On 10 June 2022, the Law Commission published its long-awaited report setting out options for the reform of corporate criminal liability in the UK. The report follows years of disquiet with the current model of corporate criminal liability. Widespread criticism, including by successive Directors of the Serious Fraud Office (SFO) over the last decade, centres on the current model presenting a serious impediment to the successful prosecution of corporate entities.
The resulting report stops short of making specific recommendations for reform, but recognises the inadequacy of the current model of liability. It leaves the Government with a range of options to consider, any of which are likely to have significant implications for UK businesses if implemented.
Current law
As it stands, corporate criminal liability in England is generally established by the "identification principle". This provides that a corporation will generally only be liable for the conduct of a person who had the status and authority to constitute the body’s “directing mind and will”. This may be contrasted with the position in the US where vicarious liability applies, i.e. an employer may be held responsible for the actions of its employee(s) regardless of their seniority. Criticism of the English model is longstanding, typically focussing on the unfairness it presents to small business, which offer much easier enforcement targets on the basis that the smaller the entity, the more straightforward the exercise of identifying the directing mind and will.
In addition to the identification principle, there are alternative models of liability which apply to specific offences. The most specific of these, in the context of economic crime, is the "failure to prevent" model of liability, first introduced by the Bribery Act 2010. This created liability for a commercial organisation that fails to prevent an "associated person" from bribing another person with the intention of obtaining business for the company (or an advantage in business). The company does, however, have a defence if it can show that it put in place "adequate procedures" through a proper compliance programme, for example. Since the Bribery Act, the failure to prevent model has been extended to include some tax evasion offences.
Reform proposals
Notwithstanding the clamour for significant and broad reform, the Law Commission has in fact returned a nuanced set of options, presenting what amounts to an incremental set of possible reforms, intended to avoid 'disproportionate burdens upon business'.
For example, under the options proposed by the report, the identification principle itself survives as a model of liability. However, the Commission proposes that conduct would always be attributable to a corporate for the purposes of liability if a member of the corporate's senior management engaged in, consented to, or connived in the offence. In addition, the Commission proposes that this model of liability may be amended such that a CEO or CFO would always constitute 'senior management'. This latter proposal, to ensure that a corporate can be held responsible for the actions of a CEO or CFO, would appear to be in response to the decision of the High Court in Barclays v SFO [2018] EWHC 2055 (QB). This established that even a CEO of CFO may not have sufficient autonomy to represent a company's directing mind and will – a decision which the Law Commission describes as 'on any analysis a narrow view of the identification principle'. The report does leave open the option of not reforming the identification principle at all, but notes that, in that case, the argument for alternative reform, such as the expansion of the failure to prevent model, would be 'even more compelling'.
In terms of expanding the failure to prevent model of liability, the Commission rejects both a widespread expansion across all criminal offences (including sexual offences etc) and an alternative, more limited, expansion to cover all economic crime (as proposed by the current and former Directors of the SFO). In fact, the Commission presents the option that any expansion of the failure to prevent model of liability should be limited to failure to prevent fraud by an associated person. The report sets out that this would cover offences including:
- fraud by false representation;
- obtaining services dishonestly;
- the common law offence of cheating the public revenue;
- false accounting;
- fraudulent trading;
- dishonest representation for obtaining benefits; and
- fraudulent evasion of excise duty.
In addition, the report leaves open the option for the introduction of failure to prevent offences to cover human rights abuses, ill-treatment or neglect, and computer misuse. It notes that further work and consultation would be necessary before such reform would be introduced.
Compliance burden
As noted above, the Commission's report was intended to avoid 'disproportionate burdens upon business'. The principal reason for the rejection of the expansion of the failure to prevent model to cover all economic crime was that the reform would impose too large a burden on corporates across too broad a range of offences. This would create further positive compliance duties on corporates which would overlap with other duties under the anti-money laundering regime, for example.
The report does leave open the possibility of expanding the failure to prevent model to other economic crime offences beyond fraud in due course, albeit subject to a series of proposed safeguards, including:
liability should not attach where the offending was intended to cause harm to the corporate. This is particularly important in the context of a failure to prevent fraud where often it is the corporate that will be the victim of the fraudulent conduct;
- there should always be a defence on the basis the corporate put in place (where appropriate) reasonable procedures to avoid the commission of the offence;
- the Government should be subject to a duty to publish guidance on the procedures that corporates can adopt to prevent commission of the offence, with additional sector specific guidance where appropriate; and
- extra territorial liability should not be automatically introduced by extension of the model, but considered on a case-by-case basis.
Conclusion
Although the proposals fall short of including the option of expanding the failure to prevent model of liability to cover all economic crime, they do represent a significant departure from the current model of criminal liability in the UK.
For now, the next stage is for the Government to review the proposals and make decisions about which, if any, reforms to bring forward. The implications of this decision will be significant, with reform along the lines of any of the proposals in the paper likely to represent the most profound shift in corporate criminal liability in the UK since (at least) the Bribery Act 2010.