Government shelves new corporate offence of failing to prevent economic crime

The government appears to have killed off the idea of any change to corporate criminal liability. Adrian Darbishire QC and Rachna Gokani of QEB Hollis Whiteman, consider the implications of this policy change and what it means for the future of corporate criminal liability.

Original news

Government abandons more stringent corporate counter-fraud laws, LNB News 30/09/2015 70

Independent, 30 September 2015: In an about turn, the government has abandoned its plans to make it easier to prosecute companies which fail to stop economic crimes, such as fraud and money laundering. The reversal follows the viewpoint there is no evidence corporate doing is going unpunished.

What was the government’s original plan in this area?

In enacting the Bribery Act 2010, s 7 (BA 2010), Parliament acknowledged the inadequacy of the identification doctrine (in that sphere at least) and recognised that wider reform of the law on corporate criminal liability was still some way off.

In its UK Anti-Corruption Plan, published in December 2014, the government undertook to ‘examine the case for a new offence of a corporate failure to prevent economic crime and the rules on establishing corporate criminal liability more widely’ by June 2015. The rationale was that, ‘in addition to bribery, there are likely to be other forms of economic crime for which it is appropriate to ensure that senior corporate actors are sufficiently accountable’.

Further, in its 2015 election manifesto, the Conservatives pledged to make it a crime ‘if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations’ and make sure that the penalties are ‘large enough to punish and deter’.

What problem with/gap in the existing legal framework was it aimed at resolving?

In English law, criminal liability for ‘guilty mind’ offences requires proof of the guilt of a controlling mind of a corporation (R v St Regis Paper Company Ltd [2011] EWCA Crim 2527, [2011] All ER (D) 36 (Nov)). The application of the identification doctrine by the courts has been inconsistent but generally strict, and the requirement severely limits the cases in which a successful prosecution for such offences is possible. It has been said that the doctrine is simply not adequate in a world where corporate decision-making may be highly decentralised, and may take place in a multi-national context.

How surprising is the government’s decision not pursue its plan for a new offence?

More than somewhat. In May 2012, the Ministry of Justice consultation paper on deferred prosecution agreements (DPAs) (LNB News 18/05/2012 11) identified the problems posed by the law of corporate criminal liability and stressed that more needed to be done. While in March 2014, the government said it had ‘no specific plans to review the adequacy of the current legislation on corporate criminal liability’, by December of that year it had performed a volte face when an examination of the case for reform was specifically provided for in the UK’s first ever Anti-Corruption Plan.

Simultaneously, the director of the Serious Fraud Office (SFO) spoke out in favour of the creation of the offence of a company failing to prevent acts of financial crime by its associated persons, which he heralded as an idea that ‘appeared to be gaining traction’. On 7 September 2015, just three weeks before the government’s announcement, David Green QC said of DPAs:

‘There is, I suggest, one more step necessary to make DPAs mainstream. That involves moving away from the identification principle of corporate criminal liability in English law and embracing something closer to vicarious liability, as in the USA. Until that is done, a corporate might conclude that if the prosecution of a company is so difficult under our law, why should they agree to a DPA? On a broader front, if the public interest, in terms of public confidence, demands more prosecutions of corporates, then such change is surely necessary.’

It was unexpected therefore when, on 28 September 2015, the government quietly scrapped the idea of a change to corporate criminal liability, at least for the foreseeable future, and indeed that it did so only in answer to a Parliamentary question as to its intentions under the Anti-Corruption Plan.

What is the rationale behind its decision?

It’s very simple—the government does not consider that there is a problem. The parliamentary answer notes:

‘Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the model BA 2010 offence and there is little evidence of corporate economic wrongdoing going unpunished.’

That view is particularly surprising, as it is in stark contrast to the government’s response to the DPA consultation in which the government recognised the pernicious and damaging effect of corporate economic crime on our economy and referred to the ‘general recognition’ that options for dealing with offending by commercial organisations are currently limited and the number of outcomes each year, through both criminal and civil proceedings, is ‘too low’. Not any longer, it seems.

However, the new approach is broadly consistent with this government’s concern to prioritise fostering economic activity over other policy objectives. Thus, in June 2015 the Chancellor, George Osborne, said that while boards and top management must, of course, live up to their responsibilities, and face the consequences if they don’t, he was not in favour of more corporate prosecutions. He expressed the view that simply ratcheting up ever-larger fines that just penalise shareholders, erode capital reserves and diminish the lending potential of the economy is not, in the end, a long-term answer.

What does all this mean for lawyers and their clients?

It seems likely that nothing will change in terms of corporate criminal liability for the foreseeable future. For the reasons given above, that raises obvious questions about the extent to which DPAs will take off. SFO director, David Green QC, has himself acknowledged that many companies may conclude that, given how difficult corporate prosecutions are to bring home, the attractions of a DPA are limited. He considers a change in the law to be ‘necessary’ for their success.

How does this fit in with other developments in this area of the law?

On 16 July 2015, HMRC launched a consultation on a potential new corporate criminal offence of failure to prevent the facilitation of evasion (LNB News 16/07/2015 149):

‘The purpose of [the] consultation is to find an appropriate and proportionate means of ensuring corporations can be held accountable under the criminal law for failing to prevent their agents from criminally facilitating tax evasion.’

Applauding the BA 2010, s 7 model as ‘an effective response to corporate commercial bribery’ that ‘incentivises companies to put in place adequate procedures and promotes corporate good governance’, HMRC proposed that a corporation should be held accountable where it fails to prevent its agents from facilitating tax evasion, with a due diligence defence to ensure that corporations who have taken reasonable steps to put in place adequate compliance procedures to prevent the criminal facilitation of tax evasion by their agents do not face prosecution. The end date for the consultation is 8 October 2015.

Do you have any predictions for future developments?

Despite the government’s complacency about the punishment of corporate delinquency at present, this is a debate that is unlikely to go away. First, the gulf between English and US practice in this area is huge, and the US model appears to show how a more inclusive approach to corporate criminal liability can work in practice. Second, prosecutors such as the SFO and HMRC are likely to continue to use the current law as an explanation for lack of success in prosecuting companies, and to continue to call for a change in the law. Finally, there is now a marked trend towards much larger fines for large companies in other spheres, such as environmental crime and health and safety. It would be surprising if the more punitive approach in those areas did not leak across into financial crime.

Whether via a Royal Commission, following successful prosecutions under BA 2010, s 7, or after a lack of success in the use of DPAs, our prediction is that legislation to effect some significant extension to corporate criminal liability will be formally back on the table within a few years.

 

Interviewed by Lucy Trevelyan.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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