Last December Lisa Osofsky, director of the Serious Fraud Office complained: 'I can go after Main Street but I can’t go after Wall Street.'
Back in September 2014, the then Attorney General, Jeremy Wright QC MP announced that the government was considering proposals to create a new corporate offence of failing to prevent economic crime.
Winding the clock forward to 2017, the government finally consulted on the potential reform of the law for economic crime such as fraud when committed on behalf of or in the name of companies. The results are yet to be published but are expected this year.
Last year Sir Brian Leveson and Lisa Osofsky, amongst others, called for an extension to corporate criminal liability law and the creation of an all-encompassing failure to prevent fraud offence.
'Corporate criminal liability' is a term that describes the legal mechanisms by which companies – as separate legal entities distinct from their owners, officers or employees – can be held to account under the criminal law for wrongdoing.
Apart from strict liability and vicarious liability criminal offences, corporate criminal liability for fraud and economic crimes is currently determined using the well established and highly litigated identification principle. This is derived from common law rules. In the leading case of Tesco Supermarkets Ltd v Nattrass [1972] A.C. 153, the House of Lords ruled that the attribution of corporate criminal liability for offences requiring proof of criminal intent, is governed by a doctrine of general application. A corporation acted through living persons and that such a person properly identified would not be acting or speaking for the company, but as the company itself - thereby attributing criminal liability to the company. However this would only apply if the person concerned was a directing mind and will ['DMW'] of the company. A criminal conviction of the company requires such a person, having been identified as a DMW, to have committed the guilty act while possessing the state of mind and intent required for the criminal offence to be proved.
Many consider that the current law is not fit for purpose, and that the Tesco v Nattrass test is inadequate as a means of holding companies liable for criminal wrongdoing.
The problems and controversy arise as it can often be difficult to ascertain or prove who represents the DMW of a company. This is particularly so for large multi‑national companies where the decision making may take place in a variety of forms, within the hierarchy and governance of the organisation.
Alun Milford, former General Counsel to the SFO, has also argued that affixing criminal liability using the identification principle is unfair in application, unhelpful in impact and unprincipled in scope.
It is easier to attach corporate liability to a single-minded enterprise than to a multi-national corporate, because of the requirement to identify the DMW of the company. It is argued that this means that multi-national corporates are unfairly escaping liability. The lack of prosecution of UBS over LIBOR fixing is a recent high profile example.
However, there is no principled reason for the distinction in treatment between different economic crimes. Why should failure to prevent bribery or the facilitation of tax evasion be singled out whilst other economic crimes are not?
Our current system of limited corporate liability incentivises a company’s board to distance itself from the company’s operations.
In front of the Committee, Sir Brian Leveson strongly promoted the importance of 'failure to prevent' style offences in shifting the onus onto the corporate to prove they had adequate procedures in place.
So how would a failure to prevent fraud offence work? The 'failure to prevent' model has been used in two specific instances:
The Bribery Act 2010
Section 7 of the Bribery Act 2010 provides that a company may be guilty of an offence if a person associated with that company bribes another. The definition of an 'associated person' is wide and includes anyone who performs a service for the company and therefore can capture employees, agents or subsidiaries. The onus is on the company to prevent any associated persons acting in this way. Statutory defences are provided for if the company had in place 'reasonable procedures' to prevent bribery.
The Criminal Finances Act 2017
The Criminal Finances Act 2017 has more recently created two offences of 'failure to prevent' tax evasion. Mirroring the legislation in the Bribery Act 2010, the Criminal Finances Act 2017 makes the facilitation of tax evasion by an 'associated person' to a company an offence.
It is strongly anticipated that if a failure to prevent fraud offence is to be brought onto the statute books, then it will be modelled on these existing statutory regimes.
Too large a burden?
A key argument against a new failure to prevent fraud offence is that its imposition would impose too large a burden on business, which in turn negatively impacts on the economy.
Other alternatives to a failure to prevent offence could be amending the current identification doctrine or introducing a vicarious liability offence of fraud – as operates in the USA.
The House of Lords Bribery Act Committee last month called for a decision on whether to introduce a failure to prevent fraud offence without delay, and the Treasury Committee requested that the government should consider introducing a new offence of failing to prevent economic crime stating that 'It is wrong and potentially dangerous to not reform this area.'
As the National Economic Crime Centre is launched, and the government commits to the new world class fraud and cybercrime court in the City of, are we about to see the creation of new offences to bring companies to court for fraud?
Michelle Sloane is a senior associate at RPC, Michael Goodwin QC practices as a barrister at Red Lion Chambers and Aimee Riese practices as a junior barrister at Red Lion Chambers
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