November 27, 2021

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Last Call for the Identification Principle: English Corporate Criminal Liability Under the Microscope | Dechert LLP

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Executive Summary

On 9 June 2021 the Law Commission published its “Corporate Criminal Liability” discussion paper (the “Paper”) and launched a public consultation (that closes on 31 August 2021). These developments signal a renewed effort on the part of the Government to address long standing challenges in English law relating to corporate criminal liability. The Paper sets out thirteen questions for discussion which query various aspects of the law on corporate criminality, most notably: possible reform of the identification principle, and expanded use of ‘failure to prevent’ offences – which have proved successful under the Bribery Act 2010.1 It is envisioned that the Law Commission will publish an options paper towards the end of 2021 with recommendations for reforming this important area of law. This article examines the potential options for reform and lessons which could be learned from other countries.

Why Now?

The issue of corporate criminal liability has been the subject of intense scrutiny for decades. While corporate liability has been specifically extended by statute for various specific offences (corporate manslaughter, bribery, tax evasion) the vast majority of offences remain governed by the “identification principle”. This principle has recently been the subject of litigation due to a renewed public focus in response to the perceived lack of corporate accountability for the 2008 financial crash. Following several failed prosecutions, the Serious Fraud Office (“SFO”) has also been calling for a reform of the law in order to strengthen their hand. The SFO, now led by a former FBI deputy general counsel, has lamented the hurdles present in the English law system in comparison to those of the US Department of Justice (“DoJ”), putting the UK at a competitive disadvantage on the world stage in relation to the successful prosecution of corporates.

As a consequence, English law stands at a proverbial crossroads in how it seeks to engender greater accountability and strong corporate governance, particularly amongst large international organisations which may face investigation and potential prosecution in several jurisdictions.

Any proposals by the Law Commission will potentially have far reaching consequences for both businesses and their senior management operating or incorporated in England and Wales. In the event that a ‘failure to prevent’ model is rolled out to wider forms of criminal conduct, it will become increasingly important for corporates and their management to be proactive in their compliance: undertaking routine ‘health checks’ on the conduct of company’s employees, its delegates and suppliers, as well ensuring policies and procedures are in accordance with best practice.

Corporate Criminality

In English law, corporates have an independent legal personality. However for the majority of offences, corporates are only be capable of committing a criminal offence by the acts of their officers or employees through the identification principle. This principle limits a corporate’s criminal liability to the actions of persons representing the company’s ‘directing mind and will’ (“DMW”). As further noted:

“in practice, [DMW] is limited to a small number of directors and senior managers, which restricts the scope of [corporate] criminal liability, because the individuals who might commit the wrongdoing are not always senior enough within the company to represent its “directing mind and will””.2

In 2020 in the Barclays3 case, Lord Justice Davis confirmed that the mental state of an individual can only be attributed to a company as its DMW, where that individual has been delegated full responsibility and autonomy for the relevant function, and that they are not responsible, and do not report to anyone else. In that case, certain very senior C-suite officers were found not to be the DMW of the bank, as the specific function in question had been reserved to the board (or its subcommittees).

This restrictive approach makes it particularly difficult for prosecutors to successfully convict large companies for offences such as fraud due to the diffuse nature of their decision-making structures. As a consequence, the current English law approach to DMW means that, “larger corporations whose actions will often have the most serious social and economic consequences”4 are less likely to be successfully prosecuted for criminal acts than smaller entities with flatter hierarchies. In a similar vein, the Paper cites government guidance from 2017 which acknowledges the inherent problem with English law’s current approach to corporate criminality:

“The common law method of criminal attribution may have acted as an incentive for the most senior members of an organisation to turn a blind eye to the criminal acts of its representatives in order to shield the relevant body from criminal liability. The common law may also have acted as a disincentive to internal reporting of suspected illegal tax activity to the most senior members… Bodies that refrained from implementing good corporate governance and strong reporting procedures were harder to prosecute, and in some cases lacked a strong incentive to invest in preventative procedures.”5

This perceived unfairness is one of the main criticisms of the identification principle. It also explains why the Paper concludes that the Law Commission’s previous position that there was no “pressing need for reform of the identification doctrine…no longer hold[s] true” and thereby raises the possibility of broadening the scope of corporate criminal liability.6

Failure to Prevent Offences

Partly in response to the issues identified above, Parliament created two specific ‘failure to prevent’ offences focusing on corporate liability for bribery7 and tax evasion8. These offences are ‘strict liability’ meaning that the corporate is legally responsible for the actions of all employees and third parties acting for or on behalf of the entity in order to win or maintain business or an advantage in business for the entity. There is no seniority threshold and no requirement for the individual to be an employee.

However, the failure to prevent offences were accompanied by a defence of “adequate” or “reasonable” procedures9, together with a requirement that the Government provide guidance on the steps that companies should take to avail themselves of the defence10. This model has successfully placed the emphasis on compliance and changed the mindset of corporate Britain.

Nevertheless, the Paper cautions against the wholesale adoption of a ‘failure to prevent’ model without further detailed consideration of the crimes that would be encapsulated by the new laws.11 Reading between the lines, the Law Commission clearly does not view the wholesale adoption of further failure to prevent offences as the panacea that the Government is searching for.

International Comparison

What lessons can be learned from our overseas comparators? In the US, the legal standard for corporate criminal liability is respondeat superior. Under this standard, a corporate entity can be held criminally liable for the actions of its employees as long as the employee was (i) acting within the scope of the employee’s employment and (ii) the action, at least partially, was intended to benefit the corporate.12 Significantly, there is no requirement to prove that the corporate benefitted from the employees’ actions.13 Respondeat superior is far reaching in that there is no formal defence of “adequate procedures” and accordingly corporates can be held criminally liable for their employees, even in circumstances where an employee violates an express compliance program. However, recent DoJ guidance has made clear that DoJ will evaluate a corporate compliance program when making relevant prosecutorial decisions such as charge, level of fine and the requirement (or not) of a monitorship.14

In addition, under US law, individual CEOs and other high-ranking corporate officers can also be held criminally liable for a junior employee’s criminal conduct if they can be proved to have encouraged the employee’s illegal act15 or wilfully turned a blind eye to the employee’s criminal act.16

The advantage to enforcement agencies of the US approach is that it makes prosecuting corporate entities or senior individuals much easier, when compared to the English legal framework. This provides prosecutors with significant leverage in any negotiations and a strong incentive to corporates to cooperate with government investigators in the hope of avoiding or limiting criminal liability. For corporates, the cooperation requirements can be extremely costly but the legal framework arguably discourages businesses from challenging government investigations based purely on the merits of the case.

In France, since 199417 (when Law n°92-683 of 22 July 1992 entered force and amended the general provisions of the Criminal Code) legal persons can be held liable under criminal law for offences committed on their behalf by their “organs or representatives”. Initially such criminal liability only existed where a law or regulation explicitly accepted it, but a 2004 law generalised the regime of corporate criminal liability to cover all criminal offences18 (unless the law explicitly provides otherwise).19 The French legislation does not provide an exhaustive definition concerning the “organs or representatives” of a company, instead leaving it open to the judiciary to apply the law based upon to the facts of each individual case. As a result, the judiciary have found that the “organs or representatives” of a company can include its directors, managers or supervisory board and others with authority to manage the company, whether on a de facto basis or under the company’s policies and procedures. Employees who have been delegated powers, although not necessarily documented in writing, may also be found to be representatives of the company.

Under the French Criminal Code, Article 121-3, companies may also be prosecuted “in the event of fault of recklessness, negligence or breach of an obligation of prudence or safety provided for by law or regulation” (where the law explicitly foresees it) in circumstances where the company “did not perform normal diligence” in relation to their objectives or functions. This provision of French law can be viewed as a corollary to the English regime of ‘failure to prevent’ offences.

As a result of the above provisions, French prosecutors, in comparison to their English counterparts, generally have a wider group of employees for whom the undertaking of any illegal activity may also result in corporate criminal liability. As such the French legal position on corporate criminal liability appears to be a halfway house between the English and US legal frameworks and may offer some inspiration for the approach that the Law Commission may take in its recommendations, given the limited legal debate in France that has arisen regarding the issue of corporate criminal liability.

Expand the Identification Principle

As Lord Justice Davis noted in Barclays, it “is always open to parliament to draft statutory offences with the position of corporations in mind.”20 Undeniably, there is considerable pressure on the Government to introduce legislation to better reflect the large, modern, multi-national companies that the law is struggling to govern, and the Paper offers first glimpses of the paths which the Government may take.

The Paper offers two visions for the future legislative reform of corporate criminal liability: either the Government expand the scope of failure to prevent offences to include a wider array of corporate wrongdoing, or it seeks to revise the identification principle so as to attribute criminal liability to a broader group of individuals within a business.

This mirrors the position taken by the SFO which has similarly proposed that: (i) failure to prevent offences be extended to other forms of economic crime and (ii) where a criminal offence (e.g. fraud) is committed by an officer or employee, to obtain or retain business or a business advantage for a company or otherwise to benefit the company financially, the conduct would be attributed to the company and the company would be guilty of the substantive offence.21

It seems that reform is now inevitable albeit its form remains unclear. For those interested in participating in the debate, the consultation closes on 31 August 2021. A link to provide responses can be found here: https://consult.justice.gov.uk/law-commission/corporate-criminal-liability/.

Footnotes

1) Chapter 10, Law Commission discussion paper “Corporate Criminal Liability”, 9 June 2021

2) Chapter 1, para 1.7, Law Commission discussion paper “Corporate Criminal Liability”, 9 June 2021

3) SFO v Barclays [2018] EWHC 3055, [2020] 1 Cr App R 28, approving Tesco Supermarkets v Nattrass [1972] AC 153 [1971] 2 WLR 1166

4) Chapter 1, para 1.8, Law Commission discussion paper “Corporate Criminal Liability”, 9 June 2021

5) HMRC, “Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion”, 2017

6) Chapter 2, paras 2.61 and 2.72, Law Commission discussion paper “Corporate Criminal Liability”, 9 June 2021

7) Bribery Act 2010, s 7

8) Criminal Finances Act 2017, ss 45 and 46

9) Bribery Act 2010, s 7(2)

10) Ministry of Justice, The Bribery Act 2010: Guidance about the procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing (2011); HMRC, Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion (2017)

11) Chapter 3, paras 3.24, Law Commission discussion paper “Corporate Criminal Liability”, 9 June 2021

12) E.g. United States v. Potter, 463 F.3d 9, 25 (1st Cir. 2006) (stating that the test to determine whether an agent is acting within the scope of employment is “whether the agent is performing acts of the kind which he is authorized to perform, and those acts are motivated, at least in part, by an intent to benefit the corporation.”).

13) E.g. United States v. Automated Medical Laboratories, Inc., 770 F.2d 399, 407 (4th Cir. 1985).

14) https://www.justice.gov/criminal-fraud/page/file/937501/download

15) E.g. United States v. Rodriguez-Lozada, 558 F.3d 29, 41 (1st Cir. 2009); United States v. Dearing, 504 F.3d 897, 901 (9th Cir. 2007).

16) See Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011)

17) Law n°92-683 of 22 July 1992 amending the general provisions of the Criminal Code

18) Law n°2004-204 of 9 March 2004, in force since 31 December 2005

19) French Criminal Code, Article 121-2

20) SFO v Barclays [2018] EWHC 3055, [2020] 1 Cr App R 28, paragraph 103

21) Lisa Osofsky (Director, Serious Fraud Office), evidence to House of Lords Bribery Act 2010 Committee, 13 November 2018, Q 158.

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