On 13 January 2017, the UK government opened a consultation on its proposals to reform the law on corporate liability for economic crime. It requested responses by 24 March 2017.
In the consultation document the Government noted that the existing “identification doctrine” for corporate liability, attracts criticism and is regarded by prosecutors, practitioners and legal academics as not being fit for purpose when applied to large modern companies. The identification doctrine allows for corporate entities to be convicted for the criminal acts of their directors and senior managers if they represent the “directing mind” of the business. In practice, this is restricted in application to the actions of the Board of Directors, the Managing Director and other senior officers who carry out functions of management and speak and act as “the company”. This has led to more prosecutions of smaller companies where it is often easier to identify the “directing mind” and link that person with the criminal act.
According to the consultation, the Government is concerned to explore whether the operation of the identification doctrine is hindering the effective administration of justice and has requested evidence in response to five different options:
Option 1: Amendment of the identification doctrine
Legislation could amend the common law identification doctrine by broadening the scope of those regarded as a directing mind of a company. However, this appears unlikely to be adopted as the consultation states that “retaining the identification doctrine in any form...would encourage corporate efforts to limit potential liability through the adoption of evasive internal structures. It would not promote the prevention of economic crime as a component of corporate good governance.”
Option 2: Strict (vicarious) liability offence
The creation of a strict liability offence based on the principles of vicarious liability would make the company guilty, through the actions of its employees, representatives or agents, of the substantive offence, without needing to prove any fault element (such as knowledge or complicity) at the corporate centre. The U.S. already has a similar doctrine based on respondeat superiore or “let the master answer”. The consultation notes that, “If the solution is to create such a new statutory form of vicarious liability, one needs to consider whether it should be subject to a due diligence type defence if it is to be effective as a means of incentivising economic crime prevention as part of corporate good governance”.
Option 3: Strict (direct) liability offence
A strict direct corporate liability offence would focus on the responsibility of a company to make sure that offences are not committed in its name or on its behalf. A company would be convicted without the need to prove any fault of the substantive offence (which is needed for vicarious liability). Instead the company would be convicted of a separate offence, more akin to a breach of statutory duty, for failing to ensure that economic crime is not conducted on its behalf. The consultation states, “By focussing on a failure to exercise supervision over the conduct of those pursuing a company’s business objectives, this model may more accurately target the real nature of corporate culpability.” This model is already employed by section 7 of the Bribery Act (Failure to prevent bribery). This offence is subject to a due diligence type defence which is expressed in terms of a company having adequate procedures in place to prevent the offence from occurring
Option 4: Failure to prevent as an element of the offence
In this option, the concept of a failure on the part of those managing the company to prevent the relevant offending from occurring is an element of the offence. It is for the prosecution to prove not only that the offence occurred but also that it occurred as a result of a management failure, manifested either as negligent conduct or as systemic inadequacies in the company’s mechanisms, which failed to prevent such offences from occurring.
The consultation states that “In effect this model takes the principles of option 3 but places on the prosecution the burden of proving that the company had not taken adequate steps to prevent the unlawful conduct occurring rather than placing the burden on the defence to prove that the company had done so.”
The Government’s starting position is that this statutory offence should initially apply to a short list of the most common serious economic crime offences (which could be added to if necessary by secondary legislation) for example:
- The common law offence of conspiracy to defraud;
- The offences at section 1 of the Fraud Act 2006;
- The offence of false accounting at section 17 of the Theft Act 1968; and
- The money laundering offences at section 327 to 333 of the Proceeds of Crime Act 2002.
The consultation document also states that the formulation of a defence appropriate for economic crimes (other than bribery and the facilitation of tax evasion) and the extent to which such a defence would have similar policy benefits, would need to be carefully considered.
The Government’s press release in May 2016, which launched the consultation, appeared to favour option 4, stating that “the consultation will explore whether the “failure to prevent” model should be extended to complement existing legal and regulatory frameworks. The consultation follows the recent announcement by the Prime Minister to bring forward a criminal offence for corporations who fail to stop their staff facilitating tax evasion and two recent prosecutions for the offence of failure of a commercial organisation to prevent bribery on its behalf”.1
Option 5: Investigate the possibility of regulatory reform on a sector by sector basis
The consultation states that “There has been significant reform in the regulation of the financial services industry in order to deter misconduct through strengthening individual accountability, particularly at senior manager level. There is also the potential for lessons to be learned from the experience of strengthening the regime for financial services which may be applicable more broadly.”
In a shift from the Government’s May 2016 press release, the consultation includes five options to reform the law. We suspect that this is both due to the change to the Prime Minister in the intervening period and, as the consultation recognises, the advantages and disadvantages of option 4 and reform generally, will need to be carefully considered against the alternatives. For example, one potential issue raised by a due diligence type defence is that, in the financial services sector, firms already have extremely sophisticated systems. Therefore it is questionable whether it would be worthwhile pursuing prosecutions to examine the adequacy of such systems. Potentially trials will only be brought where there are no procedures in place which, is still, more likely to target smaller, less sophisticated companies.
The next step will be for the government to respond to the consultation evidence.