The expansion of corporate criminal liability has been under discussion for some time but is it now more likely?
On 9 June 2021, the Law Commission launched a discussion paper which seeks views on the law surrounding corporate criminal liability and how it can be improved so that not only are criminal actions sanctioned appropriately but corporations and their directors and officers (D&Os) foster a culture of corporate responsibility. This comes within a general drive to hold wrongdoers to account and could lead to further exposures. Coupled with the ever increasing regulatory burdens and exposures that corporations face, D&O insurance will be more vital than ever.
Corporations and D&Os are exposed to an array of criminal offences within, for example, company, health & safety and environmental legislation. However, prosecutors have struggled to hold them criminally liable. A corporation is not a natural person and thus necessarily acts through people within the organisation – its directors, officers and employees. Whilst some corporate criminal offences were drafted with non-natural persons in mind (usually strict liability offences for compliance failures), many include, as elements of the offence, the requirement for intent, dishonesty, recklessness etc i.e. a specific mental state. This means that for a corporation to be held liable for such offences, the acts of individuals must be attributed to the company via the “identification principle.” This is where, in order for the company to be held liable, a prosecutor must prove that the individuals involved in the crime represent the “directing mind and will” of that company i.e. the individuals' actions are to be considered those of the company. This is very difficult to establish and has led to a low number of convictions and calls for reforms. The Law Commission’s discussion paper therefore seeks views on a number of points, including: what principles should govern the attribution of criminal liability to non-natural persons and whether there is merit in providing a broader basis for liability than the dentification principle. Reforms targeted at reforming the way companies are held accountable inevitably leads to an increased liability landscape for D&Os.
An exception to the identification principle, and an example of recent reform in this area, is the “failure to prevent” model. In recent years, legislation has been introduced, the Bribery Act 2010 and the Criminal Finances Act 2017, which operates on this model, placing direct liability on the corporation if it has failed to prevent illegal activity. The sole defence available to the organisation will be for it to show that it had in place “adequate” or “reasonable” procedures (depending on the Act in question) to prevent the criminal act, placing the onus on corporates and their D&Os to ensure that their own procedures (and, where necessary, those of their associated persons) are adequate/reasonable.
Aligned with the failure to prevent model has been the introduction of deferred prosecution agreements ("DPAs") with corporations, whereby companies agree to certain terms and a fine in return for suspension of the prosecution (nine have been agreed so far). They are entered into with the company, not the directors, and require significant cooperation, exposing the individuals involved to subsequent prosecution. The SFO recently revised its guidance in relation to DPAs, highlighting the key factors to be taken into account where a DPA is under consideration and it was clear that cooperation and exposing the wrongdoers was key to the process. The Discussion Paper asks whether there should be more “failure to prevent” offences akin to those covering bribery and facilitation of tax evasion in respect of fraud and other economic crimes and, if so, which offences should be covered and what defences should be available to companies. It follows that the introduction of more “failure to prevent” offences potentially increases the use of DPAs and knock on liabilities for directors. Concerns have also been raised about the compliance cost on companies and it could be the case that the introduction of wider “failure to prevent” offences is counter-productive and encourages more defensive reporting.
Another area of concern for D&Os is whether the law on individual criminal liability of directors for the actions of corporate bodies needs reform. In particular, the Discussion Paper asks what principles should govern the individual criminal liability of directors for the actions of corporate bodies and whether statutory "consent or connivance" or "consent, connivance or neglect" provisions (found, for example, in the Fraud Act 2006, the Environmental Protection Act 1990 and the Bribery Act 2010, amongst others) are necessary in view of the general law of accessory liability. Will this lead to an increase in prosecutions being brought against directors and officers where they allegedly bear some responsibility for a corporate body’s criminal conduct?
The consultation closes on 31 August 2021 and the results will inform the Law Commission's options for reform to the government. An options paper will be published towards the end of the year which we shall await with interest.
The Law Commission is seeking views on whether, and how, the law relating to corporate criminal liability can be improved so that they appropriately capture and punish criminal offences committed by corporations, and their directors or senior management.