Proposed extension of Corporate Criminal Liability welcomed by Serious Fraud Office (SFO)
In a recent speech at the Annual Management, Investigations Compliance eDiscovery Conference, Matthew Wagstaff, joint head of Bribery and Corruption at the SFO, set out the role and remit of the SFO. Mr Wagstaff was eager to confirm that the role was to investigate and, where the evidence and public interest justifies it, to prosecute. He confirmed that the SFO exists to tackle the most serious or complex cases of fraud, bribery and corruption.
He discussed several key areas including bribery and internal investigations. However, he also discussed the SFO's position regarding corporate criminal liability. He posed the following question:
in circumstances where employees are able to engage in serious criminal conduct in the course of their employment as a result of a failure of corporate controls or an absence of compliance with regulatory requirements, is there not a case for saying that the corporate itself should be held to account for those failings?
The SFO clearly welcomes David Cameron’s recent announcement that the UK Government has reignited its plans to widen corporate liability for economic crime. The Prime MInister (PM) made announcements in this area at the recent anti-corruption summit at Lancaster House.
Failure to prevent - Historic developments
Proposals for a wider range of economic crimes to impose corporate criminal liability first surfaced in 2012. They were developed further when the UK Anti-Corruption Plan was published in December 2014 to explore the case for a new offence of ‘corporate failure to prevent economic crime’.
These plans were dropped by the autumn of 2015 much to the annoyance of the director of the SFO, David Green QC, who later remarked:
existing legislation makes it difficult to prove criminal liability at the top of big companies… and the lack of corporate charges since the financial crash of 2008 is undermining public confidence.
This difficulty with proving the criminal liability of corporates largely remains the case today. However, in April 2016 the landscape changed again as the Government announced that they were going back to reviewing corporate criminal liability laws, with a corporate failure to prevent tax evasion offence expected to be legislated on later this year.
That announcement was set against the backdrop of the SFO securing its first successful prosecution under Section 7 of the Bribery Act 2010 (“Section 7”) on 18 December 2015. Sweet Group plc pleaded guilty for failing to prevent bribery of an associated person and was subsequently ordered to pay £2.2 million in fines in February 2016.
There has also now been the first Deferred Prosecution Agreement, which was entered into between the SFO and ICBC Standard Bank.
The UK’s enforcement armoury for corporate economic crime has therefore been buoyed by these recent successes and is now set to be strengthened further. The latest announcements at the anti-corruption summit, coupled with the earlier statement in April represent a strengthening of the UK Government’s resolve to combat corporate economic crime.
The build up to the summit was less than ideal, with the PM’s on-mic gaffe when making comments about the corruption levels in Nigeria and Afghanistan. There was, however, a very important message to take away; the UK Government intends to crack down on fraud and money laundering.
The PM announced three significant developments:
- The planned introduction of a public register of corporate beneficial ownership intended to assist law enforcement agencies with the exposure of corruption among foreign companies who own properties in the UK. This is considered a prelude to the reversing of the burden of proof so that the property owner is required to show the purchase was facilitated by legitimate funds.
- The creation of a new Anti-Corruption Coordination Centre, designed to implement an international coordination of police and prosecutors working together to identify, investigate and prosecute cross-border corruption.
- Plans for the introduction of further corporate ‘failure to prevent’ offences, which builds on announcements earlier this year that corporates would be targeted with the introduction of wider economic crime legislation.
The PM used his keynote anti-corruption speech to deliver the news on the tightening of corporate economic crime.
The PM said:
In addition to prosecuting companies that fail to prevent bribery and tax evasion, we will consult on extending the criminal offence of ‘failure to prevent’ to other economic crimes such as fraud and money laundering.
The Ministry of Justice now plans to publish a consultation paper on the issue in the summer.
Justice Minister Dominic Raab said:
The Government is finding new ways to tackle economic crime and we are taking a rigorous and robust approach to corporations that fail to prevent bribery or allow the tax evasion on their behalf.
We now want to carefully consider whether the evidence justifies any further extension of this model to other areas of economic crime, so that large corporations are properly held to account.
The proposed offences will look to build on the ethos of Section 7, which was introduced to overcome the obstacles of the identification principle required for convictions under current legislation.
The proposed new offences to target corporate failure to prevent tax evasion, fraud and money laundering are hoped to bring significant strength and a greater ease to the UK’s armoury to prosecute corporates.
The reaction and impact
Despite the fickle manner with which the UK Government has dealt with legislating on corporate liability for economic crime over recent years, the reaction has been positive.
David Green QC, who has long called for the development of such laws, said:
If enacted, such an offence would significantly and very usefully extend the reach of the SFO in relation to corporate criminality.
The new proposals will make it easier for prosecutors to prosecute corporate wrong-doing by introducing strict liability offences in areas such as tax evasion, fraud and money laundering. The prospect of an unlimited fine will not sit easy with the senior company executives who would no longer be able to hide behind the otherwise hard-to-overcome identification principle. There would be no requirement to establish a controlling mind in order to amass a successful prosecution, as is currently the requirement for corporate economic crimes save for Section 7.
A defence of “reasonable procedures” is likely to be available for any new failure to prevent offences. This would require companies to have in place effective compliance procedures aimed at preventing criminal offences being committed by any persons associated with the company.
The wide definition of ‘associated persons’ means that corporates are hugely exposed to the actions of a rogue employee, agent or subsidiary, which may enable the corporate to be found vicariously liable. The logistical burden to adequately oversee the conduct of ‘associated persons’ and ensure compliance with procedures is hugely onerous, especially for large corporations. Being so vulnerable to the actions of others which may result in criminal liability for the corporate itself therefore demonstrates the need for robust compliance procedures which the corporate can later rely on in its defence.
The consequences for a firm in being found guilty of a failure to prevent offence would be serious and far-reaching. They would include the risk of an unlimited fine, the potential disgorgement of funds by compensation orders or confiscation orders and a range of other ancillary sanctions by the Court and of the firms’ regulator. Not to mention the reputational damage such a conviction would cause and the inevitable negative impact on its current client base and future opportunities, including potential debarment from public procurement processes. Then there are the knock-on effects for the shareholders who may suffer a diminution in value, innocent employees who may be affected by the corporates downturn and also the creditors of the corporate who may struggle to be repaid in a timely way.
The potential consequences for directors and company officers include disqualification, fines and imprisonment. There would also be the potential for action by their regulator and the possibility of civil claims against them.
Firms should immediately review their procedures and give active consideration to potential shortcomings in advance of any new enactments. Investing the requisite resources now would be a prudent investment for corporates so that policies can be introduced, affected and implemented in advance of any new legislation.
This may be a substantial burden in the short term but with the criminalisation of corporate wrong-doing now firmly on the Government’s agenda, it is essential that firms undertake a full review of their anti-graft procedures.
Corporates should brace themselves now for a future of transparency and make a staunch commitment to robust corporate governance. Making such a commitment to review and update compliance procedures should be made now as robust policies and procedures may provide an essential defence should the worst happen in the future and a corporate finds itself with a need to evidence a reasonable procedures defence.