A review of the Law Commission - Corporate Criminal Liability Proposals
Companies currently can only be held liable for criminal offences if a “directing mind or will” (DMW) of the company has been involved in a crime. This elusive concept has become even harder to prove following the Barclays case, which defined a DMW of a company as someone (likely on the Board) who has “full discretion to act independently of instructions” or “entire autonomy” to make decisions. In many circumstances, this will be very hard to prove, thus making the concept of corporate criminal liability virtually defunct in the absence of specific legislation. This imposes a tougher statutory duty, such as the Bribery Act section 7 offence, which makes companies strictly liable if they fail to prevent associated persons from committing bribery.
Following various proposals (in the UK Economic Crime Plan 2014 and the 2015 Tory party manifesto) to consider implementing a Failure to Prevent Economic Crime offence, in November 2020 the Law Commission was tasked to report on possible reforms to corporate criminal liability. This report was published on 10 June 2022. It focusses on financial crime, with a laudable emphasis on avoiding “disproportionate burdens upon business.” In the report, the Law Commission proposes reforms under five broad categories, and offers 10 options for the government to adopt, including the option: (i) to consider introducing a new offence of failure to prevent fraud; (ii) to clarify the circumstances under which criminal liability should attach to the body corporate and/or personally to directors; and (ii) to recommended extensions to existing sanctions.
Ultimately, it is now up to the government as to which, if any, of these options are considered or taken forward. Bearing in mind the number of challenges faced by the government at present, it is unlikely that reform of corporate criminal liability even makes it onto the list, nor will it happen any time soon. However, it is worthwhile to consider the options proposed by the Law Commission, as they offer very real food for thought.
1. Attribution of criminal liability to corporations
The Law Commission proposes that the existing “identification doctrine” of criminal liability could be retained, but that the interpretation could be modified to avoid unfair outcomes.
At present, a corporation will only be liable for the conduct of a person who had the status and authority to constitute the body’s “directing mind and will,” members of the board of directors, for example. This is more difficult to apply to large organisations than to small businesses, where the managers and directors are closer to the day-to-day operations of the business. To mitigate this potentially unfair outcome, corporations will face prosecution if a member of the senior management (those who play a significant role in a substantial part of the organisation’s activities) engages in, consents to or connives in the offence of its employee or agent.
On the other hand, it should also be possible to convict corporations of crimes of negligence where it is not possible to identify a natural person who was individually negligent because no one had been given the necessary responsibility.
2. “Failure to prevent” offences
Creation of a new offence of failure to prevent fraud by an associated person, based on similar offences which are already a key part of bribery and tax evasion legislation, is proposed as an option. Any such offence should include a specific defence where an organisation can prove it had reasonable prevention procedures in place, or that it was not reasonable to have any such measures. To assist organisations, the Government should publish guidance on procedures that would prevent fraudulent activities.
On a broader note, the Law Commission has reasoned that such “failure to prevent” offences should only be introduced if there is a good reason to expect corporations to have put in place reasonable measures. As such, it has rejected (for the time being, at least) extending the "failure to prevent" limb to other offences, such as human rights offences, ill-treatment and computer misuse.
3. Liability of directors and senior managers
Personal liability should only attach to offences of strict liability or negligence. It is the Law Commission’s view that directors should not be personally, criminally liable if the offence requires proof of consent, connivance or neglect. In these cases, it should be clear that a director can only be criminally liable if they consented to, connived in, or were neglectful about the commission of the crime. This could be achieved by general legislative amendment or incorporated into the Crown Prosecution Service guidance.
4. Sentencing of non-natural persons
Publicity orders should be an available sanction in all cases where an organisation is convicted of an offence. At present, only fines are broadly available, but a publicity order may be a sensible approach for charities or public bodies where the imposition of a large fine would have a detrimental impact on users of a service, or for small companies with a local reputation and lack of media coverage of court cases.
The Law Commission rejected the idea that courts should have the power wind up companies upon conviction for serious offences. The Secretary of State already holds that power, and sentencing guidelines provide that fines capable of putting an organisation out of business may be appropriate in certain circumstances.
5. Civil Options
In order to encourage organisations to institute anti-fraud measures, the Law Commission proposes an option for large organisations and public interest entities to report on their anti-fraud procedures. Failure to report would attract administratively imposed fines, operating in a similar way to the “failure to prevent” offence – organisations would be liable unless they can show they took reasonable precautions to prevent their associated persons from committing fraud.
The Law Commission comments on this option to say that its application may free up the criminal justice system and protect organisations from the consequences of a criminal conviction, such as no longer being able to tender for public contracts. How such a system would be imposed is still very much in question – the Law Commission has mooted penalties for non-compliance, enforced by the Financial Conduct Authority, Crown Prosecution Service and Serious Fraud Office. However, query whether public authorities or prosecutors want to have such quasi-judicial functions and whether having both civil and criminal sanctions for fraud will muddy already muddy waters further.
The options raised in the Law Commission report will now be subject to further consideration by Government. We will have to wait to see how the reforms, if any, will be taken forward.
Following Brexit, COVID-19, Ukraine, the cost of living crisis, and much more, there is already a lengthy list of matters in the government’s inbox. As such, it is unclear whether reform of corporate criminal liability even makes it into the list, but, assuming it does, it is unlikely to happen any time soon.
Irrespective of that, the Law Commission has suggested a number of highly credible reforms to the UK’s anachronistic and largely unused corporate criminal liability regime. Whichever option is settled upon, what is clear is that this issue is now firmly on the public agenda and that, for companies, crime prevention is better than cure.