The End of the ‘Directing Mind’ – Corporate Liability for Economic Crime
On 13 January 2017, the UK Ministry of Justice issued a Call for Evidence on the reform of Corporate Liability for Economic Crime. The Call for Evidence seeks evidence on the extent to which the identification doctrine is a deficient tool for the effective enforcement of the criminal law against modern companies and what form of reform should be adopted.
While there can be little doubt in the wake of the LIBOR and other banking scandals that the Government wish to improve the chances of securing convictions against a wider range of defendants, this consultation represents a root and branch reform of the law. It is right that prosecuting large multinational corporations has proved difficult in recent years and the argument goes that the ‘identification doctrine’ derived from Tesco Supermarkets Ltd v Nattrass is no longer fit for purpose in the modern age of companies with complex internal management networks. Critics argue that the identification doctrine unfairly impacts on smaller companies where corporate liability is least needed while large companies avoid it through the decentralisation of responsibilities, making it difficult to identify a senior individual who may be fixed with liability for fraudulent or other criminal activity within a particular operation.
Due to the difficulties presented by the identification doctrine, the general approach in the UK to economic crime has been to prosecute individuals and impose regulatory fines on corporates. Financial institutions, such as Barclays and RBS, have been fined heavily following investigations such as LIBOR. In 2012 the FSA (as it was then) fined UBS £29.7million for systems and controls failings following the case of the “rogue trader” Kweku Adoboli. However, whilst UBS escaped with a financial penalty for regulatory non-compliance, Mr Adoboli himself was prosecuted and was sentenced to seven years in prison.
Recent developments in the law have signalled a changing approach to the manner in which companies are dealt with under the criminal law with a move towards a tougher stance on corporations which fail to tackle economic crime. The Government has set out 5 options for consideration in the reform of corporate liability:
- Amendment of the identification doctrine
- The creation of a strict (vicarious) liability offence
- The creation of a strict (direct) liability offence
- The creation of an offence of failure to prevent as an element of the offence
- Regulatory reform on a sector by sector basis
The government’s view is that retaining the identification doctrine in any form is untenable as the problems associated with it derive from the complex internal management structures of large modern companies. This makes the requirement to link offending conduct to a “directing mind” increasingly difficult and any form of identification doctrine is thought to create an incentive for executives to distance themselves from knowledge of wrongdoing lower down through delegation and disassociation of management. Whether in fact it does so is a matter of argument. In fact the problems may be overstated. The difficulties in prosecutions of corporations are usually evidential rather than legal and there ought not to be a removal of the protection of the doctrine which would expose an individual who has no knowledge of any crime being committed to prosecution, potentially fixing them with responsibility for criminal activity that they did not know about and could not, even on reasonable enquiry, have discovered.
The Consultation invites consideration of whether the strict liability approach of the US legal system should be adopted. A strict liability offence would be wholly inappropriate; it would unjustifiably penalise corporations even in the absence of corporate, rather than individual, wrong doing – for example in cases of ‘rogue traders’. Any reform of the law must not be designed simply to make it easier to prosecute corporations. A strict liability offence would be an unjust extension of the law that may have a catastrophic impact on economic growth at a time when the UK’s economy has been unstable following political developments both at home and abroad. Furthermore, strict liability offences offer little incentive to prevent corporate crime through good governance if the company will be held liable regardless of efforts made.
The change that appears to be favoured is an adoption of an offence of failure to prevent economic crime. This follows the pattern of corporate liability seen in section 7 of the Bribery Act 2010 which makes a company criminally liable if it fails to prevent bribery by someone (employee or third party) acting on its behalf. This is a strict liability offence, subject only to the defence of having adequate anti-bribery procedures in place. The Criminal Finances Bill 2016-2017 has also been published which introduces new offences modelled on section 7 relating to failure to prevent the facilitation of tax evasions by a person acting on the company’s behalf. Both of these are inroads into the identification doctrine and could be adapted for use in corporate liability for economic crime.
An offence of failing to prevent economic crime is not, however, the perfect panacea to the problems of prosecutions in this area. If introduced, companies would be tasked with ensuring that their compliance regimes were robust in addressing a very wide range of potential offending. Whereas this form of offence may be practical in the confined contexts of bribery and tax evasion it will place a very significant burden indeed on companies in the far wider category of economic crime.
The term ‘Economic crime’ is capable of being so broadly interpreted – encompassing fraud, share ramping, all forms of dishonesty and money laundering offences – that the measures required to prevent it would have to be wide ranging, extensive and thus likely to place a significant financial burden on corporations that are already subject to onerous compliance regimes. Shortly put it ought not to be the role of senior management to police all the actions of employees of a corporation. Effective and clear guidance will be vital so that companies can approach their compliance needs proportionately but it is difficult to foresee what measures could adequately prevent all economic crime without placing economic growth at risk. Even if a company has significant measures in place to prevent economic crime that will not prevent ‘rogue trader’ type offending which could not reasonably be foreseen and which by its very nature circumvents preventative measures.
For an amended law on corporate liability to be successful the SFO will need to show that it has the appetite to prosecute these types of cases. To date there have been no corporate prosecutions brought under the Bribery Act. A law which cannot or will not be effectively enforced should not be enacted for the sake of scoring political points. Furthermore, there remains a tension on the best approach to corporate liability – the tougher stance seen in recent developments is counter balanced by the growing use of deferred prosecution agreements which encourage cooperation between the SFO and corporates and may in the long run be a more effective response. The negative media focus on corporates since the financial crisis has impacted the relationship between the SFO, regulatory bodies and the corporate world at a time when structured mutual assistance is likely to be the most practical and effective means of fighting economic crime. Rather than seeking to demonise companies further by toughening the laws on corporate liability a preferable approach may be the increased use of regulatory options and deferred prosecution agreements. These encourages open lines of communication and cooperation between regulatory bodies and corporates thus presenting a united front in the fight against economic crime. Economic crime is bad for corporates – both financially and in reputational damage – and as it increases and becomes more complex companies need to be able to communicate and seek assistance from their regulators and law enforcement without fear of unjust recriminations. Mutual cooperation and a united stance between regulators, law enforcement and the corporate world may not be the most politically attractive option but it may be the most effective tool in the fight against economic crime. A nuanced, sector by sector, approach to regulation is preferable to the proposed removal of an established doctrine with the burdens it will place on industry.