On 13 January 2017, the Ministry of Justice published a call for evidence seeking views on a number of options to reform the criminal law concerning corporate liability for economic crime. The consultation is a response to a growing sense of unease around the adequacy of the criminal law in England to respond to events of serious corporate wrongdoing such as was seen in the recent LIBOR manipulation scandal.
What's the Problem?
Corporate liability for economic crimes carried out by employees and/or other representatives of a company is governed by common law rules known as the identification doctrine. The doctrine requires prosecutors to prove that the directing mind of the company knew about, actively condoned or played a part in the wrongdoing. Essentially, therefore, both knowledge and intent need to be established at an individual, personal level, in those people who truly can be said to be in control of the company. This represents a significant hurdle for prosecutors, especially when considering criminal liability for large modern companies.
When dealing with small companies it is not difficult to establish knowledge and intent in the directing mind. However, in the modern world large, often multinational, companies have complex internal structures which make it increasingly difficult to do so. It has even been suggested that the identification doctrine encourages companies to decentralise responsibilities to avoid liability, making it harder to identify a senior individual who is in charge of a particular operation. Further, the doctrine operates so as to prevent a company from being held criminally liable where there is found to be a collective failure at board level but it is not possible to attribute particular failings to specific individuals. This is, on any view, an unsatisfactory state of affairs.
The problem most recently crystallised in the LIBOR manipulations scandal. In the US, the Department of Justice was able to successfully prosecute a number of the Banks because the US legal system operates on a system similar to that of vicarious liability whereby the actions of an employee are directly attributable to the company1 . This meant that, for instance, the SFO could prosecute, and convict, Tom Hayes, but it could not prosecute his employer, UBS. The same unsatisfactory situation has occurred with Barclays and Deutsche Bank with individual traders and LIBOR submitters being prosecuted but not the banks.
What's the Solution?
The Government has set out 5 options for consideration:
- Amendment of the identification doctrine
- The creation of a strict (vicarious) liability offence
- The creation of a strict (direct) liability offence
- The creation of an offence of failure to prevent as an element of the offence
- Regulatory reform on a sector by sector basis
As it is the very nature of the identification doctrine that is said to be the problem, it is only right to consider whether reform should be to introduce legislation that amends the common law rules. Legislation may, however, lead to even greater adoption of evasive internal structures and, therefore, may not promote the prevention of economic crime as a component of good corporate governance.
The creation of a strict (vicarious) liability offence would make the company guilty without the need to prove any fault element, such as knowledge of complicity at board level. However, it again gives the company little incentive to prevent corporate crime as part of good corporate governance if the company is liable regardless.
A strict (direct) liability offence would have greater focus on the responsibility of the company to make sure offences were not committed in its name or on its behalf. A company would be convicted without the need for proof of any fault element of a separate offence akin to a breach of statutory duty to ensure that economic crime is not used in its name or on its behalf. This is a model most directly relatable to the offence created in the Bribery Act for failure to prevent (s.7). This is understood presently to be the governments preferred option – at least on the basis that it is working successfully for bribery offences. On this basis, the burden of proof is on the company to show that it did have adequate procedures in place to prevent the unlawful conduct.
An extension and, some consider, an improvement on option 3 is the creation of a failure to prevent offence that requires the prosecution to prove that the offence has occurred but also that it occurred as a result of a management failure, either through negligent conduct or systemic inadequacies. The burden of proof, therefore, remains on the prosecution to prove that the company had not taken adequate steps to prevent the unlawful conduct occurring.
What happens next?
The call for evidence asks for responses to 16 specific questions relating to the options and ends on 24 March 2017. Responses will inform government decisions over whether to make further reforms to the criminal law in this area.
The focus of any consultation on changes to the criminal law to create corporate liability for economic crime should not be on making it easier to prosecute corporate wrongdoing; rather it should be aimed at making it easier to hold to account those people responsible for it. Too many times we have seen seemingly endemic wrongdoing result in the punishment of lower ranking employees without any senior managers, let alone board members and, thus, the company being held to account in the criminal law. The current state of the criminal law makes it too difficult, if not impossible, to hold companies to account. In the regulated sector, changes have already been made to address this lacuna with wholesale changes to the regime around benchmark submissions and the introduction of the Senior Managers Regime. However, the application of criminal sanctions needs careful consideration and a cautious approach should be given to consideration of the expansion of criminal liability in this area, with the primary focus always being on the identification and prosecution of the real wrongdoers. A one size fits all approach and the adoption of a system akin to that which presently operates under the Bribery Act may not be the best way forward.
1The U.S doctrine of respondeat superior, "let the master answer."