On 10 June 2022, the Law Commission (the "Commission") published its long promised "options paper" (the "Paper"), the next stage in the potential reform of the UK's corporate criminal liability laws.
The Commission was asked by the Government to carry out a review of the current law on corporate criminal liability and present a set of options for strengthening it in ways that will not "overburden businesses". The review followed frequently aired concerns that the current law falls short in adequately holding corporations – especially large companies – to account, particularly for economic crimes such as fraud.
Those who have previously called for a broad "failure to prevent economic crime" offence will be disappointed with the Commission ruling this option out, although the narrower "failure to prevent fraud" offence remains on the table as one of the ten options that are outlined in the Paper. The other options range from: the retention of the current general rule of corporate criminal liability based upon the "identification principle" (either in its current form or through the adoption of the Canadian model); to alternative specific failure to prevent offences and also include a number of civil options including administrative monetary penalties and High Court civil actions.
In this briefing, we outline (i) the context in which the Paper has arisen; (ii) the scope of the Commission's review; (iii) the Commission's ten proposed options for reform; and (iv) our analysis of the impact of the Paper.
The review arose following numerous calls over a number of years for the Government to reform how criminal liability is attributed to companies in the UK. The principal way under common law is to show that an offence has been committed by an individual who is deemed to be the "directing mind and will" of the company. Ordinarily, this will be the board and senior officers carrying out the functions of management, but the board may also delegate to others "full discretion to act independently of instructions from them". This is known as the identification doctrine and derives from the House of Lords decision in 1972 of Tesco Supermarkets Ltd v Nattrass  AC 153.
Many, including the Serious Fraud Office ("SFO"), have argued that the current identification doctrine is inadequate in attributing criminal responsibility to large corporations. Others have contested this and challenged the Commission to demonstrate that criminal liability is the most appropriate way to deal with misconduct within corporates, especially in sectors which are already liable to regulatory sanction.
On 3 November 2020, the Ministry of Justice published its response to the Call for Evidence on corporate liability for economic crime, almost four years after its launch (see our e-bulletin for more). It found that the various replies to the Call for Evidence did not provide a conclusive evidence-base on which to justify reform and, accordingly, the Government requested a review of the identification doctrine by the Commission. This led to the broader and more "first principles" based approach of the Commission's consultation. It produced a discussion paper on which views were canvassed – both through a series of webinars held during the Summer of 2021 and through responses to the discussion paper. This principles-based approach remains a feature of the Paper.
Our London Corporate Crime and Investigations team hosted the launch event for the Commission's consultation, in June 2021, and was subsequently involved in assisting interested parties to respond as well as submitting its own response to the discussion paper. The Commission received 45 responses to its consultation, all of which were considered and fed into the Paper.
2. Scope of the Commission's review
The Commission's remit included consideration of the identification doctrine, the relationship between criminal and civil law in the areas of corporate liability and other ways that the law could be used to hold corporations to account.
The Commission focused on economic crimes considered more common in the corporate context such as fraud, tax evasion and money laundering; however, the options that are presented in the Paper are not limited to economic crime.
The Commission does not make recommendations in the Paper but details options for reform of the law, whilst ruling other options out. Some of the options are presented as alternatives in the Paper, but the Commission states that each option should be considered in the round.
3. The Commission's ten options for reform
We set out below a summary of the ten proposed options for reform.
Option 1: Retention of the existing identification doctrine
The Commission references the case of SFO v Barclays  EWHC 3055 (QB) 125 (discussed in detail in our previous briefing) in which senior executives, including the CEO and CFO, were not found to represent the "directing mind and will" of the bank since they had not been delegated authority for the specific acts by the board. The Commission notes that a number of respondents to the consultation felt that Barclays will have limited the instances where the state of mind of individuals may be attributed to a corporation. Nonetheless, it concludes that there is a case for retaining the existing identification doctrine following the principles first established under Tesco (as summarised above) (Option 1) and that there is a need for one or more general rules of attribution to cover offences (Principle 1).
The existing identification doctrine is selected over models followed by other jurisdictions, such as:
- fault being based upon a company's corporate culture. Although attractive in theory, the Commission is hesitant to recommend an option which has received so much criticism within its own jurisdiction (Australia) for being unclear and failing to lead to successful prosecutions; and
- • companies being held responsible for criminal acts committed by their employees in the course of their employment (the doctrine of "respondeat superior", similar to vicarious liability). The Commission agrees with the majority of respondents that this model (being the US model) would be inappropriately broad. The model raises practical concerns about the need for prosecutorial safeguards and seems to be favoured by certain respondents as a route to making corporate prosecutions easier to achieve which the Commission emphasises is not the basis on which it intends to recommend reform.
However, in respect of crimes involving negligence, where proof of fault is not required, the Commission finds that it should be possible to prosecute these offences on the basis of collective activity even if it is not possible to identify a specific individual who is negligent (Principle 2). Similarly, directors should only be criminally liable on the basis of neglect for offences of strict liability or negligence.
Option 2: Extending the identification doctrine to include the actions of senior management
The Commission proposes two options whereby criminal conduct may be attributed to organisations through the identification of senior management engaged in, consenting to, or conniving in the conduct. Option 2A defines senior management as including anyone involved in taking decisions relating to the corporate policy and strategy and management of (i) the affairs of the company as a whole or (ii) a substantial part of it. Option 2B proposes that, in addition, senior management will always include the company's CEO and CFO.
At the Fraud Lawyers Association's Annual Conference on 10 June 2022, Commissioner Professor Penny Lewis explained that these options would avoid the criticisms raised in Barclays since both options would hold a company criminally to account where senior management had the requisite fault, irrespective of whether they had been given delegated authority for the particular acts in question.
Option 3: The offence of failing to prevent fraud by an associated person
The case for additional failure to prevent offences is presented alongside the case for reform of the identification doctrine and not as an alternative. However, the Commission states that in the absence of any reform of the identification doctrine, the case for additional measures to tackle economic crime, such as new failure to prevent offences, becomes more compelling.
The Paper rules out the broad failure to prevent economic crime offence on the basis that:
- there is a potential for overlap with the existing failure to prevent offences under the UK Bribery Act 2010 and the Criminal Finances Act 2017; and
- it would be challenging for companies to put in place reasonable procedures to tackle broad economic crime and for the Government to introduce guidance in respect of these procedures.
However, the Paper does advocate for specific failure to prevent offences, including failure to prevent fraud committed by an employee or agent of the company with the intention of benefitting the organisation or a person to whom the associated person provides a service on behalf of the organisation (Option 3). A number of fraud offences are identified as being within scope of such an offence, including fraud by false representation, obtaining services dishonestly, false accounting and fraudulent trading. It would not extend to conspiracies or attempts of fraud offences. This is a welcome limitation of the offence, given that conspiracy offences require only an agreement to act, and would prevent a company from being liable for failing to prevent employees from attempting to commit fraud even if the company's procedures would have stopped any actual fraud from taking place.
Three other failure to prevent offences are identified as being potentially appropriate: failure to prevent human rights abuses (Option 4; which has previously been the subject of the UK Parliament Joint Committee on Human Rights Report); ill-treatment or neglect (Option 5); and computer misuse (Option 6).
Like the existing failure to prevent offences, organisations would have a defence of proving that they had procedures to prevent associated persons from committing fraud. Interestingly, as with the current failure to prevent the facilitation of tax evasion offence, the prevention procedures for fraud are specified as being "reasonable" rather than "adequate" (per the failure to prevent bribery offence) on the basis that, if misconduct has taken place within a company, a company's procedures are more likely to be found to be inadequate for failing to prevent the misconduct even if the procedures were reasonable in the circumstances. The Commission recommends a requirement on the Government to publish guidance on the nature of anti-fraud prevention procedures. If this option is to be pursued, it would be particularly helpful if such guidance could be sector-specific on an offence-by-offence basis to aid companies by offering tangible steps for them to effectively prevent fraud.
To view the full article click here
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.