to avert the risk of committing regulatory offences but, when breaches do occur, they must be able to take swift action to mitigate the harm caused and the corresponding penalties imposed.
However, as fines reach unprecedented levels, the question remains as to whether financial penalties alone are sufficient to fundamentally change the attitude businesses take toward their regulatory obligations. Will the hefty £250,000 fine imposed on Thames Water force them to take a serious look at whether their current compliance systems pass muster? Or is something more needed?
This article was co-written by senior associate Emma Davies and trainee solicitor Rosie Nelson, and published in New Law Journal in February 2016.