As part of its efforts to strengthen criminal sanctions for corporate offending, the government is considering proposals to create a new corporate offence of failing to prevent economic crime. For companies that are only just coming to grips with the effect of the Bribery Act 2010, this is likely to require consideration and potentially substantial investment in a raft of new compliance measures.
As part of its efforts to strengthen criminal sanctions for corporate offending, the government is considering proposals to create a new corporate offence of failing to prevent economic crime. The new offence would mirror and expand the existing corporate offence of failing to prevent bribery under section 7(1) of the Bribery Act 2010 (2010 Act).
The new Attorney General, Jeremy Wright QC MP, made the announcement on 2 September 2014 at the Cambridge International Symposium on Economic Crime (see box "Background to the proposals"). He explained that the evolving nature of economic crime means that new ways are needed to expose and combat it.
The proposed change is broad-reaching and simple to legislate. However, for companies that are only just coming to grips with the effect of the 2010 Act, it is likely to require consideration and potentially substantial investment in a raft of new compliance measures (for background, see feature article "Bribery Act 2010: what does it mean for your company?").
The proposals are intended to remedy a problem that has plagued UK prosecutors in their attempts to effectively police corporations: the difficulty of establishing corporate criminal liability under the "identification principle". In order to convict a corporation, the prosecutor must prove, to the criminal standard of proof, that an individual at executive or board level (the "directing mind and will" of the company) committed the acts amounting to the commission of an offence, and also had the criminal intent to commit those acts.
In an address to the London School of Economics in April 2013, the Director of the Serious Fraud Office (SFO), David Green QC, highlighted the evidential difficulties of the identification principle (www.lse.ac.uk/collections/law/projects/lfm/final%20proof%20as%20published.pdf). He explained that board members might deliberately separate themselves from any incriminating emails, while mid-level managers might simply follow the orders they are given. In addition, decisions might be split between several individuals at different levels with different states of knowledge. Mr Green concluded that the identification principle creates a perverse incentive for a board to insulate itself from the criminal activities of its employees.
Creating the new offence
Section 7(1) of the 2010 Act, on which the new failure to prevent economic crime offence would be modelled, criminalises a commercial organisation's failure to prevent bribery committed by an employee or agent. Section 7(2) creates a defence available to the commercial organisation if it can prove that it had in place adequate measures designed to prevent this conduct.
According to Ministry of Justice guidance on the 2010 Act, the commercial organisation must establish the section 7(2) defence on the civil standard of proof; that is, the balance of probabilities. In his April 2013 address, Mr Green noted that any extension of the "failure to prevent" principle for corporate crime would include the accompanying defence of having adequate procedures in place, which, as with the section 7(2) defence, would need to be proven only to the civil standard. Therefore, to escape liability, companies would need to provide evidence of the procedures that were in place to prevent the conduct that formed the basis of the offending.
Having these procedures should be a priority for all companies. The resulting rewards are that:
Effective self-governance should prevent offending in the first place, eliminating the risk of rogue employees incurring criminal liability on the company's behalf.
If wrongdoing does occur, the company can present evidence that its procedures were adequate in terms of seeking to prevent the conduct in question.
Where the procedures fail and flaws are identified, attempts at self-governance can mitigate in favour of a company being offered a deferred prosecution agreement, as provided for in the Crime and Courts Act 2013 (for background, see feature article "Deferred prosecution agreements: moving into the unknown"). This mitigates the reputational damage caused by a criminal conviction, while putting in place formal terms by which a company can be required to correct inadequacies in its procedures, as well as pay harsh financial penalties.
Part 2 of Schedule 17 to the Crime and Courts Act 2013 sets out the existing economic crime offences to which a deferred prosecution agreement is potentially applicable. Therefore, in order to create the new offence of failing to prevent economic crime, the government could use the simple legislative mechanism of amending section 7 of the 2010 Act to include these offences. This would provide companies with more certainty over the nature of the threat from prosecution that they might face.
Defending the reform
Mr Green expected the proposals to be controversial and that objections would be "deeply embedded and predictable". He noted that the proposed change in the law would effectively:
Impose corporate criminal liability on the basis of corporate negligence.
Be said to be excessively burdensome on corporations in comparison with the burden of proof and liability imposed on individuals.
Create an additional expense in terms of compliance and governance that would be unwelcome in straitened economic times.
However, he defended the proposals on the grounds that existing health and safety legislation, as well as section 7 of the 2010 Act, already made use of negligence principles to impose corporate criminal liability on those companies that fail to operate effective preventative governance. Companies are already under a duty to protect the physical safety of their employees, and would be liable if an employee were injured through negligence.
In Mr Green's view, companies that do not have a preventative regime in place against the commission of specified criminal offences by its agents and employees should not escape liability. Companies enjoy the right to make money through the activities of their employees and agents, so they should also have a duty to provide an effective preventative regime. A corporate defendant charged with a "failure to prevent" offence would also have the protection of a jury's assessment of the adequacy of its procedures and of the precise circumstances of the offence.
Mr Green concluded pragmatically that if it is in the public interest for more companies to be prosecuted, the current identification test is unrealistically high. The new offence would have a greater chance of success and there are a number of public policy arguments to support it.
Polly Sprenger is Of Counsel in the Fraud and Investigations Group at Eversheds LLP.
David Green QC, the director of the Serious Fraud Office, has been a long-standing proponent of reforming the law to make companies liable for failing to prevent economic crime. In June 2014, the then Solicitor General, Oliver Heald QC, confirmed that there have been a number of calls to reform the current corporate liability regime, notably from Mr Green, and described the idea of a new offence as an "attractive option" (www.standard.co.uk/news/politics/firms-could-face-fines-for-failing-to-prevent-fraud-9573279.html).
There was also debate in Parliament during the passage of the Crime and Courts Act 2013 about the possibility of introducing a broader range of "failure to prevent" offences. During the debates on the introduction of deferred prosecution agreements, Lord Ahmad of Wimbledon said that the extent to which the current law of corporate criminal liability can be improved by using the new "failure to prevent" formulation in the 2010 Act should be subject to long-term examination (www.publications.parliament.uk/pa/ld201213/ldhansrd/text/121212-0001.htm). He stressed that the government is committed to ensuring that investigators, prosecutors and the courts have the right tools to address financial and economic crime effectively.