Corporate criminal liability reform: a breakthrough at last?
Amendments to the Economic Crime and Corporate Transparency Bill may prove to be a breakthrough in the stalemate over the reform of corporate criminal liability.
The proposed amendments were put forward by Dame Margaret Hodge to the Public Bill Committee on Thursday 24 November 2022. If adopted in this form, they would fundamentally change the landscape of corporate criminal liability in the UK, by introducing:
– A new corporate offence of “failure to prevent fraud, false accounting or money laundering”.
– Director criminal liability for failing to prevent fraud, false accounting or money laundering where the offence is committed with the consent or connivance, or is attributable to any neglect on the part, of the director.
– Corporate criminal liability for economic crime offences where:
– the offence is committed with the consent, connivance, or neglect of a senior manager; or
– a senior manager, acting within the scope of their authority, is party to an offence and a senior manager failed to take all reasonable steps to prevent that offence from being committed.
This is the first time we have seen draft legislation for corporate criminal liability for economic crime put up for consideration in Parliament. Due to concerns raised by the Minister for Security, the amendments have not been adopted into the Bill. However, Dame Margaret has succeeded in putting the onus on the government to implement reform with Tom Tugendhat MP having committed to “look at this extremely seriously… to make sure that any opportunity [to reform] is fulfilled as quickly as possible.”
The Bill is the second instalment of the UK government’s 2022 economic crime legislative agenda, following the passage of the Economic Crime and Transparency Act 2022 earlier this year.
The Bill, as originally drafted, sought to reform the Registrar of Companies by tightening identity verification procedures, grant powers to law enforcement to freeze and confiscate cryptoassets, and expand the SFO’s pre-investigation powers (see our article).
The grapevine has been full of rumours that the Bill might be amended to squeeze in a new failure to prevent (FTP) economic crime offence, which has long been on the SFO’s Christmas list, following the publication of the The Law Commission’s Corporate Criminal Liability Options Paper in the summer and two separate Parliamentary Committee reports in the autumn: the House of Commons Justice Committee in October; and the House of Lords Fraud Act 2006 and Digital Fraud Committee in November 2022. The Committee had also been quizzing witnesses on such an offence, fuelling the speculation.
However, it was not until the Committee’s last scheduled sitting that the amendments – which go far beyond anything expected – were formally moved.
The impact of the amendments
Failure to prevent fraud, false accounting or money laundering
As drafted, the offence would broadly mirror the FTP bribery and tax evasion offences under the Bribery Act 2010 and Criminal Finances Act 2017.
It captures offences committed by “associated persons” (“A”) intending to confer a business advantage on the corporate or another person to whom A provides services on behalf of the corporate.
It is a defence for the corporate to show it had “reasonable procedures” in place designed to prevent A from undertaking the conduct. Further, the corporate will not be held liable where it can prove that the conduct was intended to cause harm to itself. Unlike the Bribery Act, there is no suggestion that overseas conduct would be caught.
The offence applies to “relevant commercial organisations” but, unusually, this is defined differently for (a) fraud and false accounting and (b) money laundering offences.
For (a), it includes: all UK incorporated companies or partnerships carrying on business anywhere in the world; or any overseas corporate body or partnership carrying on any part of its business in the UK.
For (b), the intention seems to be to capture businesses operating in the “regulated sector” as defined under Schedule 9 of the Proceeds of Crime Act (POCA). That is credit institutions, financial institutions, auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals, trust or company service providers, estate agents and letting agents, high value dealers, casinos, art market participants, cryptoasset exchange providers, custodian wallet providers.
Director liability for failure to prevent
Unlike its bribery and tax evasion equivalents, officers could be held personally liable where the failure to prevent offence is committed with their consent or connivance, or is attributable to their neglect. “Officers” include directors, managers, associates, secretaries, or similar officers, or persons purporting to act in such a capacity.
The “Identification” Doctrine
The Bill proposes two further means by which corporates can be held criminally liable for economic crime offences.
First, the corporate would commit an offence where the offence is committed with the consent, connivance or neglect of senior managers. “Senior managers” includes the CEO or CFO, as well as those playing a significant role in the making of decisions about how the entity’s relevant activities are to be managed or organised, or managing or organising entity’s relevant activities. A similar concept of senior management culpability already applies to corporate manslaughter.
Second, where a senior manager (or senior managers collectively) responsible for the organisation’s activities relevant to the offence “fails to take all reasonable steps to prevent [an] offence being committed”.
A senior manager, but not necessarily the same one(s), would need to be “a party to the offence”. For this purpose, the actions of a group of senior managers could be treated as the actions of one, but they would have to be acting within the scope of their authority for the corporate to be guilty.
It is unclear if there would need to be a conviction of an individual, or whether it would be sufficient for the prosecutor to merely prove the acts which would amount to an offence had been committed on, for example, the balance of probabilities.
Rough and ready
The amendments are unquestionably rough and ready, leaving many issues to be resolved. While the Law Commission did not consider the “identification doctrine” and “failure to prevent” to be mutually exclusive, the amendments go far beyond the options set out by the Law Commission.
For instance, the Law Commission concluded that corporates could be held criminally liable where a director has “consented or connived” in the offence. The amendments go further in holding the corporate liable where the offence is attributable to a director’s neglect. However, it was suggested that a corporate could only be held liable for a director’s negligence where a “crime of negligence” has been committed (i.e., where an individual can be convicted on a mens rea of negligence). This is not the case for most of the economic crime offences which the “consent, connivance or neglect” offence would cover.
“Consent or connivance” offences already exist under, for example, the Fraud Act 2006. However, in practice, prosecutions are rare as a ‘directing mind and will’ needs to be identified for the underlying corporate offence. It is therefore questionable how useful it would be to prosecutors.
On the reverse side of the coin, the Law Commission concluded that it would be unfair to hold individual directors criminally liable for a corporation’s neglect unless the predicate offence was strict liability or a crime of negligence.
While FTP offences might be characterised as crimes of corporate negligence, the predicate offence (such as the bribery, tax evasion, or fraud) will rarely be one. It is therefore surely “stretching the chain of causation too far” to hold individual directors criminally culpable for negligently enabling employees or agents to commit economic crimes, as the Law Commission concluded. If not, theoretically, a director may serve a sentence for being merely negligent in failing to prevent a fraud by an employee or agent who is not even prosecuted for the crime.
The amendments effectively create a quasi-general FTP economic crime offence which would capture the existing FTP bribery and tax evasion and the proposed FTP fraud, false accounting and money laundering offences. Clearly, it is undesirable to have separate offences for the same behaviour. Does ‘Legal/Compliance’ need to ensure that it has “adequate procedures” in place, or that its senior managers “take all reasonable steps to prevent an offence being committed” by another senior manager? Is the corporate going to be prosecuted even where there was no intention to benefit the corporate?
There is no rationale for combining fraud, false accounting and money laundering into one FTP offence. Any corporate offence for money laundering regime should be designed specially to fit within the existing and complex POCA regime, where officers can already be held criminally liable for, amongst other things, failing to disclose.
Lastly, there is no requirement to publish guidance on prevention procedures, as has been recommended by the Law Commission.
Reform of corporate criminal liability has been at the top of the SFO’s agenda for many years now. The war in Ukraine has forced economic crime up the government and Parliament’s agenda. These amendments appear to be an attempt to drag corporate criminal liability along. This is unsatisfactory, resulting in a hurried and ill-considered proposal.
It is clear that the “identification doctrine” amendments were driven by a perceived inequity in the treatment of small and large companies when it comes to criminal liability. In particular, the failure of the SFO to convict Barclays in 2018 was cited in Committee. However, the proposed legislation would not have changed the outcome. The cases against each of Barclays employees – including the CEO and CFO – failed.
At its heart is a question of principle: when is it right to hold corporates and senior managers criminally culpable? The principle needs to be considered in the context of the existing civil and regulatory regimes, as well as the government’s broader legislative agenda.
For example, it is anticipated that a new directors regulatory regime for public-interest entities will be introduced under the auspices of the Auditing Reporting and Governance Authority, due to be created in 2024. There are a wealth of reports and papers on the issue now and it is critical that both the government and Parliament give proper thought to these issues before any reform.
These amendments have not survived the version of the Bill which the Committee has sent back to Parliament, so it is unlikely that these reforms would be adopted this year. But, the government has now committed to dealing with the reform of corporate criminal liability for economic crime – and soon. If it does not, it will have to explain itself.