Reforming corporate criminal liability: a balancing act

The Law Commission published its long-awaited options paper on corporate criminal liability to mixed reviews. Those who had hoped for a broad "failure to prevent" criminal offence were disappointed. However, the Commission's more incremental approach of introducing specific failure to prevent offences was greeted with relief by corporates that had feared the vast compliance burden of a broad offence.

The Law Commission (the Commission) published its long-awaited options paper on corporate criminal liability on 10 June 2022 to mixed reviews. Those who had hoped for a broad “failure to prevent” criminal offence were disappointed. However, the Commission’s more incremental approach of introducing specific failure to prevent offences was greeted with relief by corporates that had feared the vast compliance burden of a broad offence.

The paper sets out the government’s options for improving the law to hold to account corporates that commit serious crimes. In addition to the failure to prevent offences, the key focus of the paper is on the attribution of corporate criminal liability, the liability of senior management, penalties and reporting obligations.

The problem of corporate liability

The paper references Ministry of Justice statistics which show that, between January and September 2020, there were over 5,000 convictions of companies or other non-natural persons. Many of these were for offences such as breaches of environmental regulations, which were created with companies in mind. However, offences such as fraud can cause difficulties when it comes to corporates. Many criminal offences require a particular state of mind; whether that is intention, knowledge, recklessness or dishonesty, and this raises the question of whose state of mind is to be attributed to a corporation.

The general rule for attributing criminal liability to companies is the identification doctrine. A company will usually only be liable for criminal conduct by one or more natural persons that represent its controlling mind and will. This contrasts with the position in the US, for example, where under the doctrine of respondeat superior, an employer may automatically be answerable for the conduct of its employee by virtue of vicarious liability.

With its focus on a limited number of directors and senior managers, the identification doctrine raises practical difficulties when seeking to hold to account and prosecute large companies. Decision making can be diffuse or there may be doubt over whether individuals had the necessary authority to engage in the conduct in question.

As Professor Penney Lewis, the Law Commissioner for Criminal Law, stated on publication of the paper, there is broad consensus that the law must go further to ensure that corporates, especially large companies, can be convicted of serious criminal offences such as fraud (see box¹ “Law Commission review").

The options

The paper puts forward ten reform options, which may be summarised under four categories.

Attribution of criminal liability. The Commission considered alternative approaches to the attribution of criminal liability, including the attribution of the criminal acts of any employee to their employer and conviction by reference to a company’s culture or systems. However, it rejected both of these: the former would represent a fundamental shift in liability, lacked support from stakeholders and raised practical concerns on appropriate prosecutorial safeguards; while the latter, acknowledged as interesting and potentially promising, was not recommended for a wholesale reform.

The Commission put forward the following two options:

• Retaining the existing identification doctrine.
• Reforming the identification doctrine by widening its scope to cover the conduct of a member of the senior management team, being any person who plays a significant role in decision making or actual management of the whole or a substantial part of the organisation’s activities. This could be extended further so that CEOs or chief financial officers would always be considered to be members of senior management.

For crimes of negligence, the Commission concluded that it should be possible to convict on the basis of collective negligence, rather than having to identify a natural person who was negligent.

In the absence of reform to the identification doctrine, the Commission noted that the case for additional measures, such as failure to prevent offences, would be even more compelling.

Failure to prevent offences. Failure to prevent offences already exist in the context of bribery and tax evasion (see feature articles “Bribery Act 2010: ten years on” and “Facilitation of tax evasion: new offences of failure to prevent”). The Commission proposes extending the offences to capture other economic corporate crimes, including an offence of failure to prevent fraud by an employee or agent, which would apply where a corporation has failed to put in place appropriate measures to prevent fraud being committed for the corporation’s benefit.

The paper sets out some general principles for future failure to prevent offences, including that:

• Liability would arise only where the conduct was undertaken by an employee or agent with a view to benefitting the corporation directly or indirectly by assisting a client (unless the intention was to harm the corporation).
• As with the defence to existing offences, a corporation would have a defence if it could prove that it had in place reasonable prevention procedures or it was reasonable not to have these procedures in place. The government should publish guidance on what these procedures might be.
• There should not be a presumption that the offence would extend to conduct carried out by employees or agents overseas, but rather it should be considered in the context of the specific offence.

The Commission also put forward three other offences for which a failure to prevent model might be appropriate, covering human rights abuses, ill-treatment or neglect, and computer misuse. It noted that further work would be necessary on the scope of these offences.

Senior management liability. The Commission concluded that, in principle, directors and senior managers should not be personally criminally liable on the basis of neglect if the offence is one that requires proof of a particular mental state. This conclusion was driven by perceived inconsistency in existing legislation, and its application, on this issue.

Penalties. The paper notes that, in general, the only penalty available to courts when sentencing non-natural persons is a fine. The Commission rejected the option of winding up a company on conviction for a serious offence, in part because powers to similar effect already exist. Instead, the Commission’s view is that there would be value in making publicity orders more widely available, notably for public bodies or charities, but also for smaller enterprises with a local, but not national, reputation, given the constraints on the ability of local media to cover court cases.

Reporting obligations

The paper contemplates options under which corporations might be subject to civil procedures, such as where the decision makers did not act deliberately or dishonestly, which would avoid occupying the criminal justice system with regulatory cases. The options put forward are:

• The introduction of a regime of monetary penalties.
• The ability to pursue civil actions in the High Court.
• Reporting obligations on larger companies to disclose their anti-fraud procedures.

Response to the paper

On the day of its publication, the paper came in for fierce criticism from various bodies for not going far enough and letting corporations off the hook. It is true that the paper deliberately steers away from radical reform, ruling out a broad-brush failure to prevent offence and instead opting for an incremental approach, starting with fraud. This is no doubt informed by the need to avoid placing burdensome administrative requirements on corporations, which will also be relieved that the Commission did not propose options such as a move towards US-style vicarious liability.

The problematic identification doctrine would remain, although the proposed modifications would represent a significant expansion, with focus extending beyond the board of a company or the “total delegation” of authority by it.

The paper also raises interesting questions from an environmental, social and governance angle, with a number of the options placing emphasis on governance and a move towards greater transparency with reporting obligations (see feature article “ESG standards and ratings: know the score”). Meanwhile, it will be interesting to see whether the other new failure to prevent offences that the Commission put forward, such as those concerned with human rights, will gain traction.

In terms of next steps, it is now up to the government to decide how to proceed. Should it decide to pursue any new offences or modifications to the identification principle, there will no doubt be further consultation, with the prospect of reform in the short term unlikely.

¹ Law Commission review

The Law Commission’s (the Commission) options paper follows its review of the law on corporate criminal liability. In November 2020, the government tasked the Commission with performing a balancing act: it was to examine the issue of attribution of corporate criminal liability and produce an assessment of different options for reform, but ones that avoided disproportionate burdens on business (see News brief “Reform of corporate criminal liability: two ways about it”). A particular focus was placed on economic crime, such as fraud, tax evasion, bribery and money laundering.

The Commission’s terms of reference included:

• Whether the identification doctrine is fit for purpose when applied to organisations of differing sizes and scales of operation.
• Examining other ways in which criminal liability may be imposed on corporates under the current criminal law of England and Wales.
• Whether an alternative approach to corporate liability for crimes may be provided in legislation.

This article was first published in PLC Magazine July 2022 issue