Casting the net wider

In regulations recently laid before parliament, the government introduced legislation that extends the criminal law in an effort to improve the cashflow of smaller businesses by placing new accounting obligations on larger corporates. This is the latest step in the increasing use of criminal law as a tool to alter corporate practices and behaviour.

The new regulations, Reporting on Payment Practices and Performance Regulations 2017 and Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017, create two new criminal offences for larger UK companies and LLPs – and their directors and members – which fail to meet new government reporting requirements on information concerning a corporate’s payment practices.

The minister for small business Margot James MP said the new legislation will ‘improve payment practices across the board’, noting that ‘it’s completely unacceptable that small and medium-sized businesses are owed £26.3bn in late payments, which hampers their ability to grow and has no place in an economy that works for all’.

The new reporting obligations will require large UK corporates to prepare and file a broad range of information with the government every six months in respect of all contracts for goods, services or intangible property (albeit there is an exclusion for those contracts which are for financial services only). Information including narrative descriptions of the standard payment terms, statistics concerning the late payment of invoices, and statements about the business’s process for resolving payment disputes need also be submitted.

Although any company or LLP may choose to make a report under the regulations, only those which exceed two or more of the following thresholds will face criminal liability for failure to make a report:

• £36m annual turnover;
• £18m balance sheet total; and
• 250 employees.

The first criminal offence created by the regulations will be committed by companies or LLPs which fail to submit a report to the government containing the necessary information within 30 days of the end of the relevant reporting period (the first reporting period is the initial financial year that starts on or after 6 April 2017). In addition, individual directors or designated members will also be personally criminally liable, unless they can show that they took all reasonable steps to ensure compliance.

Separately, the regulations create a further criminal offence for any person – including third-party advisers such as lawyers or auditors – to knowingly or recklessly publish, or cause to publish, any report or information pursuant to the reporting obligations which is misleading, false or otherwise deceptive. Each offence is punishable by way of a fine on summary conviction at the magistrates’ court.  

While these new criminal offences plainly stop short of criminalising the underlying conduct which the new reporting obligations seek to address (for example, the persistent late payment of invoices), they nevertheless represent the latest attempt to alter corporate culture and behaviour through the expansion of corporate criminal liability. For example, it is notable that, at the same time as these regulations were laid before parliament, the Criminal Finances Bill, which will create new criminal offences for those corporates which fail to prevent their employees or agents from facilitating tax evasion, was before the House of Commons.

This development of criminal liability as a de facto regulatory tool arguably began with the introduction of anti-money laundering legislation, and, more recently, has developed with the creation of the landmark offence of failure by a commercial organisation to prevent bribery by an employee or agent under section 7 of the Bribery Act 2010. There is a strong argument that these pieces of legislation have had only a limited practical impact in terms of enforcement action, but there can be no doubt that they have changed their respective cultures. For example, due diligence is now ubiquitous across large swathes of corporate practice and a sophisticated practice of compliance has emerged in recent years.

And it seems that this appetite to use corporate criminal liability as a tool to amend corporate behaviour is unlikely to diminish, at least in the short term. In fact, only last month the government began a fresh consultation process on wholesale reform of corporate criminal liability, with a view to the potential replacement of the ‘identification doctrine’ as the model on which corporate criminal liability is based.

The current model of the identification doctrine founds corporate criminal liability by attributing the actions and intentions of those senior individuals in charge of a company – the directing mind or will of the company – to the company itself. The doctrine is widely regarded as not fit for purpose in an age of complex company structures, and as the director of the Serious Fraud Office David Green QC – an advocate of reform – wryly observed in 2013, it is often the case that, ‘in practice, the email trail has a strange habit of drying up at middle management level’.

It remains to be seen what, if any, replacement model of corporate criminal liability will follow, although one option being actively considered by the government is that corporates would be held liable for any economic crime committed by an employee or agent on the basis that they failed to prevent the commission of the crime.

The criminal offences created by the regulations are indicative of this wider, ongoing shift towards the expansion of corporate criminal liability in order to regulate corporate practices and behaviour. It is an expansion which patently has the benefit of focusing minds, but it also necessarily carries with it new and additional risks for corporates and those charged with advising them. The practical effect of such reforms – including the new regulations – will inevitably depend on the level of enforcement, but it seems unavoidable that the evolving issue of corporate criminal liability will be an increasingly important consideration for businesses and those who advise them in the years to come.

Jenny Barker is of counsel in the business crime team at Peters & Peters LLP