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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

The Law Commission consults on corporate criminal liability reform

As the Law Commission's consultation on reforming the law relating to corporate criminal liability continues, Clifford Chance examines the case for reform and asks whether the need for a change in the law has been overstated.

THE LAW COMMISSION'S CONSULTATION

Reform of the law of corporate criminal liability has long been talked about, but reaching a consensus on what, if anything, should be done in this regard has proved difficult.

Launched last month, the Law Commission's latest consultation follows a 2017 call for evidence from the Ministry of Justice concerning proposals to reform corporate liability for economic crime. The results of this were ultimately inconclusive, leading the Ministry of Justice to ask the Law Commission to pick up the baton and seek views on whether, and how, the law relating to corporate criminal liability can be improved so that it appropriately captures and punishes criminal offences committed by corporations, and their directors or senior management.

WHAT CRITICISMS HAVE BEEN MADE OF THE LAW AS IT STANDS?

Some critics of the current state of the law take aim at the identification principle. Broadly speaking, this is the most common means of establishing corporate criminal liability on the part of a company, absent legislation expressly creating this liability for particular offences. The principle provides that, where the commission of an offence can be attributed to an individual or group of individuals who are the directing mind and will of a company, the company can also be criminally liable for the offence, as acts of a directing mind and will are considered to be acts of the company.

In practice, particularly in larger organisations, only a limited number of directors and senior managers of a company will be considered to have sufficient discretion and autonomy to be considered the company's directing mind and will. This means that for a company to be criminally liable as a result of the identification principle, it will also be necessary for one of a small number of sufficiently senior individuals within the company to be criminally liable.

This has led to criticism that it is prohibitively difficult to prosecute companies for criminal wrongdoing, even where wrongdoing has been committed for the benefit of the company or on the company's behalf by employees outside of this narrow group of senior individuals. It has also been suggested that the current state of the law results in unfair disparities between the treatment of larger and smaller companies, and that smaller companies are more likely to be successfully prosecuted as a result of the identification principle. Given that senior management are more likely to be personally involved in the everyday decisions and acts of smaller companies, the distance of senior management in larger companies from day to day decision making has been said to act as a shield against corporate criminal liability for those companies.

The Law Commission's consultation examines the approach taken to corporate criminal liability in several other jurisdictions, such as the vicarious liability approach taken in the USA. However, the Law Commission also seeks inspiration from closer to home and examines whether the offences of failure to prevent bribery and failure to prevent the facilitation of tax evasion, that have been created in recent years, could be extended to cover a broader range of economic crimes. With both the Serious Fraud Office and the Crown Prosecution Service supportive of a more expansive approach being taken to failure to prevent offences, the prominence with which this approach features in the Law Commission's consultation materials is unsurprising, and this may represent the most likely direction of travel for the Law Commission when formulating its options.

DO THESE CRITICISMS MISS THE POINT?

Underlying the criticisms of the current state of play is an assumption that the fact that it is difficult to prosecute corporates is problematic. When launching its consultation, the Law Commission itself characterised the potential for reform as a trade-off between enabling corporates to more readily be prosecuted, against ensuring that businesses were not unnecessarily burdened by any reform, stating:

"Public trust in the law and in business is likely to be damaged when firms cannot be prosecuted for criminal offences carried out in their name and from which they would or have benefited. Likewise, the law must operate in a proportionate way and not place unnecessary costs on legitimate businesses."

There are however good reasons why corporates are ill-suited to many forms of criminal liability. As the Law Commission states in its consultation, companies act through people, be they directors, managers, employees or agents, and companies cannot intend to do something or be dishonest in the same way that people can.

If one of the aims of reform is to act as a disincentive to corporate wrongdoing, then efforts may be better directed at ensuring that criminal acts of those individuals are effectively investigated and prosecuted. If the prospect of individual culpability in a corporate setting is remote, then the fact that it is easier to impose a criminal financial penalty on the corporate concerned is likely to act as little disincentive to the wrongdoer. Put simply, what is more likely to act as a disincentive to commit crime – the prospect of your employer receiving a criminal fine or the prospect of you facing a lengthy term of imprisonment?

Since the deferred prosecution regime came into force in 2014, ten deferred prosecution agreements have been reached with corporates, with seven of these relating solely or in part to the offence of failure to prevent bribery. Whilst many of the deferred prosecution agreements have come with headline grabbing financial penalties for the corporate concerned, so far not a single individual in the UK has been successfully convicted in relation to the subject matter of such an agreement (though some cases remain ongoing). It is difficult to see how public trust in the law and in business can be upheld when individuals are not held to account for criminal wrongdoing in the corporate context.

WHAT ABOUT THE BENEFITS OF FAILURE TO PREVENT OFFENCES?

Proponents of the failure to prevent model have made much of the virtues that come with enhanced compliance programmes and policies and procedures introduced by corporates to prevent corporate wrongdoing. How effective these have been in relation to the failure to prevent offences relating to bribery and the facilitation of tax evasion is open to question. It is clear though that the broader and more ill-defined the wrongdoing being targeted is (e.g. "economic crimes" generally), the less value that overarching and generalist compliance programmes become in changing corporate behaviours, while at the same time they risk companies being bogged down in more and more complex policies and procedures in a bid to avoid liability

These arguments also overlook the fact that it is not good business sense for companies to become embroiled in criminal conduct by their employees, regardless of whether the company will also be held criminally liable for this conduct. Companies will already often be liable as a matter of civil law for criminal conduct committed by their employees and may also face regulatory sanctions and penalties as a result. These factors, combined with the negative reputational consequences that flow from corporate criminality and the rise of the ESG agenda, should be incentive enough for corporates to have adequate procedures in place to prevent corporate wrongdoing, and provide sufficiently strong consequences for those that do not.

Introducing further corporate criminal offences, whether in the form of failure to prevent offences or otherwise, may well provide a source of low-hanging fruit for prosecutors and pave the way for a greater number of corporate deferred prosecution agreements and convictions (and in doing so provide a useful source of income to the Treasury). However, given the inevitable length of time it takes to secure such outcomes, financial penalties levied some years later usually have the greatest impact on shareholders and employees who had nothing to do with the underlying historic misconduct.

IS THERE A FUTURE FOR THE IDENTIFICATION PRINCIPLE?

Despite the criticisms that have been made of the identification principle, there must be something to be said for corporate criminal liability being reserved to instances where criminal culpability attaches to such senior decision makers at the company that their acts can properly be considered to be acts of the company. The signal that a corporate criminal conviction sends out in these circumstances is far stronger than that sent out by a "failure to prevent" conviction, or indeed a conviction on the basis that corporates should be vicariously liable for acts of their employees, no matter how junior. As we have set out, the absence of corporate criminal liability in cases that fall short of this does not equate to a complete absence of liability on the part of the corporate.

On 7 July 2021, Clifford Chance and 7 Bedford Row chambers co-hosted an event held by the Law Commission as part of their consultation, titled "Deferred prosecution agreements: a vehicle for corporate justice?". A recording of the webinar can be accessed here. Should clients wish to discuss issues raised by the consultation further, then the contacts listed would welcome the opportunity to do so.