EMBRACE THE POSSIBILITIES
Start preparing for long term changes to Corporate Criminal Liability
Recent developments in the UK have increased the likelihood that the English common law corporate criminal liability regime will change significantly, even if not in the near future. Companies should take action now to prevent possible financial and reputational pain later.
In the UK, with a few exceptions, corporates typically incur criminal liability on the basis of the “identification principle”.
Under this principle, the acts and state of mind of those who represent the “directing mind and will” of the corporate are attributed to the corporate itself, thereby bringing it liability. While seemingly capable of encompassing a wide range of individuals, in practice the directing mind and will of the corporate is limited to a small number of directors and senior managers. As a result, the identification principle has long been criticised as not only being inadequate to deal with misconduct perpetrated at lower levels of management but also for making it disproportionately difficult to prosecute larger corporates, which typically have more diffuse decision-making structures in place. The principle is therefore widely viewed to be outdated and impracticable. As put by Lord Edward Garnier QC (the former Solicitor General of England and Wales), “It’s simply inept”.3
Recent developments signal that reform may now be in the pipeline, albeit slowly.
Given the degree of dissatisfaction with the principle, it is perhaps surprising that change has not yet been effected. As discussed during our Emerging Themes webinar on 14 January 2021, recent developments, however, signal that reform may now be in the pipeline, albeit slowly. Firstly, the Government’s long-awaited response to its 2017 call for evidence on corporate criminal liability for economic crime was published in November 2020. While this concluded the evidence submitted to be inconclusive, it made provision for the second development - a further review by the Law Commission, which is now under way. This review will include an assessment of whether the identification principle is fit for purpose when applied to organisations of differing sizes and scales of operation4 as well as “the laws around corporate liability and …options to reform them”.5 It is expected that the Law Commission will publish its Options Paper on these issues in late 2021.
While slow, the direction of travel is clear: further reform of the corporate criminal liability landscape is on the horizon. Clearly, the imposition of such reforms has broader societal benefits. Not only does corporate crime undermine equity in negotiations, it also attacks fair competition, and impacts employees and their families. Criminal conduct of this type reduces confidence in a country, in its economy, and in individual companies. Ensuring companies are doing all they can to prevent “bad apple” employees and associated entities committing criminal offences should also ultimately benefit those same companies. The flip side, however, is the impact such change will likely cause at a more granular level, namely to those within its scope in terms of increased compliance burden.
Any suggestion that we should adopt the US approach of strict vicarious should in our view be strongly resisted.
While we support the updating of the identification principle to make it fit for purpose for the present day, we are not in favour of change for the sake of change. In particular, any suggestion that we should adopt the US approach of strict vicarious liability (as suggested in the initial consultation as a potential option) should in our view be strongly resisted. We do not believe from our experience that there are any true positives in having the playing field so skewed in favour of the prosecutor. As an alternative, the UK’s own “failure to prevent” offences in the Bribery Act 2010 and the Criminal Finances Act 2017, and similar suggestions from Australia, provide possible routes forward that we expect the Government will find both attractive and proportionate. We therefore anticipate the imposition of a form of quasi-strict liability for economic crimes (the precise definition of which is yet to be determined) modelled on the “failure to prevent” offences, and buttressed by a defence of adequate procedures, will be the one that finds favour.
3 Speaking at the Fraud Lawyers’ Association International Conference, 21 June 2019 4 https://www.lawcom.gov.uk/project/corporate-criminal-liability/ 5 Law Commission statement, Law Commission begins project on Corporate Criminal Liability, 3 November 2020
Despite the Government’s delay, despite the impact of COVID-19 and Brexit, and despite concerns over the ever increasing compliance burden, change will come.
With this possible change in mind, companies should ensure that they have adequate systems and controls to mitigate the risk of any corporate liability, and routinely monitor and review them. For regulated firms, this should not be an overly onerous exercise in light of the systems and controls already required under the regulatory regime. In our view, however, such review should be done sooner rather than later – particularly in light of the increased risk of fraud and other financial crime caused by COVID-19.
In addition to longer term risk mitigation, there’s an immediate commercial benefit for companies that make sure they have adequate procedures and controls mitigating financial crime risks.
For other corporates, the implementation of adequate procedures and controls to mitigate financial crime risk is not only a matter of good corporate governance but also a key component of reducing both internal and external risk (and in particular that posed by counterparties and transactions). Additionally, corporates should consider the composition of decision-making entities and ensure that they are exercising real and genuine oversight. Ensuring such processes are documented and the parameters defined may be particularly helpful in both the current and any future regime. We do not know when change is coming, but acting now is very likely to save pain later.
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.