Developments in corporate criminal liability
February 2017 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
Corporate criminal liability is in a deeply unsatisfactory state. The law attaches criminal liability to companies in two completely separate ways. The first of these, and the most longstanding, is the ‘directing mind’ route. The second is through what has been termed the control principle of liability. Which of these routes apply in any one scenario depends entirely on the criminal offence being investigated. There is no logic to the distinction to be made between the routes to corporate liability. This article considers recent developments to both ways of establishing criminal liability.
Recent developments in the ‘identification’ principle
In order for prosecutors to convict a company via the ‘directing mind’ route (also known as the doctrine of identification), they must establish beyond reasonable doubt the guilt of a person sufficiently senior within a company to be considered a directing mind of that corporate entity. In other words, the guilt of a person who could be said to embody the company; someone whose actions and words could be considered the actions and words of the company itself. Sometimes it may be clear whose actions could be identified with the company – for example, senior personnel such as the chief financial officer or a managing partner.
However, too frequently the answer to this question is obscure and susceptible to argument because it requires identification of the criminal legislation in play and thereafter identification of the individual whose acts for the purpose of the relevant criminal provision should attribute criminal liability to the company. Take, for example, a health and safety officer who is not a member of the board of directors but to whom the company has delegated sole responsibility for ensuring compliance with a particular piece of health and safety legislation. His or her failure to ensure compliance could attach liability to the company.
The directing mind principle more frequently gains criticism for making it difficult to convict companies. Establishing the guilt of senior officers of the company is very difficult if the evidence shows, as it frequently does, that the criminal act was carried out by employees lower down in the chain of command. As a result, it is easier to convict a SME than it is a multinational and there is no principled reason why the law of criminal liability should favour one structure over another. Alun Milford, general counsel of the Serious Fraud Office, recently described the identification principle as “an inadequate model for attribution to a corporate of criminal liability... unfair in its application, unhelpful in its impact, and it underpins a law of corporate liability that is unprincipled in scope”, which gives a fair indication of the level of the SFO’s hostility to this doctrine.
Recently, the Court of Appeal gave an unexpected twist to this principle by apparently endorsing the prosecution of a company in the absence of its directing mind. In R v A Ltd and others  EWCA Crim 1469, one officer said to embody the directing mind of the company was absent from the trial. He was in another jurisdiction, had never been charged with the offences in question and was therefore not the subject of prosecution. Nonetheless, the prosecution was free to call evidence in order to establish his guilt (and thus also that of the company), in his absence, in circumstances where the company would not be in a position to challenge the evidence called. The Court of Appeal said that the underlying argument was that it was unfair for the corporate to have to address allegations of criminality when its controlling mind whose behaviour was relied upon to prove its guilt was not also charged with the crime and had been unwilling to assist the corporate in its preparation for its defence.
The Court of Appeal noted, in purely obiter remarks that, “in reality, however, a corporation can only operate through its directing mind or minds and their knowledge is, and must remain, the knowledge of the corporation. The presence or otherwise of a directing mind at the trial is irrelevant. Were it otherwise, as the judge observed, had the directing mind died, become incapacitated (as well as one whose attendance at trial could not be secured, perhaps because he deliberately absented himself), it would not be possible to prosecute the relevant corporation however egregious the conduct”.
One can understand the public policy considerations that may lie behind this comment. It cannot be right that a company should be able to escape liability for criminal wrongdoing (and thus not be required to compensate any victims) as a result of the non-availability of the directing mind – particularly if his unavailability were within the control of the corporation. However, the position is not necessarily so clear. A company is entitled to a fair trial after all. It is entitled to be able to defend itself just as much as an individual defendant. Where a directing mind is absent through no fault of the company, is it right that there is never any room for enquiry as to whether a company will have a fair trial? Surely the answer is that it depends on the circumstances of each case. That whether a fair trial can be achieved is a question of fact for the trial judge upon consideration of all of the relevant facts.
This question was not directly before the Court of Appeal and did not form part of the argument before the Court. While it seems unlikely that the Court of Appeal would seek to fetter the discretion of a trial judge to assess the fairness of any trial to take place before him or her, this is a fairly strong statement from the Court of Appeal and it seems reasonable to suppose that the circumstances in which a judge may conclude that a trial of a corporate in the absence of its directing mind may be unfair will be rare.
It is worth noting that the Court of Appeal also held that the fact that a director has a bifurcated role is irrelevant. This was because knowledge acquired when acting as director for another company within the group was brought to his actions on behalf of the defendant subsidiary.
A type of ‘control liability’ is, for prosecuting agencies in the UK, the preferred model for establishing corporate criminal liability and the director of the SFO, among others, has argued strongly for it to replace the identification principle. The advantages of corporate liability based on this model are that it should have equal application to all corporates regardless of structure, it avoids the problems for successful prosecution posed by arms-length or devolved decision making and it promotes good corporate governance. In short, it is intended to make it easier to prosecute larger corporate entities. It marks a shift, from prosecution to protect the public and the economy from rogue and dangerous businesses to punishment for a failure to create and enforce appropriate ethical policies. It is enhanced regulation with a criminal bite. It also places a significant burden on companies to devise, train on and implement policies and procedures sufficient to provide the company with a defence in the event of a breach.
Criminal liability based on variants of the control theory appears in both the Bribery Act 2010 and the Corporate Manslaughter and Corporate Homicide Act 2007. The Corporate Manslaughter and Corporate Homicide Act 2007 provides that an organisation will be guilty of an offence if “the way in which its activities are managed or organised” by its senior management, causes (in other words, is a substantial element in) a person’s death or amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased.
Notwithstanding the intention, through the 2007 Act, to achieve more successful prosecutions of larger companies, it is interesting that, to date, the Corporate Manslaughter and Corporate Homicide Act 2007 continues to be deployed, predominantly, against SMEs. In the case of the Bribery Act, a different variant has been used. Criminal liability will attach to a company whose inadequate policies and procedures have failed to prevent the commission of a bribery offence – a section 7 offence. However, the identification principle will still need to be deployed to convict a company for a section 1 or section 2 offence – making or receiving a bribe.
This should be an even easier test for prosecutors to prove since there is no causation element and the adequacy of the procedures is a matter to be raised by the defence. Although the Bribery Act has been in force for over five years it remains too early to tell whether section 7 will achieve the aim of convicting larger, more complex companies. The sole conviction to date concerned the multinational Sweett Group PLC (not including two deferred prosecution agreements).
The use of the ‘failure to prevent’ model is likely to be extended by what is currently clause 40 of the Criminal Finances Bill. This provides that a body is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with that body: the failure to prevent tax evasion offence.
While based on section 7 of the Bribery Act, there are important differences. For example, it is a defence for a company to show that it had “reasonable” (as opposed to “adequate”) prevention procedures in place; and, less subtly, there is no requirement for the associated person to be acting to obtain an advantage in the course of the company’s business. The extension of the control principle indicates a statement of intent by the government. Future criminal legislation aimed at corporates is likely to be based on a similar principle. Indeed, the Serious Fraud Office has argued not only for a general offence of failing to prevent fraud but for the identification doctrine to be replaced entirely.
In May 2016, the government said that it would consult on plans to extend the scope of the criminal liability based on failing to prevent beyond bribery and tax evasion to other economic crimes. However, the consultation, which was due to be published last summer, has yet to appear. While the government may have been distracted in the short term by Brexit and a change of prime minister, this is unlikely to be the last we have seen of changes to corporate criminal liability.
Sean Curran is a partner at Arnold & Porter Kaye Scholer LLP. He can be contacted on +44 (0)20 7786 6297 or by email: email@example.com.
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Arnold & Porter Kaye Scholer LLP