Or the beginning of corporate prosecution?

In January 2017, HM Government opened a call for evidence on the reform of corporate criminal liability. The main motivation for this being  the perception that it is too difficult to prosecute companies in England and Wales.

There is plenty of justification for this. Under the law of England and Wales, a corporation is generally only criminally liable if senior managers can be proven to be culpable under the “identification principle”. The Director of the Serious Fraud Office, behind the recent deferred prosecution agreement with Rolls-Royce, has stated:

“I would very much like the test for corporate criminal liability to be looked at again. As you know, in this country, it is extremely difficult to convict a company of an offence because the prosecution has to show that the controlling minds of the company — somebody at the board level — were complicit in the criminality you are trying to prove. I think that bar is too high, and is a very unrealistic test — not least because I think anyone will agree that if you’re looking into allegations of corporate misconduct spookily the e-mail trail tends to dry up at a fairly junior level.”

This is not the case for all agencies. Some offences, particularly those connected with health and safety, attract vicarious liability. This explains why the vast proportion of corporate prosecutions in England and Wales are by the Health and Safety Executive, who announce successful prosecutions every week. For more information see Practice note, Corporate criminal liability in the UK.

Section 7 of the Bribery Act 2010 introduced the concept of “failing to prevent” (see Practice note, Bribery Act 2010: corporate criminal liability). The concept will be further used to combat suspected tax fraud in the forthcoming Criminal Finances Bill.

The Criminal Finances Bill creates two new “failure to prevent” offences for corporate entities:

  • Section 40 creates an offence where a company or a partnership is guilty if a person associated with it commits a UK tax evasion facilitation offence when acting in that capacity, and includes aiding, abetting, counselling or procuring the commission of the principal offence.
  • Section 41 creates an almost identical offence concerning the facilitation of foreign tax evasion, conduct which amounts to an offence under the law of a foreign country and would be regarded by the courts of any part of the United Kingdom as amounting to the fraudulent evasion of that tax.

In both cases, it will be a defence for the company or partnership to prove that when the offence was committed they had in place such prevention procedures as was reasonable in all the circumstances, or to prove that it was not reasonable in all the circumstances to expect prevention procedures to be in place.

Prevention procedures are designed to prevent persons acting in the capacity of a person associated with the company from committing tax evasion facilitation offences. Similar to the Bribery Act, the government is required to prepare and publish guidance about procedures that relevant bodies can put in place to prevent such offences. A draft is published, and contains almost identical principles to the Bribery Act. Both offences will also require the consent of the Director of Public Prosecutions or the Director of the Serious Fraud Office, perhaps a knowing indication of the growing presence of private prosecutions.

The consultation proposes the following five options:

  • Amendment of the identification doctrine, where legislation could amend the identification doctrine by broadening the scope of those regarded as a directing mind of a company.
  • The creation of a strict liability offence based on the principles of vicarious liability, which would make the company guilty, through the actions of its employees, representatives or agents, of the substantive offence, without the need to prove any fault element such as knowledge or complicity.  There would also need to be consideration of whether it should be subject to a due diligence type defence to provide an incentive to prevent economic crime.
  • The creation of a strict direct corporate liability offence, which would focus on the responsibility of a company to make sure that offences are not committed on its behalf. Here, a company would be convicted without the need for proof of any fault element, not of the substantive offence, as with vicarious liability, but of a separate offence akin to a breach of statutory duty to ensure that economic crime is not used in its name or on its behalf. As with the strict vicarious liability option it is necessary to consider whether direct strict liability should be subject to a due diligence type defence (close to the model used for the section 7 offence).
  • Failure to prevent being an element of the offence, where a failure on the part of those managing the company to prevent the occurrence of the relevant offending is an element of the offence, and it is for the prosecution to prove not only that the predicate offence occurred but also that it occurred as a result of a management failure. This model places on the prosecution the burden of proving that the company had not taken adequate steps to prevent the unlawful conduct occurring, rather than placing the burden on the defence to prove that the company had done so.
  • Investigate the possibility of regulatory reform on a sector by sector basis. HM Government suggest there has been significant reform in the regulation of the financial services industry in order to deter misconduct through strengthening individual accountability, particularly at senior manager level.

Initial plans to extend corporate criminal liability were shelved by the government in 2015 before being reintroduced at the anti-corruption summit in May 2016 and reaffirmed by the Attorney General last September. For more information see Legal update, Criminal Finances Bill in the making. This stop/start approach has not helped the government present the case for reform as urgent and it is hoped the consultation will be acted upon.

In practice, 2017 has already seen two different approaches by different agencies to corporate failings in respect of business crime.

The Rolls-Royce deferred prosecution agreement is covered in some detail at Blog, The Rolls-Royce DPA: an end to corporate prosecution? The key finding in a corporate liability context is that the most serious and sustained kind of bribery and corruption can still result in a company not being prosecuted.

Later in January, the FCA published a final notice issued to Deutsche Bank AG, which resulted in the bank being fined £163 million for failing to maintain an adequate anti-money laundering control framework. The investigation found that between January 2012 and December 2015, there were serious deficiencies throughout the bank’s AML control framework, and as a result of these failings, Deutsche Bank failed to obtain sufficient information about its customers to inform the risk assessment process and to provide a basis for transaction monitoring, a  breach of Principle 3 of the FCA’s Principles for Businesses.

There was no suggestion that any criminality resulted  directly from the failings. However, it is a criminal offence under regulation 45 of the Money Laundering Regulations 2007 to fail to comply with a number of the other regulations, and the final notice suggests some evidence that the following regulations were breached:

  • Regulation 7: requirement to apply due diligence.
  • Regulation 8: requirement for ongoing monitoring of a business relationship.
  • Regulation 9: customer verification.
  • Regulation 11: customer due diligence.
  • Regulation 20: appropriate and risk-sensitive policies and procedures.

The offence under regulation 45 carries a maximum penalty of an unlimited fine. The presumption is the FCA did not consider any criminal action appropriate.

In addition,  a group of six financiers, including a former senior HBOS banker, were sentenced to long terms of imprisonment after being convicted for their roles in a scam involving £245 million worth of fraudulent loans after a CPS prosecution. The prosecution was brought after a six-year investigation by Thames Valley Police that involved 150 officers who sifted through about 500,000 documents.

While both the CPS and Thames Valley Police will be delighted with securing such a result, a case that may have been considered appropriate for the Serious Fraud Office, questions will remain as to what went wrong with the compliance procedures at HBOS to allow such a fraud to continue for so long, and what, if any, sanction will follow.

The first two cases, both of which resulted in enormous fines but no criminal conviction, perhaps give the impression there is no appetite to prosecute big companies. The FCA’s prosecutions in relation to business crime remain limited to individuals. The SFO’s online court calendar reveals two corporate prosecutions listed for trial: one “big” company listed for trial in January 2018, and a logistics company with a turnover of £11.3m for trial in September 2017.

The new failure to prevent tax evasion offences will no doubt be well received by prosecutors, and the forthcoming guidance from the Chancellor on prevention procedures will be a most important document for companies. The former Solicitor General, Sir Edward Garnier QC, commented at a Fraud Advisory Panel meeting on 31 January 2017 that he would be proposing amendments to the bill to include further offences.

This Blog has commented that there seems to be a tendency in government to respond to problems by creating new laws, rather than seeking to use existing laws more efficiently, or to put greater resources into investigation and prosecution. It is fair to say that some organisations have stated explicitly that corporate structures are too large and complex to be able to apply the identification doctrine with confidence, as per LIBOR.

However, the section 7 Bribery Act offence has been available for more than five years. So far, we have yet to see a contested case, and have no indication as to whether particular procedures are actually “adequate”.

The most important respondents to the consultation may be the prosecution agencies. The SFO, somewhat paradoxically, argues both for and against the need for reform, with express comments concerning the inability to prosecute companies in the LIBOR case,  yet being in a position to do so in the Rolls-Royce matter, where the majority of allegations were based on the pre Bribery Act offence of conspiracy to corrupt. However, this is a key consultation that will shape the future of how corporate entities are held to account in the future, and responses will no doubt be forthcoming from all sections of society.

The consultation is welcome, and the results will make interesting reading. Whatever resolution emerges must address three key issues:

  • That there is no difference between the treatment of companies, regardless of their size, and a company is no less likely to be prosecuted because the trail to the top is so much longer.
  • Does the proposal achieve the correct a balance between improving corporate behaviour and punishing wrongdoing?
  • How is the public interest limb of the Code for Crown Prosecutors affected, particularly if any penalty passed will result in adverse effects for innocent employees and shareholders?

The response closes on 24 March 2017.

Practical Law David Bacon

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