The Director of the Serious Fraud Office (SFO), David Green QC, spoke at the 31st Cambridge International Symposium on Economic Crime last week and once again reiterated his views on the inadequacy of the current legal framework in tackling corporate fraud. He proposed the creation of a new statutory offence of a company failing to prevent crimes of dishonesty or fraud by its employees or agents. In light of recent attempts to water down parts of the Bribery Act, Mr Green’s proposal is likely to be met with some resistance by those businesses who feel they have already gone to the expense and burden of incorporating one set of costly compliance programmes.

Other highlights of Mr Green’s address were the fact that eight Bribery Act matters are under development in the SFO’s intelligence section, his restatement of the fact that the SFO will not guarantee civil outcomes, and a warning shot to companies that seek to use the media to “spin their way to the result they desire”. In relation to this latter pointed remark, for those companies and individuals who in the future might need to negotiate with the SFO especially those seeking to ensure a civil rather than criminal outcome, using the press in the hope of gaining bargaining power is likely to backfire. However, companies turning to the media is an increasing phenomenon and should not be discouraged if handled responsibly, in good faith and as part of the company’s desire to show it takes allegations of wrongdoing seriously.

The corporate offence - the UK legislative position

In the UK, liability for corporate fraud can only be established where the ‘directing mind and will’ (i.e. the top level personnel) of the company can be said to have been complicit in the criminality - the ‘identification principle’. The threshold for establishing corporate criminality is high, and as Mr Green noted in his speech last week “the email trail has a strange habit of drying up at the middle management level”, making conviction difficult.

Mr Green’s views have been supported by numerous legal commentators who have highlighted the failure of the current legislative position to reflect the reality of modern day large multinational corporations and their impact on the economy and society as a whole. Indeed the Law Commission in its 2010 paper on ‘Criminal Liability in Regulatory Contexts’ has concluded in line with Mr Green’s views that the ‘identification principle’ may be “an inappropriate and ineffective method of establishing criminal liability of corporations”.

The difficulties of the ‘identification principle’ have, however, in some respects been circumvented through statute. The most obvious recent example in the UK was the Bribery Act 2010. Under section 7 of the Bribery Act 2010, an offence can be committed by an organisation if it fails to prevent bribery by its employees or associates. This offence is subject to a statutory ‘adequate procedures’ defence, available where the corporate had in place adequate procedures designed to prevent persons associated with it from committing bribery. Other instances include the Health and Safety at Work Act 1974 which introduced corporate offences for failing to ensure the health and safety of employees. However, we saw in relation to the Corporate Manslaughter Act 2007 that a necessary ingredient for the offence was to show that the senior management had organised or managed the organisation’s activities in such a way to be a substantial element of the breach, leaning towards the traditional ‘identification principle’.

Extending the approach applied by bribery and health and safety legislation is a good thing according to Mr Green. His view is that corporates, or at least certain types of corporates, should be motivated to encourage a better corporate culture. As Mr Green squarely put it in comments he made to the Guardian “poor corporate culture was a contributory factor in the crash”. But perhaps what really irritates Mr Green is that where a company “has gained from dishonesty, why should it be able to chuck a few mid-ranking people overboard and sail onwards?”.

Fraud is estimated to cost the UK economy £73 billion a year, according to the Home Office’s National Fraud Authority. Reform is being proposed as a means to “underpin the recovery by encouraging clean and stable markets and increasing investor confidence”. It is thought such an approach would sit well alongside deferred prosecution agreements, now on the statute book and due to come into play in early 2014 in England & Wales. According to proponents of legislative reform, deferred prosecution agreements are unlikely to be an effective tool in combating economic crime unless there is a credible threat of corporate prosecution – as Jonathan Fisher QC recently noted: without legislative change “the DPA initiative will be a damp squib”.

The US approach

It is argued that further support for legislative change is found in the US, Australia and the Netherlands. “When it comes to prosecutions of corporates, the SFO’s performance is often compared unfavourably to that of US prosecutors” noted Mr Green in his keynote speech last week. The key reason for that he says “is the much higher bar” set in the UK to establish UK corporate liability. Whilst the SFO will no longer be able to rely on this shield in relation to the number of prosecutions under the Bribery Act, he has a point in relation to corporate fraud and dishonesty.

In the US corporates are held vicariously liable for the acts of employees. Prosecutors in the US must establish that the corporate agent’s actions were both within the scope of his duties and intended, at least in part, to benefit the corporation. This clearly sets the threshold for prosecuting corporates at a lower level than in the UK. Knowing that prospects of acquittal are unlikely, corporates in the US are more inclined to cooperate with prosecutors as a means to avoid a criminal conviction and its consequences. Given this lower threshold, the Department of Justice has been able to apply significantly higher financial penalties than is the case in the UK. A Labour Policy Review of June 2013 refers to the fact that the highest fraud fine imposed by the SFO was £2.2million against Seven Trent Water Ltd which is one thousand times lower than the highest US fraud fine of £2 billion issued against GlaxoSmithKline. While it is hoped by the UK authorities that the magnitude of fines will increase following the finalisation of the Sentencing Guidelines, the lack of any substantive threat of corporate prosecution for fraud means focus on the document has been on penalties issued pursuant to Bribery Act offences.

Proposals from Parliament

On 14 June 2013 Shadow Attorney General Emily Thornberry revealed Labour’s plans if elected to combat corporate fraud entitled ‘Tackling Serious Fraud and White Collar Crime’. This followed an earlier announcement by the Shadow Home Secretary of a proposed Economic Crime Bill.

Such developments mark an intention by both sides of the political spectrum to expand criminal law further into the business sphere, mirroring somewhat the Conservative Party’s pledge in 2010 to “strengthen corporate criminal law to ensure companies can be held liable for their actions”. Given widespread public frustration at the lack of companies and individuals brought to account after the 2008 banking crash, there is demand for change and a desire to sharpen corporate vigilance. Further, improving the credibility of the authorities policing and prosecuting poor corporate conduct would be seen as protecting London’s integrity and global reputation as a leading international financial centre.

Provided the political will remains firm it seems legislative change in this area is likely to be an election issue, and one where both sides will be campaigning for a shift in the law. So while there is unlikely to be any immediate concrete legislative developments in the next two years, it is on the horizon.

Concerns for business

Companies will nevertheless see the prospect of legislative change as a cause for concern. Even in the US where the ‘respondeat superieur’ principle has been in existence for over one hundred years, critics have sought to circumscribe its effect. Arguments against effectively holding companies vicariously liable for employee’s criminal conduct will be equally applicable to the UK context and include:

  • the fact that a company is really a fiction and only exists insofar as there a human beings pulling the strings, and so any punishment for unlawful conduct should really be meted out against the individual wrongdoers. The counter-argument is that in this present age companies have rights of their own including the right to own property, sue and be sued, enter into commercial agreements and can even rely on human rights under the European Convention. Plus, whilst companies are incorporeal, investors use them to protect personal wealth. Why should companies not be treated as ‘persons’ in their own right?
  • why extend criminal liability when a form of regulatory or civil sanction might be sufficient – after all, a company can’t feel remorse and a large fine is the primary penalty; it is stating the obvious to say it can’t go to prison. Rules could be changed if necessary to ensure a regulatory or civil finding could lead to public debarment from contracts achieving the same result as a criminal conviction, although that will not be relevant to all companies. One expects a rebuttal to that position in that criminal liability can lead to greater sanctions with stronger deterrent effects, and give rise to public condemnation;
  • looking at the US FCPA, in more recent years the prosecutorial authorities have focussed more on punishing individuals as a deterrent factor, as there was a feeling amongst some that financial penalties against companies, however large, were not forcing enough of a change in what is ultimately human conduct. So what value is there in punishing the company? The usual answer to this argument, one advanced by Mr Green, is that it would be unacceptable for companies to be able to brush aside unlawful conduct by their employees by sacking them, and then hoisting up a ‘business as usual’ banner. Further, it is indisputable that introducing the Bribery Act in the UK with its corporate offence has encouraged many companies to be more rigorous about preventing and/or rooting out corruption;
  • some companies may be the innocent victim of a rogue employee’s misconduct and/or have positively discouraged the predicate behaviour. To exclude from liability those companies that have been defrauded would require the offence to have certain thresholds such as in the US like the fact the employee was acting within the scope of his duties and his actions either intended to or did benefit his employer. In the US having a good corporate culture and adequate procedures in place to prevent fraud would not amount to a defence but a mitigating factor in relation to any possible financial penalty or sanction. Mr Green of the SFO has also put a marker down that he believes an equivalent to the defence of ‘adequate procedures’ under the Bribery Act could be incorporated in any new law;
  • following on from this point, critics of corporate criminal liability might say a new adequate procedures defence will likely increase the internal compliance budget of many companies. Further, unlike the Bribery Act, which may not be a major issue for many companies who do not operate in high risk industries or countries, the issue of preventing fraud will apply to all corporates. And so the issue of cost and red tape will be flagged as well as how one defines what constitutes ‘adequate procedures’ in a fraud context. The rebuttal will be that good corporate citizens will already have policies and training to combat fraud, money laundering, insider dealing and other economic crimes – and so such a policy will encourage those that do not to do so, and thereby level the playing field. Further, it is worth noting that the existence of a corporate compliance programme is already a factor tending against prosecution in the joint prosecution guidance on corporate prosecutions;
  • there may be other unintended consequences like the gradual watering down of legal privilege particularly if the UK prosecutors end up following the US trend of demanding waivers; harming of innocent parties associated with convicted companies like shareholders, employees and customers; and potentially reputational damage caused to UK plc. Again, there will be counter-arguments to each of these points.

Final thought

If the political will remains supported by public interest and pressure from the prosecutorial authorities, then the possibility of new legislation to strengthen the possibility of corporate criminal convictions is very real. The outcome of the SFO’s Libor investigation could potentially influence which way the wind will blow and how fast. In his 2 September speech, Mr Green indicated that there will be “significant developments” in the case in due course. So this particular area will be a hot topic for the foreseeable future and one that all companies should closely watch.