27 January 2021 - Post by:
The UK Law Commission is considering whether corporate criminal liability law should be reformed and two weeks ago MPs proposed a new economic crime corporate offence to be included in the Financial Services Bill. What is the likely way ahead and what are the implications now for companies?
Corporate criminal liability for economic crime – calls for reform
Supporters of reform point to the SFO’s well-publicised recent failures to hold corporates criminally liable for the conduct of their staff. The last time the SFO successfully prosecuted a corporate entity was almost three years ago, when a transport company was found guilty of conspiracy to corrupt.
The SFO and supporters of reform say that the current state of the law is far from satisfactory, with the identification principle making it difficult to prosecute a large company for offences such as fraud, conspiracy to defraud, theft, false accounting, insider dealing or market manipulation.
The past three Conservative governments have given a lukewarm reception to previous attempts to introduce a new criminal offence that would allow a company that has failed to take reasonable steps to prevent economic crime, to be prosecuted. The Law Commission’s ongoing review was triggered by the UK Ministry of Justice’s 2017 Call for Evidence. Reporting late last year, it failed to reach a firm conclusion as to whether or how the law should be reformed.
MPs keep up the pressure
On 13 January, a group of cross-party MPs (led by Labour MP Dame Margaret Hodge) tabled an amendment to the Financial Services Bill. The amendment proposed introducing a new combined offence of facilitating/failing to prevent economic crime. The proposed definition of economic crime encompassed fraud, false accounting and money laundering. The new offence was targeted purely at FCA-regulated entities.
The proposed amendment found some sympathy from both governing and opposition parties during its debate in the House of Commons. Multiple MPs voiced their concerns over the slow progress of holding corporates criminally accountable.
However, the overarching message in response was that the government did not wish to pre-empt the work of the Law Commission. The amendment was not voted on, likely because it would not have passed. But the proposed amendment and resulting debate was a reminder to the government of its 2015 manifesto pledge to make it a criminal offence if companies failed to put measures in place to prevent economic crime. Attempts to introduce an offence of failure to prevent economic crime into the Criminal Finances Act 2017, and an offence of failure to prevent money laundering into the Sanctions and Anti-Money Laundering Act 2018, were similarly unsuccessful.
Why was this most recent amendment targeted at FCA-regulated entities? Most likely for the simple reason that the proposed offence was attached to the Financial Services Bill, thus necessarily restricting its scope to companies that are subject to FCA regulation. Such a targeted offence would make little strategic sense for those calling for reform as headline grabbing cases in recent years have often involved corporate defendants operating outside financial services. Furthermore, the FCA already has statutory powers to fine regulated firms for systems and control failures.
Law Commission looking at corporate criminal liability very broadly
The Law Commission’s remit is much wider than simply considering how to appropriately formulate a failure to prevent economic crime offence. The government’s response to its 2017 Call for Evidence shows that views are split over whether there is a need for reform, and if so, what the best way to go about it is.
The Law Commission is looking beyond economic crime by considering how to reform the whole law on corporate criminal liability, and the interplay with existing civil liability regimes (e.g. civil recovery of the proceeds of crime). This may well include looking at corporate criminal liability for offences relating to environmental damage and modern slavery. Both these areas were raised by respondents during the 2017 Call for Evidence.
Looking ahead – a possible timeline
For now, it seems that despite repeated calls from the SFO’s former and current directors (as well as a number of former Attorney Generals) for the reform of the law on corporate criminal liability as a matter of urgency, the ball firmly lies in the Law Commission’s court.
The Law Commission is due to report later this year and, assuming its recommendations are accepted by the government, legislating for a new, potentially wide criminal offence could take many more months if not years. As a reference point for a possible timeline, the Bribery Act 2010 came into force in July 2011, nearly two and a half years after the 2008 Law Commission report on bribery.
If the law changes, and the identification principle is replaced by a mechanism that makes it easier to successfully prosecute large companies for economic crimes other than failure to prevent bribery and the facilitation of tax evasion, there will no doubt be a refocus on compliance policies and procedures to ‘shore up’ a company’s defences at that stage.
However, it would be complacent for a company to wait until then. The pressures of good corporate governance, press scrutiny and reputation, and individual and corporate liability (albeit under the identification principle) should now be enough to require careful focus on proportionate and risk based corporate compliance programmes.
Understanding the evolving risk of corporate criminal liability in a number of jurisdictions, and how it impacts strategic decisions during an investigation, is one of the nine challenges for in-house counsel identified in our 2021 Cross-border White Collar Crime and Investigations Review.