Legislative reforms could make it easier for the government to prosecute companies

The UK Government is preparing to receive a series of recommendations that will change the way prosecutors hold UK companies to account when those companies break financial laws. We discuss why those changes are needed, and what they could mean for corporate entities in the UK and beyond.

The government is set to consider developing a range of new legislative powers designed to make it easier for corporate entities to be prosecuted in court — and no matter which direction the government ultimately takes, it’s going to have major implications for UK company owners.

At the end of August, the Law Commission wrapped up a three-month consultation on existing rules that can attribute criminal liability to UK companies based in England and Wales. The Law Commission is an independent body responsible for reviewing UK Government legislation and offering recommendations on potential changes those laws may require.

By the end of 2021, the Commission is then set to produce a paper outlining the results of that consultation — alongside recommendations for the government on how those current rules should be reformed.

This quick guide outlines why reforms are being considered, the various options up for consideration, and what the potential changes could mean for limited companies here in the UK.

Why is the UK Government considering reforms to the law?

Prosecutors have been requesting changes to the law on corporate prosecutions for a long time — but at present, the guidance on how the law actually works is pretty muddled.

Right now, the general rule that UK courts use to attribute criminal liability to a UK corporate entity is what’s known as the “identification principle”.

According to the Crown Prosecution Service (CPS), the identification principle is a regulatory guideline that requires prosecutors to be able to identify and establish a “directing mind and will” (DMW) of a company. From there, it needs to be proven that any corporate criminal liability was committed through that individual’s conduct and state of mind at the time of the offence.

Translation: in order to prosecute a company for breaking the law, law enforcement officers or regulators would need to be able to implicate at least one specific individual (or a specific group of individuals) in any case of wrongdoing.

Generally speaking, the so-called DMW of a company is going to be either a director or an executive officer.

But in large corporations, these individuals are rarely responsible for making day-to-day decisions in how the company is run. Because many financial crimes can trace their origins back to the day-to-day running of a company, it’s pretty difficult for prosecutors to implicate company directors of corporate wrongdoing.

At big corporations, authority over most decisions is often retained by the wider board or delegated to a group of multiple individuals in a committee — and so it’s hard to prove company directors knew anything about any lawbreaking.

That being said, the identification principle can be disproportionately used against small limited companies with relative effectiveness. After all, company directors are more likely to be involved in the practical decisions being made at small limited companies — which means it’s a lot easier for prosecutors to attach a name to any implications of wrongdoing.

It’s important to note that there are a few exceptions to the identification principle, though.

For example, there are offences like “failure to prevent bribery” and “failure to prevent the facilitation of tax evasion” in which prosecutors aren’t obligated to identify just one individual or group when going after a corporation. The same can be said if a company is found to be in breach of consumer protection laws, health and safety laws, or environmental rules.

Last year, the UK Government admitted there were too many inconsistencies around the identification principle — particularly concerning economic crimes. That being said, lawmakers also agreed there wasn’t a clear consensus in terms of what corporate liability offences would need to be introduced if the CPS were to ever drop the current identification doctrine.

That’s where the Law Commission’s reform consultation comes in.

What are the options the Law Commission has recommended?

The short answer is: we don’t know yet.

Now that the Law Commission’s summer consultation has come to an end, the group is expected to present its recommendations to the UK Government at the end of 2021.

But in the meantime, it’s possible to get a rough idea of what those recommended law changes may be by sifting through the Law Commissions June discussion paper which set out the core questions which the consultation wanted to answer.

First and foremost, the consultation set out to establish whether the identification doctrine is currently fit for purpose when it’s applied to companies of different shapes and sizes. At this point, it seems evident the doctrine is not fit for purpose — but the consultation sought the views of companies and lawmakers for their own opinions.

Next, the consultation raised a question over the option to impose vicarious corporate liability in instances of wrongdoing. In that case, a company would be considered criminally liable for the acts of any of its employees — and it’s already used to fine companies under certain US federal law.

If this precedent were to be extended to financial crimes, however, it could dramatically assist prosecutors in tackling corporate financial crime on a larger scale.

Another option that was up for discussion is to simply amend the identification principle. The CPS definition could be extended to include senior management, or by allowing fault to be attributed to a company in which the existing corporate culture in some way tolerated, encouraged, or otherwise led to regulatory non-compliance.

Finally, the consultation raised questions over expanded regulatory powers. That’s why one potential option up for consideration might be to expand legislative powers on a sector-by-sector basis. For example, the financial services sector already has a number of sector-specific criminal offences — including the Money Laundering Regulations 2017.

The Law Commission could recommend this same sector-by-sector approach should be applied to other retail, manufacturing, or service industries as and where required.

What do these changes mean for companies?

The Law Commission’s consultation has closed — and so now the organisation will be using feedback from industry to formulate its legislative recommendations, before presenting them to the UK Government.

But in the meantime, there are a number of considerations UK companies should bear in mind as they await the report of the Commission’s findings.

Above all else, limited company owners should take this opportunity to look within, to better understand their existing compliance burden. Stakeholders must take stock of the legislative rules that apply to the company already, who is accountable for regulatory compliance, and any risks to non-compliance.

In terms of economic crimes, it’s also worth identifying any existing gaps in accountability and future requirements for regulatory guidance.

After the Commission unveils its recommendations, there’s a very real chance those recommendations will be transformed into tangible UK law. But any and all new laws have got to include adequate information to help companies comply.

At the moment, it’s difficult to say which route the Law Commission will advise the government to take in terms of simplifying corporate prosecutions. But regardless of how the existing rules will be changed, one thing appears certain: the law is going to change.

That’s why limited company owners have got to keep their ears to the ground and stay up-to-date on any developments in this area. After all, compliance with these sort of laws is absolutely critical — and so this is one area companies can’t afford to mess up.

Want to learn more about corporate liability?

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