Corporate criminal liability rises in UK with new failure to prevent offences

Criminal liability for UK companies is rising with the introduction of ‘failure to prevent’ offences, which introduce unlimited fines and could be seen as a move towards US-style corporate liability, a D&O legal expert told Commercial Risk. There has been an increased push to broaden corporate criminal liabilities in recent years for ‘failure to prevent’ criminal activity, according to James Cooper, partner at Clyde & Co. The failure to prevent approach creates direct liability on the part of the corporate. It avoids the difficulty associated with securing a criminal conviction against a corporate body, namely the need to establish that the wrongful acts of individuals can be attributed to the corporate via the identification principle, or the ‘controlling mind’, he explained. “The failure to prevent model instead places an onus on the organisation to put in place adequate or reasonable policies and procedures to ensure that the potential for offending is reduced. As such, any expansion of the failure to prevent offences could be seen as a move towards the wider breadth of US corporate liability,” Cooper said. Failure to prevent offences have been included in several recent pieces of UK corporate governance-related legislation, starting with the Bribery Act in 2010 and then more recently the Economic Crime and Corporate Transparency Act 2023 (ECCTA), which received Royal Assent on 26 October 2023. According to Cooper, the ECCTA reforms the ‘identification principle’ for specified economic crimes. This provision came into force on 26 December last year. “In order for a company to be held criminally liable, a prosecutor must prove that the individuals involved in the crime represent the ‘directing mind and will’ of the company so that the individuals’ actions can be considered those of the company. This is known as the common law ‘identification doctrine/principle’ and is very difficult for prosecutors to establish, especially in larger organisations, and has led to criticism and a low number of corporate convictions,” said Cooper. A prominent example of the legal and evidential difficulties faced by prosecutors using the identification principle is the 2018 case brought by the Serious Fraud Office (SFO) against Barclays, where its CEO, CFO and two executives were alleged to have conspired to pay sums disguised as commissions under an advisory services agreement to Qatari investors. The SFO’s prosecutions failed because the CEO and CFO were found to not hold the ‘directing mind and will’ of Barclays, as they lacked the authority from the full board committee to conclude the relevant agreements. Now the ECCTA says that liability can be attributed to a company for economic crime offences if a senior manager, acting within the actual or apparent scope of their authority, commits or attempts to commit a relevant offence as set out in regulation, Cooper explained. If convicted, an organisation can receive an unlimited fine. The new ECCTA offence and reform of the identification principle, together with new investigative powers for the SFO, increase the prospect of investigations into individuals and UK companies, said Copper. This is in turn may result in more claims for pre-investigation, investigation and defence costs under D&O insurance, he added. “Insurers will therefore need to be clear on the trigger for these covers and their scope, as well as the applicability of relevant exclusions, such as the conduct exclusion, the reimbursement provisions and the insurability of fines and penalties,” he continued. Investigations and prosecutions can be “eye wateringly” expensive, said Cooper. “Even if a prosecution is not mounted, the preceding investigation can result in an incredible drain on resources and time for organisations,” he said. The failure to prevent fraud offence and reform of the identification principle represent an increase in exposure for companies, he stressed. However, the impact assessment prepared by the Home Office indicates that prosecutions are likely to be limited in number. The offence only applies to large organisations so the majority of companies are out of its scope. “The impact of the legislation will depend, in part, on the appetite of prosecuting authorities to bring investigations and pursue convictions. Given the failures of the Serious Fraud Office in recent years and the considerable resources needed to bring a successful prosecution, it may be that, in practice, the risk is not high,” he added. That said, the SFO has been given new and improved investigatory powers, plus the UK government has signalled its intent on reducing fraud. In addition, both the SFO and Financial Conduct Authority’s business plans have emphasised their focus on tackling fraud, with the FCA in particular keen to ensure that firms have the proper systems and controls in place or face the consequences for failures. “As a consequence, it is imperative that organisations review their fraud prevention policies and procedures, and ensure that they are suitably strong,” said Cooper. Corporate criminal offences also have a potential knock-on effect for individual directors and officers. As with the Bribery Act 2010 and the Criminal Finances Act 2017, which both contain failure to prevent offences, cases under the ECCTA are expected to result in a Deferred Prosecution Agreement (DPA) between the offending organisation, but not its D&Os, and the prosecuting authority. “Cooperation is key to the DPA process, which may lead to D&Os being subsequently exposed to prosecution. Further, given the reform of the identification principle, the SFO should have fewer hurdles to overcome for successful prosecutions for primary liability. One might also expect more civil claims and/or criminal prosecutions to be pursued against senior management or the ‘associated persons’,” said Cooper. He believes the focus on corporate criminal liability is likely to continue, depending on how successful prosecutions are going forward. In addition, corporate criminal liability is increasingly an international issue. Regulatory and prosecutorial cooperation and “long arm” criminal legislation also needs to be taken into account, said Cooper. Future changes to the UK legal landscape are already on the horizon, according to Cooper. On 14 November last year, the Criminal Justice Bill was introduced into the House of Commons, which seeks to broaden the scope of the identification principle introduced by the ECCTA. The bill makes provision for corporate liability if a senior manager commits an offence while acting in the scope of their actual or apparent authority for all crimes, replacing the provisions in ECCTA, which are confined to economic crimes. “This means that prosecutions for any criminal offences committed by senior managers could be attributed to the organisation, leading to a potential increase in prosecutions,” said Cooper.

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