For a company to be guilty of a criminal offence, someone who can be described as its “directing mind” - normally at or close to board level - must have been involved in committing the offence. The high threshold makes it difficult for prosecutors to secure corporate convictions, particularly where large, multi-layered companies are concerned, and creates little incentive for companies to enter into deferred prosecution agreements (“DPAs”).
A further complication with the so-called “identification principle” is that it has no statutory footing. Whilst the leading authority remains the well-known 1972 Tesco v Nattrass case, more recent decisions have sought to introduce a degree of flexibility in the application of the doctrine. In doing so they have muddied the waters, resulting in an unwelcome lack of certainty for companies and their advisers.
The need for reform has been recognised for some time. The Law Commission made suggestions for reform as part of a wider consultation in 2010, but these were put on hold. More recently, following the introduction of DPAs, SFO director David Green has been making the case for section 7 of the Bribery Act to be extended to other acts of financial crime (coupled with a similar “adequate procedures” defence). Under the UK’s Anti-Corruption Action Plan, the Ministry of Justice has committed to examining this proposal and to looking at the rules on corporate criminal liability more widely. Some sort of reform now appears inevitable – the question is what form it will take.
So does section 7 of the Bribery Act provide a workable blueprint for corporate crime more broadly? It is not difficult to see the appeal of such an approach. The “failure to prevent” model has already been endorsed by the OECD in relation to bribery and is familiar to legal and compliance personnel. Bribery is one of a number of economic criminal offences that are governed by the same corporate sentencing and DPA regime, so there is sense in seeking to introduce a consistent framework for liability.
Yet despite being superficially attractive, an extension of the Bribery Act model is not without its difficulties. Leaving aside the fact that the section 7 offence has yet to be tested in the courts, Green’s proposal fails to account for the fact that bribery and fraud are very different beasts. Unlike bribery, fraud is often committed against the company itself. Unless such an extension of the law were coupled with a requirement for the crime to have benefited the company in some way, a company could in theory find itself criminally liable for failing to prevent an offence of which it was the victim. Whilst prosecuting authorities would no doubt issue guidance to the effect that only the worst cases would be prosecuted, we should not be comfortable with a criminal offence whose sensible application relies entirely on prosecutorial discretion. It is also difficult to justify a reform that focuses only on economic crime (and therefore primarily on financial institutions), ignoring other types of offences that are capable of being committed by corporate entities.
An alternative approach, which was floated at one stage by the Labour Party, would be to introduce more comprehensive reform – doing away with the “directing mind” test and introducing full vicarious liability akin to the “respondeat superior” model in the US (whereby the criminal acts of any employee or agent can be imputed to the company, provided they were intended at least in part to benefit the company). Not only would this apply to the full gamut of criminal offences (obviating the need for future additional legislation in relation to other offences), it would also take into account whether the unlawful conduct was intended to benefit the company. Such a model would align the UK more closely with the US - the jurisdiction with which the UK is most likely to cooperate in global investigations.
Some argue that the absence of an “adequate procedures” defence would make liability insufficiently discriminate, blaming the corporation whenever an individual employee was at fault even if systems and controls were in place. However, companies would still have an incentive to implement policies for the detection and prevention of crime, and these would be taken into account as mitigation at the sentencing stage. A robust compliance programme could also facilitate self-reporting, which in turn might enable the company to avoid prosecution.
There is no doubt that introducing full vicarious liability would be a considerably more onerous task than a mere extension of the Bribery Act model. But if such a key area of the criminal law is to be reformed, it makes sense to bite the bullet and do it properly.
Elly Proudlock, WilmerHale