Many of the options considered by the Law Commission in its paper[1] are likely to require primary legislation to implement. Some could, however, be introduced via a more expedient route, such as within secondary legislation or via amendments to existing policy or guidance.
Given the recent turmoil in the Government, it is difficult to predict whether reform of corporate criminal liability will feature high enough on the Government’s agenda for us to see substantive legislative changes being tabled this year. However, being aware of possible legislative changes coming further down the line can only work to a corporate’s advantage.
Reform of the identification doctrine
Accepting the need for general rules of attribution in principle, the Law Commission acknowledges that the identification doctrine (the common law principle by which criminal liability is currently attributed to corporations) is too narrow, uncertain, and can be seen as unfair vis-à-vis smaller companies to which criminal liability is more easily attached; in turn, this could undermine confidence in the criminal law. Its view is that, far from creating incentives to ensure compliance, the doctrine rewards companies whose boards do not pay close attention.
Despite prefixing the paper with a warning that it is not recommending any particular option for reform, the Law Commission’s summary of the doctrine is barbed and the first option - to retain the doctrine in its current format - is almost dismissed out of hand.
The Law Commission clearly seems to favour reforming the doctrine. Its second and third options set out ways of doing so by allowing a conduct and fault element to be attributed to a corporation if a member of senior management is engaged in, consented to or connived in the offence. What, however, is left unanswered is how far the bar should be lowered. Who are the senior members of staff whose fault element (or mens rea) should be relevant and just how far down a corporate structure should it be possible for prosecutors to go to identify the mental state necessary to establish criminal liability against the entire corporation?
Whatever the answers to these questions, it seems reform based on one or both of these options is a likely outcome. Such reform would, in all likelihood, necessitate primary legislation to make piecemeal changes to the various pieces of existing law which set out the respective offences. The drafting of such voluminous amending legislation would require significant resources to achieve a successful outcome. Nevertheless, it would be less contentious than tabling legislation creating a brand new species of corporate criminal liability. It also does not preclude special rules of attribution of liability being attached to particular offences where more appropriate than the identification doctrine. Further, it is unlikely to have extensive consequences for the civil law. If the next cabinet retains the focus on corporate criminal liability, we foresee legislation of this nature being tabled in the not too distant future.
Creation of corporate criminal liability for failing to prevent specified offences
The most controversial options are those that would see primary legislation introduced to create an entirely new set of corporate criminal offences, building on the existing statutory models for failing to prevent bribery and failing to prevent the criminal facilitation of tax evasion. Given the Law Commission’s concerns regarding the identification doctrine in its current form, it states that the case for introducing new offences would be more “even more” compelling if the doctrine were not reformed in any way. Among the new offences discussed, the Law Commission proposes an offence of failing to prevent fraud by an associated person where there is the intent to benefit the corporation, or another person to whom they provide services on behalf of the corporation.
Opinion in respect of this option for reform was broadly divided in the responses, with a ‘narrow majority’ against. Detractors cited concern about overregulation, potential lack of specificity, and exerting an undue compliance burden on companies. Experience tells us that, when public opinion is divided, the process of getting legislation through both Houses of Parliament is typically particularly fraught. Let us not forget that a series of attempts to introduce a ‘failure to prevent economic crime’ type offence have been made before, and thwarted each time. Progress is likely to be further impeded due to the number and nature of the principles the Law Commission has set out for the development of any new failure to prevent offences.
We anticipate that, should lawmakers table a bill creating this offence, it would face several amendments as it makes its way through both Houses, as different permutations of the principles the Law Commission sets out take form and the various sides debate its necessity. It is likely to be a long process to get the bill made into law. For this reason and given the alternative option of reframing the identification principle itself, we view this as one of the reforms least likely to be brought into force in the short to medium term.
Reforming criminal liability of directors and managers for corporate offending
The Law Commission takes the view in the report that directors should not be liable for corporate offending where the basis for such is negligence. Rather, it concludes that directors should only be found criminally liable if they have connived or consented to offences that require proof of intent, knowledge, recklessness or dishonesty. Director liability on the basis of negligence should therefore be limited to strict liability offences or those of negligence.
Arguably this reform would be one of the simplest to implement. By way of example, it could be achieved by amending existing prosecutorial guidance advising prosecutors that it would rarely be in the public interest to prosecute a director as an accessory unless evidence exists that the respective director consented to or connived in the commission of the offence. By extension, guidance would also reflect the limited application of liability by negligence.
However, this is just part of the picture. Options for reform of director liability also include creating accessory liability for directors for failing to prevent fraud. Though concerned that such reform would stretch the chain of causation too far, the Law Commission recognised that there may be an argument in favour of it. Such reform would need to be rolled-up into future draft legislation introducing a failure to prevent offence (as discussed above) and could only be achieved via primary legislation.
Changes to sentencing for corporates
Publicity orders are currently available following convictions for specific offences[2] and also in some civil contexts. They are a way of publicising the fact of a corporation’s conviction to members of the public. The reputational risk for corporations would most certainly increase if publicity orders were made available in all cases and to all courts when sentencing non-natural persons. This would be a particular risk for small to medium sized enterprises without a national brand. At present, the lower profile of such companies as compared to larger corporate offenders and the constraints on local media to publicise court cases make them less likely to attract significant media interest; publicity orders would level the playing field in this regard to some extent.
At a minimum, the options paper proposes extending the availability of these orders to food safety, environmental, and health and safety offences. Legislation targeting only a small number of existing statutes could be brought in relatively swiftly and is likely to be uncontroversial given the nature of these offences. For this reason, it could move quickly through the Parliamentary process.
As for their introduction on a larger scale - a possibility envisioned by the Law Commission - this could be achieved by a single amendment to the Sentencing Code enshrined in the Sentencing Act 2020, for example. This would again require the enactment of primary legislation but could conceivably be introduced as part of the second economic crime bill, which is anticipated later this year.
Administratively imposed monetary penalties
Several ways in which an administrative regime could provide for the imposition of monetary penalties are discussed in the options paper. These would be enforceable as civil debts with a right of appeal to an independent tribunal and, ultimately, a right of further appeal to the civil courts. The focus would be on the corporations’ failure to prevent fraud. The Law Commission preferred the option of creating a flexible regime, similar to those concerning market abuse, anti-competitive practices, breach of financial sanctions, or money-laundering. As with these examples, once the framework of the regime has been established through primary legislation, the granular detail could be encompassed in secondary legislation, which arguably allows for greater flexibility and agility.
There was notable support for the creation of such a regime to operate alongside a criminal regime, with the latter reserved for the most serious offending. However, key detractors included the CPS who, alongside the SFO, is one of the agencies that could ultimately become responsible for overseeing the regime. In our view, this poses a substantial hurdle to the regime’s creation. Other issues which would need to be overcome to make this option a reality include:
- concerns about prosecutors acting quasi-judicially;
- the scale of resources that would need to be put into place; and
- the need for significant restructuring of superintending organisations and upskilling of existing workforces.
The process of drafting the law and accompanying guidance documents needed to give effect to such a regime would also be a lengthy task. Requiring, as it would, buy in from Parliament and the need for significant reorganisation of public departments, we consider this another reform unlikely to take effect any time soon.
Empowering the High Court to impose monetary penalties
The law currently allows High Court judges to grant serious crime prevention orders (“SCPO”). An option put forward would see the introduction of a new power of the High Court to issue similar preventative orders on corporations, backed by monetary penalties, designed to deter and prevent fraud by employees or agents. This would enable the High Court to penalise a company that has failed to take reasonable steps to prevent the wrongdoing from taking place.
Opinion was broadly divided over the desirability of such reform. From a defence perspective at least, there are significant advantages to the forum for such disputes being the civil rather than the criminal courts and to judges being the arbiters of fact for these purposes (as opposed to prosecutors such as the CPS or SFO).
The new framework could be brought into effect fairly easily via amendments to the Serious Crime Act 2007. Whether it would be effective in achieving the stated aims, however, is another matter. Currently, the CPS and the SFO can apply to the High Court for a SCPO but, thus far, this power has been very rarely used. The options paper does not clarify whether the same bodies would have exclusive rights to make applications for the new orders or whether the scope would be widened to include more regulators.
Reporting of anti-fraud procedures
The options paper suggests imposing an obligation to self-report anti-fraud procedures on corporations, in order to promote good corporate governance without recourse to the courts. This could involve an expansion of the existing modern slavery reporting framework, although the lack of enforcement under this regime was viewed by the Law Commission as a significant drawback. Rather, it favoured reform of the strategic reporting regime under the Companies Act 2006 via small amendments to s414CB to create a regime similar to that introduced in relation to climate-related financial disclosures from April this year. Such reform could be introduced fairly swiftly and without too much controversy, given its limited scope.
On 28 February 2022, the Department for Business, Energy and Industrial Strategy published a White Paper titled “Corporate Transparency and Register Reform White Paper”[1], which sets out suggested reform for Companies House and lists protecting individuals from fraud as one of its key aims. Whilst anti-fraud self-reporting is not in the White Paper, it is not inconceivable that the two initiatives may be merged and provided for in the anticipated second economic crime bill, due later this year.
Conclusion
Several of the proposed options for reform require changes to and/or new primary legislation. Before coming into effect, these would therefore need to go through the rigorous process of parliamentary legislative scrutiny. The high but differing support for the reforms among stakeholders engaged by the Law Commission in producing the paper does, however, suggest this process may well be particularly arduous.
While the outcome is currently uncertain, we suggest corporates consider the extent to which policies may need to be updated or introduced in order for the respective corporate to be able to best demonstrate compliance with anti-fraud procedures. Regular internal reviews of systems and controls established to avoid, detect and deal with an incidence of fraud is good practice anyway and, with the reforms the options paper heralds, we would suggest it may be wiser to act sooner rather than later. Similarly, corporates may wish to begin by mapping out the decision-making responsibilities at its senior leadership level with a view to identifying any anti-fraud risks which might arise should the bar for attribution be lowered.
One thing is certain: the issue of reforming corporate criminal liability is not going away. Companies that continue to keep abreast of potential changes and alive to the need to regularly assessing their anti-corruption policies, procedures, training and communications against the risks posed by their particular business to identify areas for improvement will be ahead of the curve.
[1]https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2022/06/Corporate-Criminal-Liability-Options-Paper_LC.pdf
[2]Offence under section 10 of the Corporate Manslaughter and Corporate Homicide Act 2007 and section 23 of the Criminal Justice and Courts Act 2015
[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060726/corporate-transparency-white-paper.pdf
