On 10 June, the Law Commission published its long awaited proposals on reforming corporate criminal liability in England and Wales (the “Options Paper”), following the launch of its discussion paper in June 2021. Whilst the Options Paper rejects the much discussed “failure to prevent economic crime” offence, it outlines 10 “options” for strengthening corporate liability, which notably includes the expansion of the failure to prevent model to fraud, and of the identification principle to cover a wider set of senior individuals whose mental acts and states might result in a corporate entity becoming criminally liable. Other proposals include the introduction of failure to prevent offences in relation to a small number of non-economic crimes, making publicity orders available in all cases where a non-natural person is convicted of an offence, introducing a regime of administratively imposed monetary penalties, introducing civil actions in the High Court based on Serious Crime Prevention Orders, and introducing a requirement for public interest entities to report on anti-fraud procedures, or introducing a requirement akin to Modern Slavery Act statements for large corporations to report on their anti-fraud procedures.
In this first of a series of articles examining the Options Paper and the future of corporate criminal liability in England and Wales, we summarise the Law Commission’s proposed options for reform with respect to the identification principle and the expansion of the failure to prevent model, with subsequent articles providing a more detailed analysis of these proposals.
Corporate criminal liability in England and Wales is currently dominated, with limited exceptions for some strict liability and regulatory offences, by the “identification principle”. This holds that a corporation can only be held criminally liable if the commission of an offence can be attributed to a person who has the “directing mind and will” of the corporation at the time the offence was committed. In practice, depending on a corporation’s organisational structure, only a small number of senior managers and directors will have such “directing mind and will”.
The high threshold for the attribution of criminal conduct makes it notoriously difficult to prosecute large corporate entities with complex governance structures, where decision-making power is often exercised on a collective basis. This has resulted in growing calls for reform, particularly from prosecutors such as the SFO and CPS, which has predominantly focused on the expansion of the “failure to prevent” model, which was first introduced by s.7 of the UK Bribery Act in 2010 (the “Bribery Act”) and then extended to the facilitation of tax evasion via the Criminal Finances Act in 2017, to a broad offence of “failing to prevent economic crime” which would encompass crimes such as fraud, money laundering, and false accounting.
Failure to prevent Fraud
The Options Paper has clearly rejected the idea of a broad offence of failing to prevent economic crime, noting that it would be overly burdensome on businesses and duplicative of current laws, particularly in respect of money laundering.
The Law Commission has, however, outlined the possibility of expanding the failure to prevent model to fraud, which would make it an offence where an associated person commits fraud with the intent to benefit the corporation, or to benefit a person (which might include another corporation) to whom the employee or agent provides services on behalf of the corporation.
As with the corresponding facilitation of tax evasion offence, a corporation would have a defence if it could show that it had “reasonable procedures” (which the Law Commission favoured over the “adequate procedures” standard included in the Bribery Act) in place to prevent fraud, or if it could show that it was not reasonable for it to have such procedures in place (which is expressly provided for in relation to the facilitation of tax evasion offence but not the s7. Bribery Act offence).
Interestingly, considering the broad extra-territorial reach of the current failure to prevent offences, the Law Commission concluded that there should not be a presumption that any new failure to prevent offence would extend to conduct carried out overseas and that any decision to make the offence extraterritorial should be considered in the context of the specific offence. The jurisdictional scope of the failure to prevent fraud offence is therefore unclear at this stage. We will discuss this issue in our subsequent article focusing on the new offence.
The Law Commission also concluded that:
- the new failure to prevent offence should include a requirement that the underlying criminality was either intended to confer (a) a business advantage on the corporation; or (b) a benefit on a person to whom the associated person provides services on behalf of the corporation; and
- an organisation should not be held liable under (b) above, where the conduct was intended to cause harm to the corporation.
Other Failure to Prevent Offences
Whilst ruling out the extension of the failure to prevent model to a broader range of strictly economic crimes, the Law Commission considered three categories of other offences that it had been urged to consider by respondents to the discussion paper: namely, failure to prevent human rights abuses, neglect and ill-treatment of vulnerable persons, and computer misuse. The focus on computer misuse is particularly interesting, given the Government’s current focus on the use of technology and safeguarding against harmful activity, as reflected in the Online Safety Bill and the Home Office’s call for evidence relating to the suitability of the Computer Misuse Act 1990.
The failure to prevent model
The Law Commission’s rejection of the failure to prevent economic crime offence makes it very unlikely, at least in the short to medium term, that the failure to prevent model will be expanded in this broad manner. This will undoubtedly be welcomed by businesses, many of whom already feel overburdened by compliance obligations.
Whilst this will conversely come as a disappointment to others, including the SFO, who have for several years been lobbying for the introduction of such an offence, they will no doubt be encouraged by the mooted “failure to prevent fraud” offence, and the broadening of the identification principle beyond the narrow “directing mind and will” of a company, which should make it easier to secure prosecutions against larger corporations that have complex governance structures in place.
Whilst less burdensome to companies than a broad expansion of the failure to prevent model, the expansion to fraud (if the Government accepts the proposal) will still require corporations to ensure they have reasonable procedures in place to prevent fraud. Although the procedures that many corporations will already have in place to address bribery and facilitation of tax evasion risk (as well as money laundering risk, to the extent they are a regulated entity) will go some way to satisfying the reasonable procedures criteria, careful consideration will need to be given to what additional measures need to be put in place to prevent fraud. The extent to which any new legislation applies extra-territorially will undoubtedly have an impact on the burden that this will place on corporations.
Reform of the Identification Principle
Whilst presenting the abovementioned options for the expansion of the failure to prevent model, the Law Commission made it clear that this must be considered alongside the reform of the identification principle, noting that “If the identification doctrine is retained as at present, the case for new failure to prevent offences, is inevitably more compelling”.
The amended principle suggested in the Options Paper would allow conduct to be attributed to a corporation if a member of the corporation’s “senior management” engaged in, consented to, or connived in the offence. A member of senior management would be any person who plays a significant role in the making of decisions about how the whole or a substantial part of the organisation’s activities are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities.
This proposed expansion of the identification principle would therefore extend it not only to those who decide on broad strategy, but also to those who take operational decisions covering the whole of the corporation or a substantial part of it, including for example those whose responsibilities involve taking decisions relating to corporate strategy and policy in a particular area – such as health and safety, or finance, or legal affairs. It would not, however, ordinarily, capture someone whose role was limited the management of a discrete unit (such as an individual store) which does not represent a substantial part of the company’s affairs.
If the Government does expand the failure to prevent offence to fraud and reform the identification principle along the lines proposed by the Law Commission, these will not apply retrospectively and we should not therefore expect to be able to judge the effectiveness of them for some time. In any event, the proposed changes will not address other pressing issues that are limiting the effectiveness of the UK’s ability to tackle economic crime. Even with respect to fraud, for example, the proposed new failure to prevent offence will do nothing to address the fraud perpetuated by organised criminal gangs who are responsible for a large proportion of the fraud that has become endemic in the UK over recent years, the solution to which lies not in more legislation but in the resourcing of investigations and prosecutions.
Although the UK Government has publicly stated that it intends for there to be further economic crime legislation (following on from the implementation of the Economic Crime (Transparency and Enforcement) Act (the “ECA”) in March) later this year, no deadline has been set for the Government to consider the Options Paper and it is not clear whether the reform of corporate criminal liability will form part of that second round of legislation. The ECA is, however, reflective of what appears to be a renewed impetus within the Government for the reform of corporate criminal matters and economic crime more generally, given the events in Ukraine and the recognition that these are now issues of national security. We should therefore expect to see serious consideration given to the issues raised in the Options Paper in the near future.