Summary: On Friday 13 January 2017, the Ministry of Justice (MoJ) launched its long-awaited consultation process in relation to reform of corporate liability for economic crime in the UK.
Reform in this area has been on and off the political agenda since 2014. However, in May 2016 the then-Prime Minister David Cameron formally announced that there would be a consultation and this became inevitable in September 2016 when the Government under Theresa May confirmed it remained committed.
The case for reform is based on criticism of the common law basis for attributing criminal liability to corporates in the UK, known as the identification principle: i.e. a corporate can be pinned with liability for a substantive criminal offence if a person who is the “directing mind and will” of the organisation commits the offence. In particular, it is argued that the identification principle fails to properly tackle wrongdoing in the modern corporate landscape because larger organisations often escape prosecution – it is easier to evidence the necessary complicity amongst senior staff in a small, centralised organisation than in a large organisation with a complex management structure.
New strict liability offence only one of a range of options
What might surprise some is that, whilst David Cameron announced a consultation on “plans to extend the scope of the criminal offence of a corporate ‘failing to prevent’ beyond bribery and tax evasion to other economic crimes”, the MoJ has published an initial “call for evidence” on corporate liability for economic crime generally, where an extension to the strict liability “failure to prevent” model is only one of five suggested options for reform. These options range from the extremes of introducing strict vicarious criminal liability for the actions of a corporate’s employees and agents – which is the US model and unprecedented in UK criminal law – to the potentially lighter touch approach of investigating regulatory reform on a sector by sector basis rather than introducing new criminal offences.
A balanced approach
The reason for giving a range of options is that the Government acknowledges both the potential advantages and disadvantages of reform, and suggests these need to be carefully considered and weighed. On a practical level, the paper references the potential costs to businesses, including the costs of taking advice, carrying out risk assessments, adjusting corporate governance and implementing new measures.
Whilst the outcome of the consultation process remains to be seen, this apparently balanced approach will be welcome news to smaller businesses who may have felt overwhelmed by the introduction of the Bribery Act.
Particular consideration of the interaction with financial services regulation.
The paper also acknowledges the risk of overlap with existing financial services regulation (please see our annual report for a practical update on regulatory developments in 2017) and specifically asks whether a new form of corporate liability is justified alongside the financial services regulatory regime and, if so, how friction between the two can be avoided.
This seems eminently sensible given that regulated firms will already have extremely sophisticated systems and controls in place to prevent money laundering and fraud as required by existing regulation, and there is therefore a significant risk that ill-thought through reform would increase compliance costs in the sector without bringing any substantive benefit to the public.
Interestingly, even if a new offence is modelled on the Section 7 Bribery Act “failure to prevent” model, the paper indicates that the defence may not take the same form as Section 7. It also asks what the relationship should be between existing compliance requirements in the financial services sector and the assessment of prevention procedures for the purposes of a defence to a criminal charge: could a criminal defence that links directly to fulfilment of existing regulatory requirements be on the cards?
Either way, the paper seems to signal a general change in the mood music by acknowledging that there has already been significant progress in this area: it indicates that media and public concerns about corporate misconduct have tended to focus on financial services firms, but that new measures around individual accountability have already gone a long way to addressing those concerns; and it makes it clear (if it wasn’t already) that the Government sees the new Senior Managers Certification Regime as fundamental to changes in behaviour and is concerned that a regime extending corporate liability might cut across the increased focus on personal accountability.
The call for evidence at a glance
- It is not yet certain whether any new corporate criminal offences will be introduced. The paper is a call for evidence asking for views on five options for reform of corporate criminal liability for economic crime in the UK, including increased regulation rather than introduction of new criminal offences.
- The Government is alive to the concerns of businesses around the potential cost and time burden of implementing new measures, and wishes to weigh these up against the potential advantages of reform.
- In light of the optionality, the paper allows for a “full consultation on a detailed proposal and draft legislation”.
- If a Bribery Act style “failure to prevent” offence is introduced, it will cover offences relating to fraud, theft and money laundering, and it is noted that such an offence will be likely to offer a more realistic threat of prosecution for the purpose of Deferred Prosecution Agreements.
- If any new offences are introduced:
(a) it is likely that there will be a statutory defence based on compliance measures, although the format will depend on the offence; (b) guidance akin to the MoJ’s guidance on the Bribery Act will be published; and (c) it is undecided whether the offences will have extraterritorial jurisdiction or not.
Financial Regulation in 2017: Stay alive to the changes ahead