Corporate crime reform is never far from the headlines, and interest in this contentious issue has once again reignited.
On September 5 2022, speaking at the 39th Cambridge International Symposium on Economic Crime, Max Hill QC, director of public prosecutions for England and Wales, and Lisa Osofsky, director of the Serious Fraud Office, put their support behind extending the ‘failure to prevent’ model from current bribery and tax offences to further encompass fraud, reviving a decades-long debate around how far corporates should be responsible for the actions of errant employees and agents.
The SFO has come under heavy criticism for its handling of corporate crime cases in recent years, notably in a highly critical independent review published this summer, which examined the organisation’s handling of the Unaoil bribery case.
While reforming the organisation’s institutional independence and document disclosure mechanisms remains a priority, the SFO needs greater legislative firepower to reverse its fortunes. However, is an FTP fraud offence a realistic option for legislators?
Existing FTP framework and identification principle
In 2011, the Bribery Act 2010 introduced the first ‘failure to prevent’ offence in the UK, making it an offence for corporates who fail to prevent “associated persons” from committing bribery. In 2017, the Criminal Finances Act instituted a further FTP offence, making it a criminal offence for corporates who fail to prevent the facilitation of tax evasion committed on a corporate’s behalf.
Despite successive legislative interrogation, the FTP model has never yet been extended to corporate fraud offences. Instead, under the current law, a company is guilty of fraud only if it is proven that the ‘controlling’ or ‘directing mind and will’ of the company (usually its directors) knew about or played a part in the fraud in question – the ‘identification principle’.
The identification principle sets a very high hurdle for prosecutors to meet. Following the Barclays Qatar fraud case, in which the SFO charged the bank with allegedly conspiring with executives in connection with fraudulent “disguised commissions” paid to investors, it was found that in order to attribute the conduct of one or more directors to the company, they must have the requisite status and authority in relation to the particular conduct.
As a result, even a corporation’s managing director and financial director, acting jointly, might not constitute the corporation’s directing mind and will if they do not have authority to engage in the conduct in question.
Law Commission options paper
The possibility of moving corporate fraud offences away from the identification principle and towards the more expansive FTP model has been viewed as a way to both harmonise the powers afforded to prosecutors and to counter the spiralling levels of fraud post-pandemic.
It is against this background that, in June 2022, the Law Commission published an options paper for the government examining the law on corporate criminal liability. While the options paper stops short at proposing a wider FTP economic crime offence, one recommendation proposed extending the FTP model to fraud committed by employees or agents of corporations.
Viability of proposed FTP fraud offence
Whether a FTP fraud offence is viable remains to be seen. The FTP model requires prosecutors to prove the underlying FTP offence in order for a successful conviction. This is a difficult factual and legal exercise, particularly when it comes to proving that corporate executives have acted dishonestly: a nuanced principle, which itself has been the subject of close judicial examination in recent years.
As Osofsky herself stated in her Cambridge speech, most major corruption cases involve an international element. Despite this, the Law Commission stops short of addressing whether the proposed FTP fraud offence should have extra-territorial effect (as is present in the current FTP offences), citing the potential negative impact on investment in the UK where a non-UK company falls within the scope of the offence, as one reason why.
Small-to-medium enterprises are likely to express concerns around the proposals posing disproportionate compliance burdens. To this end, the Law Commission’s options paper proposes a requirement for the government to publish guidance – potentially for specific sectors – on what prevention procedures an organisation might implement.
The future
The Law Commission’s proposals are still at a provisional stage, with no set date for a government review, and no clarity on whether any proposals will be included in the second round of legislation following on from the March 2022 Economic Crime (Transparency and Enforcement) Act. Current endemic levels of fraud, problems with the existing ‘identification principle’, and the SFO’s reputation in major corruption cases show one thing: reform is needed urgently.
Craig Hogg is an associate, and Caroline Timoney is a researcher at Peters & Peters Solicitors
