Jason Hungerford and Thomas Ajose of Mayer Brown look at the identification principle obstacle to financial crime enforcement.
Lacklustre enforcement of the United Kingdom's financial crime laws has many possible explanations – from bureaucracy at prosecuting agencies, to a lack of experience and funding – and everyone these days seems to have an opinion on the matter. Wherever one decides to point the proverbial finger, there is a structural legal impediment that underlies them all: the identification principle. Nearly ten years since the Bribery Act created the first 'failure to prevent' offence, carving out a sort of exception to the rule, calls for broadening the use of strict liability offences are growing louder.
THE UK AND US: DIFFERENT LEGAL UNDERPINNINGS
Former director of the Serious Fraud Office (SFO), David Green (now of Slaughter and May), famously championed a broad, 'failure to prevent economic crime' offence, intended to overcome the limitations imposed by the English law 'identification principle'. That principle, in short, requires that the 'directing mind and will' of an organisation be responsible for a crime in order for the organisation itself to be prosecuted. That directing mind and will is typically limited to directors and executive officers: individuals who rarely are involved in the day-to-day decisions in which financial crime-related offences have their origin.
This can mean that it is easier for prosecutors to convict a small company, whose executives are more likely to be involved in everyday business decisions, than a large one. As current SFO director Lisa Osofksy has said, "I can go after Main Street, but I can't go after Wall Street".
This stands in contrast with the United States, where the principle of respondent superior means that, generally speaking, an employee of an organisation need not be of any particular role or seniority for that employee's actions to create criminal liability for the employer. This has enabled US agencies to successfully prosecute (or secure settlements from) companies for the misdeeds of their employees, establishing the US as the preeminent enforcer of financial crime laws. US prosecutors also use this dynamic as leverage to secure cooperation from corporates in prosecuting individuals, another area in which the UK track record is mixed at best.
WINDS OF CHANGE?
Whilst the UK may still be some way from a failure to prevent economic crime offence, there have been signs in recent years that the direction of travel is toward changes that support easier prosecution of organisations.
The Criminal Finances Act 2017 (CFA) introduced a second failure to prevent offence, for the failure to prevent the facilitation of tax evasion. The CFA failure to prevent offence triggered a flurry of compliance-related activity because, like the Bribery Act, the CFA provides an affirmative defence for organisations that are able to demonstrate that they have implemented compliance measures adequate to their risk. Demonstrating that those measures exist in essence shifts the burden from the corporate back to the individual: despite all that the corporate did to ensure compliance with the law, a rogue individual overcame its proportionate defences.
Another example, albeit by analogy, is the creation of civil enforcement powers for HM Treasury in the Policing and Crime Act 2017 for violations of financial sanctions. Whilst not a measure that enables criminal prosecutions, in theory it enables the Office of Financial Sanctions Implementation to bring enforcement actions similar to those of its better-known US counterpart, the Office of Foreign Assets Control. OFSI can levy – and, in 2019 for the first time, did levy – monetary penalties against companies using the lower 'balance of probabilities' standard. Prior to these recent penalties, enforcement of financial sanctions in the UK against companies was non-existent, unless one counts penalties for failures of systems and controls levied against banks by the Financial Conduct Authority.
Arguments for removing obstacles to the prosecution of financial crime in the UK are plenty. For one, the conviction rate of the SFO has fallen sharply in the last three years, and presumably that is not due to a lower incidence of crime within the SFO's remit. And arguments have been made by numerous stakeholders, including the Treasury Select Committee and House of Lords Bribery Act Committee, in addition to the current and past directors of the SFO. As noted above, the lack of success may to some extent lie with HM Government and its prosecutors, but legal structural obstacles would nevertheless constrain even the best-functioning prosecutorial organisations. As David Green stated in 2017, "the investigation and prosecution of commercial bribery, corporate fraud and misconduct should and will remain a priority for UK law enforcement". Further 'exceptions' to the identification principle will be key elements to facilitating that goal.
Jason Hungerford is a partner in the investigations and regulatory practice, and Thomas Ajose is an associate in the litigation and dispute resolution practice, with Mayer Brown in London
Published in CDR Magazine
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