Corporate criminal liability


Financier Worldwide Magazine

November 2014 Issue

November 2014 Issue

Corporate criminal liability has become a major talking point in recent years. Cases against large corporations and financial institutions have become more prevalent, particularly since the onset of the financial crisis. In the US during 2013, the Department of Justice (DOJ) collected more than $5.5bn from firms in direct payments for alleged wrongdoing. The DOJ also assisted a number of other federal agencies and states in the collection of a further $2.6bn in fines that year. But those figures are comparative drops in the ocean of corporate liability. In August 2014, Bank of America Corp agreed to pay a record $17bn settlement related to investigations regarding the bank’s sale of faulty mortgage securities. The bank’s settlement will resolve a government investigation that stems largely from the bank’s purchases of Merrill Lynch & Co. and Countrywide Financial Corp on the eve of the financial crisis. The settlement amount is the largest ever reached between the US and a single company and takes the amount that Bank of America has spent on legal issues close to $80bn. Two of the US’ other large banks, JP Morgan Chase and Citigroup, reached their own multi-billion dollar agreements with the DOJ previously, settling for $13bn and $7bn respectively.

However, these cases are not exclusive to the US. Similar investigations and sanctions have also been meted out against firms in the UK over the last five years or so. Following the financial crisis and the subsequent economic downturn, scandals such as the alleged rigging of the benchmark London Interbank Offered Rate, and heavy domestic and foreign fines on British banks such as HSBC and Standard Chartered, have damaged the wider reputation of the City of London as a banking centre. Despite numerous pledges to clean up their act, sizable fines have repeatedly been handed down to some of the UK banking sector’s largest and most prestigious financial institutions. In late September, Barclays was fined $77m by both US and UK regulators for various offences. The UK’s Financial Conduct Authority (FCA) fined the bank £38m for taking unnecessary risks with clients’ money and failing to keep adequate records. The fine marks the second time in three years that Barclays has been disciplined over this issue. The bank was required to pay a fine in excess of £1.1m in 2011 for the same offence. Hours after the FCA ruling, the Securities and Exchange Commission (SEC) levied a $15m fine against Barclays for lax internal compliance processes following the bank’s takeover of the US operations of Lehman Brothers in September 2008.

Sanctions of this nature will see the UK’s fining regime become one of the most stringent in the world.

As a result of these and other scandals, the UK government has been compelled to act. Although the UK Bribery Act was introduced in 2010, further steps to counter bribery and corruption have been deemed necessary, including the extension of corporate criminal liability. Accordingly, the Home and Cabinet offices have created a cross-departmental taskforce with the express aim of examining the structure of the various bodies that investigate and prosecute bribery in the UK. The Serious Fraud Office (SFO), the City of London Police, the Metropolitan Police’s overseas anti-corruption team, the country’s financial watchdogs and the burgeoning National Crime Agency have all been involved in the review process.

To that end, in September the UK’s new Attorney General Jeremy Wright QC announced that “officials are considering proposals for the creation of an offence of a corporate failure to report economic crime, modelled on the section 7 Bribery Act offence”. Although the plans are still at an early stage, they do appear to have cross-party support. Labour’s shadow attorney-general Emily Thornberry has lent her support to the move.

Should the offence be created it would represent a marked shift in attitudes towards corporate criminal liability in the UK. The notion of extending corporate criminal liability has been mooted for some time. In 2013 David Green, head of the SFO, first suggested that criminalising corporate failure to prevent economic crime by an employee or agent would make it significantly easier for the SFO to bring charges against companies. The potential extension of corporate criminal liability would go hand in hand with other changes in the space. Under new rules which were introduced in October, companies found guilty of bribery and corruption can be fined as much as 400 percent of any profits accrued from that bribery. Sanctions of this nature will see the UK’s fining regime become one of the most stringent in the world.

US style deferred prosecution agreements (DPAs) were also introduced in February. Under the DPA system, companies are able to pay significant fines and overhaul their compliance systems in exchange for a suspension to a prosecution.

The proliferation of bribery, corruption and financial fraud within the British business community has become a major issue. A number of the country’s biggest and most influential corporations, including GlaxoSmithKline, Rolls-Royce and Tesco, have all been investigated in various different jurisdictions amid claims of bribery, corruption and financial irregularity. Given the revelations of the last five or so years, the move by UK regulators to extend corporate criminal liability seems to be a prudent one.

© Financier Worldwide


Richard Summerfield

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