The Law Commission has released its long-awaited proposals to reform corporate criminal liability in the UK (“Paper Options“). While anti-corruption campaigners, including MPs, have criticized him for not going far enough, the reforms envisaged in the options paper represent a significant strengthening of the existing law on corporate criminal liability and should lead companies to take a fresh look at their risk management and internal control procedures.
“There is a broad consensus that the law needs to go further to ensure that companies – especially large companies – can be convicted of serious criminal offenses, such as fraud.
It is imperative that we have the appropriate mechanisms in place to enable companies to be effectively held accountable for wrongdoing in their name…the government now has several viable paths to reform”1
The Law Commission is an independent statutory body whose purpose is to monitor legislation and recommend legal reforms. This options paper has been requested by the government and it sets out proposals for how the government can improve the law to ensure that businesses are effectively held accountable for their criminal acts.
The general principle of criminal liability applied to corporations in English law is the ‘identification doctrine’. Simply put, this provides that where a mental state is a required element of an offence, only the mental state of a senior official representing the “directing mind and will” of an organization can be attributed to a company.2 It can be an individual, a group of individuals or a board of directors. In practice, this means that prosecuting a company for a criminal offense can be difficult, especially for larger organisations, as it is difficult to attribute the mental element of the offense to the “directing mind and will of a given organization. The shortcomings of the doctrine of identification have been pointed out in SFO versus Barclays.3The case suggested that in order to establish liability, it is necessary to demonstrate that individual defendants must be either the “directing mind and will” of a company for all purposes or “the directing mind and will ” for the particular function in question. This is naturally a high threshold for any organization other than very small operations.
The Corruption Act 2010 (“Bribery Act“) and the Criminal Finances Act 2017 introduced specific corporate “failure to prevent” offenses – failure to prevent corruption and tax evasion, respectively.
As UK authorities fear that the current framework fails to hold companies accountable, the government has called for the introduction of a general offense of “failure to prevent economic crime”. To the chagrin of activists,4 the Law Commission opposed the idea of introducing a broad “failure to prevent” offence, whether it be a “failure to prevent the crime” offense or a “failure to prevent the economic crime”.
So what does the options document say?
The options paper
With a particular focus on economic crimes such as fraud, tax evasion, corruption and money laundering, the options paper offers 10 proposals for legislative reform. Those are:
- No change – ie. maintaining the doctrine of identification as it currently stands.
- A. Authorize the attribution of conduct to a company if a member of its senior management engaged in, consented to or connived at the violation. This means that a member of senior management would be anyone who (at the very least) plays a significant role in the decision-making of all or a substantial part of an organization. B. As above, but with the addition that CEOs and CFOs would still be considered senior management of an organization.
- Introduce an offense of failure to prevent fraud by an associated person (whether an employee or agent) who commits an offense of fraud for the benefit of the organization. Such an offense would not extend to conspiracy or attempted fraud. There would be a defense when an organization could prove that its prevention procedures were reasonable.
- Introduce an offense of failure to prevent human rights violations.
- Introduce an offense of failing to prevent abuse or neglect.
- Introduce an offense of failure to prevent computer misuse.
- Make publicity orders (i.e. require the offending company to publish details of its conviction) available in all cases where a company is convicted of an offence.
- Introduce an administratively imposed pecuniary penalty regime.
- Bring civil actions in the High Court based on the Serious Crime Prevention Orders but involving power to impose pecuniary penalties.
- Introduce a reporting requirement for public interest entities on anti-fraud procedures or, alternatively, introduce a reporting requirement based on the Modern Slavery Act 2015 for large companies to report on their anti-fraud procedures.
Reform of English corporate criminal liability law has been debated for some time. Successive directors of the SFO have argued that the UK should adopt US principles of vicarious liability. Lisa Osofsky, the current director of the Serious Fraud Office (“SFO”), has been a leading advocate for extending the offense of “failure to prevent” to encompass all areas of economic crime. Speaking before the House of Lords Bribery Act 2010 committee in November 2018, Osofsky said that by taking a vicarious liability approach “[the SFO] could make better progress against some of SFO’s biggest opponents“.5
The Law Commission previously reviewed the identification doctrine in 2010 and concluded that there was “no urgent need for statutory reform or replacement of identification doctrine“particularly following Meridian6¸ which, according to the Law Commission, could have initiated a coherent and fairer approach to the attribution of corporate responsibility.seven The Law Commission is of the view that the reverse has happened, as establishing liability under the identification doctrine is even more difficult for prosecutors than previously thought.8 Instead of a sea change in approach, the Law Commission proposed in its options paper that the doctrine of identification be better modified to allow attribution of senior management conduct to a company if it is is engaged in an offence, has consented to it or has colluded with it.
As noted above, the Law Commission expressly rejected a general “failure to prevent” offense, instead proposing a number of targeted “failure to prevent” offenses. The Law Commission was concerned that it was too broad; and he was of the view that such a “failure to prevent” offense should only be introduced for offenses for which there is a good reason to expect that companies have put in place reasonable prevention procedures. . For this reason, the Law Commission has limited itself to an offense of economic crime by proposing an offense of “failure to prevent fraud” (see point 3 of the list above). Similarly, the Law Commission rejected that various liability principles would be a suitable alternative to the identification doctrine. This reluctance is due to an alleged lack of stakeholder support and practical concerns about insufficient “prosecution safeguards”.
The options paper is now sitting with the government to decide on possible reform of the law surrounding corporate criminal liability. The timetable for any legislative development is not yet clear. It should be noted that the Economic Crimes (Transparency and Enforcement) Act 2022 was quickly passed by Parliament in response to Russia’s invasion of Ukraine, and at the time the government promised that a second economic crime bill would follow. The Government could therefore have the possibility of including any reform of corporate criminal liability in this second bill. However, by way of illustration, almost three years have elapsed between the date on which the Law Commission issued its recommendations on corruption reform9 and July 2011, when the Bribery Act came into effect.
Companies should review their compliance programs, and in particular their risk assessments, internal controls, whistleblower programs and investigation procedures, to provide boards of directors with the assurance that they are able to respond to the range of legislative reforms announced by the options paper.