Insights on corporate criminal liability reform

What is the Law Commission investigating?

The Law Commission has been asked to evaluate the law around corporate criminal liability and explore the options available for possible reform of the UK framework.

Despite previous calls for reform, including the 2017 Call for Evidence, advocates for reform indicate that action is needed now to prevent the UK from falling behind international standards in the prosecution of companies and 'non-natural persons' concerning economic crime. (Our full response to the 2017 Call for Evidence can be found here.)

The review will analyse the effectiveness of the current law (including the use of DPAs and civil recovery) and will draw on both domestic and international frameworks. In particular the Commission will consider:

• whether the 'identification doctrine' is fit for purpose, when applied to organisations of differing sizes and scales of operation;
• the relationship between criminal and civil law on corporate liability;
• whether an alternative approach to corporate liability for crime could be provided in legislation; and
• the implications of any change to the liability of non-natural persons for the liability of directors and senior managers.

What are the perceived problems with the current position?

The general rule is that a company can only be deemed criminally liable if the alleged offence was committed by an individual who was the 'directing mind and will' of the company at the relevant time. This is the 'identification principle' and, in practice, is usually limited to a small number of directors and senior managers. This leads to increased risk of criminal liability for SMEs where the senior employees have more direct control over the operations of the business. This is in direct contrast to larger companies with diffuse structures.

As noted in our previous article, there have long been calls to reform the corporate criminal liability model. However, the mode of reform is less clear. More recently, SFO Director, Lisa Osofksy commented that at the top of her wish list is to introduce a 'failure to prevent' offence for economic crime. The existing 'failure to prevent' offences do not require the application of the identification principle:

• Failure to prevent bribery;¹
• Failure to prevent facilitation of UK tax evasion offences;² and
• Failure to prevent facilitation of foreign tax evasion offences.³

Despite this, there are competing concerns that alternative models for assessing criminal liability may place a disproportionate compliance burden on law-abiding businesses. Therefore, the Law Commission, will have to carefully consider which option, if any, would be most appropriate to implement in the UK. 

What are the possible solutions?

The initial call for evidence in 2017 set out 5 possible reform options.

1. New legislation to replace the current common law rules;

2. A new form of vicarious liability, along the lines of the US' 'aggregation model';

3. A new strict liability offence similar to the existing 'failure to prevent' model in s7 of the Bribery Act 2010;

4. A variant of the 'failure to prevent' model; and

5. Investigate the scope for further regulatory reform.

Responses to the call for evidence were provided by a wide variety of stakeholders and those with expert industry opinion. Although there was no conclusive or persuasive evidence submitted to suggest that new legislation is required, over half of respondents did not believe that the existing regulatory framework in the UK provides sufficient deterrent to corporate misconduct. Moreover, over ¾ agreed that the identification doctrine is not effective in holding companies account for economic crime committed by or on their behalf.  This therefore suggests that some form of action to reform corporate criminal liability is needed.

A key driver in the need for reform is the high level and number of prosecutions and fines observed in the USA in comparison to the UK. This may be in part due to the USA's (federal) 'collective knowledge doctrine', which allows for criminal knowledge or intent to be aggregated from all corporate personnel and attributed to the company. This therefore can ensure prosecutions even if no single senior individual is in possession of all incriminating facts or information. However, it's unlikely that the UK will introduce a similar aggregation model due to the option's unpopularity in the Call for Evidence responses.

It's more likely that any recommendations will favour a model similar to the existing 'failure to prevent bribery' offence or a variant of this model. This is because the model is particularly clear, proportionate, encourages good governance and is familiar to practitioners and businesses already. Although additional measures would be required, so there would be costs implications for businesses. In addition, if this option is chosen, careful consideration should be given to the fact that unlike bribery, other economic offences such as fraud, cover a much wider range of situations thus making implementing appropriate measures particularly difficult.

The Law Commission's findings will not be released until late 2021 and therefore if legislative reform is the approved option, it's unlikely to be implemented before 2022-2023.

¹Section 7(1) Bribery Act 2010.
²Section 45 Criminal Finances Act 2017.
³Section 46Criminal Finances Act 2017.