The Prosecution of Corporate Entities: Proposals for reform

The Government is currently consulting on proposals to extend corporate criminal liability beyond its common law constraints specifically for economic crimes, including fraud, money laundering and false accounting when committed on behalf or in the name of companies. Companies are ‘legal persons’ and can be prosecuted for offences they have committed, where it can be proved they have committed the relevant act with the requisite intention.

The open consultation, “Corporate liability for economic crime: call for evidence” which closes on 24 March 2017 “seeks evidence on the extent to which the identification doctrine is deficient as a tool for effective enforcement of the criminal law against large modern companies.” [1]  The intended purpose of the consultation being to survey[s] the options for reform of the law, if reform is needed, asks for views as to suitability and the scope that would be most effective, the advantages and disadvantages of adoption and implications of change, particularly in terms of the costs to businesses associated with the implementation of prevention procedures.”[2]

This consultation seeks to better arm prosecutors to pursue companies for wrongdoing committed by employees – an exercise which has proved all but impossible, particularly for large multi-national companies, which often escape criminal prosecution in this country and abroad. This article outlines the difficulties in establishing corporate criminal liability under the existing common law in England & Wales and discusses two alternative models that might present potential solutions, namely the extension of section 7 of the Bribery Act 2010 and the US approach of ‘vicarious liability’.

The current position – the ‘identification principle’

Economic crimes, such as fraud, money laundering and false accounting generally require proof of criminal intent. For example, establishing the commission of fraud requires proof that the offender acted with a dishonest intention. The question is: who can form an intent on behalf of the body corporate? The established ‘identification principle’ provides that criminal intent can only be attributed to a company if it can be shown that intent rested with an individual who constituted the ‘directing mind and will’ of that company. In Tesco Supermarkets Ltd v Nattrass [3] Lord Diplock held that only a person identified by the company’s memorandum and articles of association [4] would be able to embody the requisite mind and will to be acting as the company. Lord Reid extended this criteria in circumstances where the board of directors have delegated “some part of their functions of management giving to their delegate full discretion to act independently of instructions from them” and in such a case there would be “no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company”.[5]

This wider application of the identity principle was supported by Lord Hoffman who considered that criminal intent may be attributed to a company either through the primary rules of attribution (articles of association or memorandum) or a “special rule of attribution” which would be a matter of interpretation. The court should ask “given that [the law] was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company?”.[6] Despite Hoffman’s confirmation of an extended definition of individuals who may be said to act as the company in certain situations, the identification principle has great weaknesses as a mechanism of establishing criminal liability in corporations.

Applied to smaller companies, prosecutors may very well be able to trace criminal intent to the board room or a suitable officer, but this is not so easy where large multi-national corporations are concerned. The identification principle has been criticised as propounding “a theory of corporate liability which works best in cases where it is needed least and works least in cases where it is needed the most[7] and this is clearly the case when we look at the approach taken to prosecuting corporate entities in this jurisdiction.

The LIBOR rigging debacle is a prime example of wide-spread, institutionalised wrong-doing perpetrated by individuals in response to the pressures, demands and culture of their organisations. The Serious Fraud Office (“SFO”), unable to ascribe criminal intent to a sufficiently senior member through the sprawling internal structures of UBS and Barclays instead had to settle on the traders themselves, resulting in five convictions including one guilty plea as well as six acquittals. It is telling that the United States Department of Justice (“DoJ”) was in no way inhibited in the manner of its British counterpart and entered into a Non-Prosecution Agreement with UBS requiring it to pay a penalty of $500 million. In contrast, the SFO has had numerous successes in establishing corporate criminal liability against smaller companies.[8]

There plainly exists an imbalance that needs to be addressed through a change in the law. The Government will closely examine the following two models as a basis for extending corporate criminal liability to offences of fraud, money laundering and false accounting.

Failure to prevent an offence

The Bribery Act 2010 created a new strict liability offence under section 7 for companies that fail to prevent bribery. This radical departure from the impracticalities of the identity doctrine is tempered by affording a defence if the company can show that adequate procedures were in place to prevent such conduct. The offence has certainly aided the SFO in targeting corporates and they secured their first conviction under section 7 with Sweett Group Plc pleading guilty in December 2015. Section 7’s efficacy can also be seen in leveraging three Deferred Prosecution Agreements (“DPA”s) against Standard Bank, XYZ and most recently Rolls-Royce, in which five offences of failure to prevent bribery were cited. This model may be an effective means of extending corporate liability and offers flexibility in that it could apply to any selected number of predicate offences, for example section 1 Fraud Act 2006.

However, the extension of this model to a fraud offence has drawn criticism, with detractors noting the inherent differences between bribery and fraud. While bribery is often committed to enrich a company (as Sweett Group did to win a contract to manage the construction of a hotel in the United Arab Emirates), fraud is often committed at the expense of the company. Indeed, the majority of large scale frauds are inside jobs and this might result in the paradoxical position of a company being charged in connection to the criminal activity which victimised them. However, the proper application of the public interest test by prosecutors prior to commencing proceedings is likely to render such arguments largely academic.

US Inspiration

In stark contrast to the inhibitions faced by prosecutors of the UK, the US principle of respondeat superiore or ‘let the master answer’ exposes corporate entities to criminal liability if any employee, agent or representative commits an offence. Adopting this model of vicarious liability would amount to a coup of the identity principle, companies would become criminally liable for any wrong-doing committed by an individual under their employ. Indeed, such is the breadth of this incarnation of corporate criminal liability that companies will often seek to enter into Non Prosecution Agreements that include large penalties if they fall under the scrutiny of prosecutors.    The US DoJ has a rich history of prosecuting and levying substantial fines from huge companies. For example, in 2014 JP Morgan Chase agreed to pay $1.7 billion to settle charges for its role in facilitating Bernard Madoff’s Ponzi scheme and from 2001 to 2010 there were 1,011 corporate convictions, with all but five entering guilty pleas.[9]

The UK government may conclude that the ease of establishing criminal corporate liability shifts the focus of prosecutors onto companies in place of the individual for wrong-doing. Jed S. Rakoff, a US District Judge criticising the lack of individual prosecutions in the wake of the 2008 financial crisis, stated that “the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing”.[10] Corporates, it has been accepted are institutions which “do produce wrong-doing” [11], however they should not be pursued in place of culpable individuals. Numerous scholars have discussed the possibility of a more nuanced approach to determining corporate criminal liability, widening its scope should not come at the expense of individual criminal liability – the UK Government should take heed.

Conclusion

The two models outlined in this article will undoubtedly loom large in the consultation currently underway. The section 7 Bribery Act offence has the advantage of offering a reprieve to companies that do install appropriate measures to combat criminality and would also offer consistency in the approach taken towards corporate liability – a proposal in Bill form suggests a new offence of failing to prevent the criminal facilitation of tax evasion.[12] Despite this, the implementation of strict liability may not be appropriate to fraud offences which require specific knowledge and intention. The US approach, although allowing prosecutors an easy means of proving liability raises concerns over whether it provides a sufficient deterrent. These concerns have been the subject of much discussion and will surely inform the current debate on corporate criminal liability within the UK. This is an important discussion and we await the outcome of the consultation with interest.

Oliver Rutledge

[1] https://www.gov.uk/government/consultations/corporate-liability-for-economic-crime-call-for-evidence

[2] Ibid.

[3] [1972] AC 153

[4] Member of the board of directors or CEO

[5] Tesco Supermarkets Ltd v Nattrass [1972] AC 153, per Lord Reid p171 D-G

[6] Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500

[7]Professor J Gobert, “Corporate Criminal Liability: four models of fault”, Legal Studies, 14 (3), 1994, pp.393– 410

[8] See Smith and Ouzman Ltd, Mabey & Johnson Ltd and Innospec Ltd

[9] Brandon L. Garrett and Jon Ashley, Federal Organizational Plea Agreements, University of Virginia School of Law, at http://lib.law.virginia.edu/Garrett/plea_agreements/home.php

[10] Jed S. Rakoff, “The Financial Crisis: Why have no high level executives been prosecuted?”, NY Review of Books, 9th January 2014, http://www.nybooks.com/articles/2014/01/09/financial-crisis-why-no-executive-prosecutions/

[11] Samuel W. Buell, “The Blaming Function of Entity Criminal Liability”, Indiana Law Journal, 81, 2006, pp. 473-537

[12] Criminal Finances Bill

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