UK: Law Commission Consults On Alternatives To Criminal Prosecutions In Regulatory Contexts

Last Updated: 16 May 2011
Article by James Roberts

The Law Commission has consulted on issues surrounding criminal liability in regulatory contexts, a topic of particular interest in the current environment.

As we reported in the last edition of this publication, there has been a marked increase in frequency and severity of criminal and regulatory investigations into companies. A number of factors are contributing to this, but many can be traced to enforcement attitudes in the wake of problems and publicity ultimately linking back to the financial crisis. It is therefore timely that the Law Commission has consulted on a paper on criminal liability in regulatory contexts.

No doubt these consultation proposals will have a long gestation period and so we present here an initial assessment of the proposals together with some of the recently published responses from interested parties. We will report further on the implications as the debate progresses.

Law Commission proposals

The consultation paper states that the backdrop to its proposals is concern about the increasing number of criminal offences, in particular the fact that a substantial proportion of the 3,000 offences created since 1997 are targeted at business activity, notably in the commerce and financial services sectors. The Companies Act 2006 alone created 20 new offences concerned with the way that companies are established and run, as well as re-enacting 69 offences from previous legislation. The Commission considers that criminal sanctions should only be used to tackle serious wrongdoing, and recommends a reduction in the number of criminal offences used by government departments and agencies. The Commission argues that it is out of proportion for regulators to rely wholly on the criminal law to punish and deter activities that are merely "risky", because they have the potential to lead to harm, unless the risk involved is a serious one.

Of particular note, a number of the proposals in the report relate to establishing fault on behalf of companies and attribution of liability to directors and other individuals (contained in Part 7). The aim of the proposals is to ensure that the law does not target particular businesses (such as small businesses) unfairly, and that businesses and individuals should not be subject to criminal penalties where they have made an effort to comply with the law. In summary, the proposals are as follows:

  • Limit the identification doctrine. In the absence of specific statutory provision, the default position for determining whether companies should be liable for statutory criminal offences involving proof of fault should not be the identification doctrine. This doctrine requires a controlling officer of the company him or herself to be proved to have had the fault element of the offence. It is the Commission's view that the doctrine can be more difficult to apply to large as opposed to small businesses, and it may therefore be applied with an unfair emphasis on small businesses. The Commission proposes that the correct approach is for the court to look to the underlying purpose of the statutory scheme for guidance on the right basis on which to hold companies liable for offences committed relating to that scheme.
  • Use a due diligence test. Applying a presumption of fault when considering criminal offences under statute that do not involve proof of fault is not the best approach, particularly in regulatory contexts when companies are most likely to be the defendants. A presumption of fault involves the courts reading into the statutory wording a requirement of fault that the prosecution must prove, as a matter of fairness to persons accused of the crime in question. The Commission proposes that the courts should imply a "due diligence" test to such offences (in line with more modern statutes) which permits companies (or individuals) to escape conviction for offences under the statutes if the defendant can show that all due diligence was exercised and all reasonable precautions taken to avoid commission of the offence.
  • Limit the attribution test. The statutory attribution of liability to individuals for offences committed by a company where that individual has consented to or connived in the acts constituting the offence is uncontroversial. However, some statutes have gone further, attributing liability where the individual has neglected to prevent the offence. For example, section 400(1) of the Financial Services and Markets Act 2000 (FSMA) provides that if an offence is committed by a body corporate under the Act and it is shown to be attributable to any neglect on the part of an officer then that officer will also be liable for the offence, despite the fact that offences under the Act vary considerably.

    The Commission is of the view that only subjective causing and conniving in the offence involves the degree of fault necessary for attribution. The Law Commission suggests that it might be possible to provide in these cases, that rather than for the director to be convicted of the offence itself (in some cases with an accompanying stigma), that instead there might be created a separate offence of negligently failing to prevent the commission of the primary offence (and the adverse consequences of the primary offence would not necessarily apply).
  • Limit the delegation doctrine. Likewise, the delegation doctrine, which provides that where the running of a business is delegated from X to Y, X still remains liable to be convicted of an offence committed, in relation to the running of the business, by Y may be unfair and disproportionate. The Commission proposes instead, a focus on whether X failed to prevent the offence committed by Y.

    Additionally, the Commission's proposals include:
    • Regulatory authorities to make more use of cost-effective, efficient and fairer civil measures to govern standards of behaviour, such as "stop" notices, enforcement undertakings and fixed penalties.
    • A set of common principles to be established to help agencies consider when and how to use the criminal law to tackle serious wrongdoing.
    • Where criminal offences are created in regulatory contexts, they should require proof of fault elements such as intention, knowledge, or a failure to take steps to avoid harm being done or pose serious risks. The Law Commission considers that businesses and individuals should generally not be penalised by the criminal law if they have made real efforts to comply with relevant laws in place.

Responses to the consultation

While the Law Commission has not yet published responses to its consultation, a number of the organisations that have submitted responses have made them publicly available, including the Office of Fair Trading (OFT) and the GC100.

The OFT agrees with the rationale that the identification doctrine may be less fair to smaller businesses, and that the courts should look more closely at the underlying principles of the legislation being applied to ensure fairness for both businesses and consumers. However, the GC100 raises the need for clarity and is concerned that the proposal will make it difficult for companies to know in advance what action they must take or avoid so that they are not committing an offence.

Both the OFT and the GC100 share the view that that the courts should be a given a power to apply a due diligence defence to any statutory offence that does not require proof that the defendant was at fault. However, while the OFT would support the application of a stricter due diligence defence that the defendant must take "all reasonable precautions and exercise all due diligence" to avoid commission of the offence, the GC100 prefers a test of due diligence "exercised in all the circumstances" to avoid the commission of the offence. Nevertheless, the GC100 also recognises the need, in certain circumstances, for strict liability offences to exist.

As to the proposals that the attribution test is limited, unsurprisingly the GC100 and the OFT take very different views. While the GC100 argues that one of the difficulties in the test is determining what knowledge of the facts, action or inaction by a director amounts to consent or connivance, the OFT does not believe that directors should be able to escape liability for the actions of their companies when they had no knowledge of the offence in circumstances where that lack of knowledge or the commission of the offence arises from their own negligence.

Other respondents to the consultation take a much more critical view of the Law Commission's proposals. A paper by Professor Steve Tombs and Dr David Whyte of the Institute of Employment Rights argues that the organising assumption of the consultation (ie, that reliance on criminal law may prove to be an expensive, uncertain and ineffective strategy) lacks evidence. The Trading Standards Institute expresses concerns that the removal of a criminal deterrent may undermine the aims of trading standards work. Finally, attention is drawn to the proposal that criminal offences should only be created and amended through primary legislation. The UK Environmental Law Association argues that this proposal is unworkable, given the view that criminal offences can be an appropriate means of implementing European legislation while the Food Standards Agency considers that the proposal is a disproportionate response to concerns that there is insufficient challenge to regulators creating criminal offences.

Conclusions

Anything that can reduce the complexities of the current regulatory and criminal systems is to be welcomed. In addition, the current climate has seen an increase in the regulators targeting individuals for action on the basis that regulators believe it has a greater deterrent effect (such as the FSA's policy of credible deterrence). However, as the Law Commission has flagged in its report, there are instances where this can depart from the principle of fairness if an individual director can be convicted of a serious offence, such as market rigging (section 397(1) FSMA) requiring dishonesty or recklessness, due to mere neglect.

While the responses that are currently publicly available only give an indication of how the Law Commission's proposals have been taken, they suggest there is likely to be significant opposition to any attempt to weaken the criminal regulatory regime.

In any event, the Law Commission does not intend to publish its final report on the proposals until spring 2012. It will then be for Parliament to consider whether to accept the recommendations in the report and make changes to the law. This is something that is by no means certain given the current climate in which the Government and regulators are under public pressure to be seen coming down hard on misbehaviours in certain regulated sectors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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