Member Article

Holding companies to account: criticism of the current criminal framework

Over time and bit by bit the UK’s approach to corporate criminal liability is being narrowed. The issue has long been debated with many commentators agreeing that the current criminal legal framework is far from satisfactory at holding corporate organisations to account for instances of criminality when those crimes are committed on behalf of, or in the name of, the company. 

The problem

Whilst there are several ways that a company can commit a criminal offence the real problem arises from the difficulties associated with prosecuting companies through use of what is termed the “identification principle”. It is this principle that is frequently cited by prosecuting agencies as a bar to prosecution. And it is often this principle which proves to be the stumbling block in cases which are actually prosecuted.

In order to convict a company for a criminal offence proof of a particular mental state is required. The identification principle requires that someone representing the company’s “directing mind and will” has the relevant state of mind, whether it be intention, recklessness or dishonesty. This has proven to be particularly difficult to demonstrate cases involving large organisations where there are subsidiaries or where the management of the business is often de-centralised away from the board. The problem is less acute with SME’s where management structures are more often centrally led by directors. In this respect some believe that the playing field is not level.

Piecemeal change

Attempts to get to grips with the perceived issue has been piecemeal and, to many commentators, unsatisfactory. Back in early 2017 the Government announced a call for evidence on corporate criminal liability for economic crime. It sought evidence on the effectiveness of the criminal law in enforcing against large companies for criminal offences and set out five possible options for reform. The results of that review proved inconclusive having received only 62 responses which provided no clear consensus.

The debate took a sizeable step forward in November 2020 when the Law Commission announced that they were due to investigate the wider position on corporate criminal liability (i.e. not limited to economic crime) and at the beginning of June 2021 launched a consultation “seeking views on whether the law relating to corporate liability can be improved so that they appropriately capture and punish criminal offences committed by corporations and their directors or senior management”.

The consultation runs from 9 June to 31 August 2021.

At the conclusion of the consultation the commission will draft an options paper analysing the effectiveness of the current law and recommending improvements. It is anticipated that the outcome and options paper will be delivered to government in late 2021.

The Commission specifically recognises that some overseas jurisdictions had a wider basis for corporate criminal liability, for example where the behaviour is intended in part to benefit the employer, or where there is a corporate culture of non-compliance, or the conduct was sanctioned by management.

However, perhaps the most interesting commentary in the Commission’s consultation is reserved for the strict liability “failing to prevent” offences that are currently found in the UK’s Bribery act 2010 and the Criminal Finances Act 2017. These offences were much lauded by prosecutors for rendering a company criminally liable for relevant conduct unless the company can show that they had in place adequate procedures to prevent the conduct complained of.

Dan Stowers, financial crime partner at Shoosmiths comments:

“Change is undoubtedly going to come. This consultation will be welcome news for prosecuting agencies who will undoubtedly continue to press for the replacement of the identification principal. Lisa Osofsky, director of the Serious Fraud Office, has recently maintained that an extension of the “failure to prevent” offences in relation to all forms of economic crime was still at the top of her wish list.

It’s easy to see why, such offences if carefully drafted, would neatly sit and compliment the existing bribery, tax and anti-money laundering regimes. On the other side of the fence such an offence would generate the need for wholesale reviews of business practice and in some instances huge compliance costs to meet the demands of any new offence or offences, therefore expect some resistance from business!”

The solution?

Charles Arrand, regulatory crime partner at Shoosmiths comments:

“I have little doubt that change is coming, regardless of what submissions are made as part of the consultation. The tide has seemed to be running one way in recent years, starting with the Corporate Manslaughter and Corporate Homicide Act 2007 provisions before we even get to the “failure to prevent” approach more recently. Politicians, media, and the public seem generally aligned in desiring some change. The language with which the consultation was launched seems to leave little doubt that leaving things as they are would not be a satisfactory outcome. The only potential brake (and that, in my view, is on how far reform goes, rather than on whether it will happen) would appear to be the identified concern of “undue burden of compliance” or “disproportionate compliance costs”. It strikes me that if the proposed reform is directed primarily at larger companies any such concerns are likely easily overcome by those who are already committed to effecting change.”

Charles continues:

“A bigger question, in my view, is whether an opportunity is being missed because the focus of this consultation is too narrow. It may be that it keeps getting kicked down the road because it is in the “too difficult” box, but maybe the time has come to consider corporate criminal liability in its entirety (for example, whether taking it down a more civil sanctioning route would be more effective), and whether there is a better way of doing it altogether; taking it out of the mainstream criminal system, taking the prosecutorial aspect out of the hands of agency and local regulators and putting into the hands of a specialist central legal function, and creating separate specialist courts to deal with it.”