The UK Government is considering significant changes to the law on corporate crime. These changes follow criticism from prosecutors, politicians and others that the current regime makes it too difficult to hold companies criminally liable for economic crimes such as fraud, false accounting and money-laundering.

This briefing takes a closer look at the proposals for reform set out in the Government consultation announced on 13 January.

The current position:

1. The consultation will consider the case for amending the current means of holding companies to account for economic crimes carried out by their employees or representatives, as well as options for reform.
2. The current law requires the prosecution to prove that those involved in the criminal activity were sufficiently senior within the company to be considered as the company’s ‘directing mind and will’.
3. Senior SFO figures have long been vocal in their criticism of this approach—often noting the current law makes it difficult to convict large companies given those at the highest levels of management are rarely directly involved in the wrongdoing.
4. As Alun Milford of the SFO has noted, it is
   1. ‘far easier to fix an SME with corporate criminal liability than it is a multi-national.’
5. The offence of failing to prevent bribery was introduced five years ago, in part, to address this very issue about bribery offences. That said, the SFO continues to investigate large companies for offences committed before the Bribery Act 2010 came into force, to which they must apply the ‘directing mind and will’ test.

The proposals for reform – The consultation proposes five possible models for changing the law in this area:

1. Amending the current model:
   1. the first proposal would retain the current basis for corporate liability but possibly amend it to broaden the scope of who may fall within the ‘directing mind’ of a company (although there is little indication of exactly how this would be extended).
   2. This option is unlikely to be attractive to businesses or prosecutors. Given the range of different management structures within companies, it will be difficult for the government to legislate a new definition of directing mind that is sufficiently broad to satisfy those looking for reform, while still providing companies with certainty as to how it would operate in practice.
2. Strict (vicarious) liability:
   1. this is the broadest of all the proposals and is similar to the approach taken in the US at the Federal level.
   2. It would make companies strictly liable for economic crimes (e.g. fraud) committed by their employees (no matter how junior), as well as by their representatives and agents.
   3. The prosecution would not need to show any fault or knowledge of the corporate leadership. However, the Government suggests this may be subject to a due diligence defence (i.e. the company may be able to avoid liability if it can show it properly scrutinised its employees and other representatives and their actions).
3. Strict (direct) liability through a ‘failure to prevent’ type offence [this option (3) certainly seems to be a front-runner at this stage]
   1. Under this model, the company would not be convicted of the substantive offence (e.g. fraud) but of a separate offence similar to the Bribery Act offence of failing to prevent bribery.
   2. The focus would be on companies’ failure to prevent crimes ‘linked to the furtherance of the business objectives of the company in question.’ Companies would not be liable where the perpetrator was off on a ‘frolic of his or her own.’
   3. Prosecutors would not need to prove any element of fault or failure on the part of the corporate, but the company could run a due diligence type defence (i.e. it would be for the company to show the steps it had taken to prevent the crime, rather than for the prosecution to prove a lack of or inadequacy in the steps taken).
   4. Much of the consultation document is focused on the operation and impact of the Bribery Act corporate offence and how it could be used as a model for reform, and this is the model chosen by the government to tackle the facilitation of tax evasion by corporates, as part of the Criminal Finances Bill 2016.
4. Failure to prevent as an element of the offence:
   1. this is very similar to (3), but in this option, the failure to prevent becomes an element of the offence – so the burden of proving the adequacy/inadequacy of the company’s procedures shifts on to the prosecution.
   2. Under this model, the prosecution must show some management failure or systemic weakness allowed the individuals to commit the crime.
5. Regulatory reform on individual accountability:
   1. This option would focus on preventing corporate misconduct by strengthening individual accountability within senior management.
   2. This would be done through sectoral regulation, similar to the Senior Managers Regime in financial services, rather than via a change to corporate criminal liability.
   3. SMR enables the UK Financial Conduct Authority to more readily hold individuals to account for failures by the firm because senior managers have a ‘duty of responsibility’ for certain functions or businesses. Individuals may be personally responsible for a failure in systems and processes within their areas, even where they had no actual knowledge of the misconduct in question.

5 OPTIONS:

1. The consultation notes that the five options are not mutually exclusive and ‘could include multiple options’.
2. This suggests the government is open to regulatory reform, which may include increased individual accountability, in addition to amending the law on corporate criminal liability.
3. Indeed, a theme running throughout the consultation documents is how any reform will impact on individual accountability, employment law duties and obligations, and the impact it will have on boardrooms’ approach to governance.
4. For companies in the financial services sector, the consultation recognises the need to ensure any reform which focuses on systems and controls is compatible with the existing regulatory regime.

Application to non-UK companies:

1. This is a significant consultation for all UK companies.
2. Moreover, it may also impact foreign-registered companies operating in the UK as the jurisdictional scope of any changes to the law are still unclear.
3. The Bribery Act and the new corporate tax offence, the latter which is likely to come into law later this year, both have very broad extra-territorial reach.

Full details of the consultation are on the Ministry of Justice consultation hub. The consultation is open until 24 March by way of an online survey.

http://bit.ly/2jQT3RB