Later this year, the Law Commission (”LC”) is expected to publish an assessment of the options to reform the law on Corporate Criminal Liability (“CCL”) in the UK. We anticipate the reforms could have profound implications for directors and officers with the potential for increased regulatory enforcement activity and, in turn, an increase in claims under D&O policies.
Insurers would be well advised to start familiarising themselves with the potential routes to reform in order to ensure that they are prepared for this increased activity and that the wording of their policies properly reflects the legal landscape.
The need for reform?
The SFO has been criticised for its failure to secure significant convictions and those who say the law on Corporate Criminal Liability (“CCL”) is in desperate need of reform include Lisa Osofsky, the director of the Serious Fraud Office (SFO). Ms Osofsky believes the law in the UK makes it “very difficult to hold companies with complex governance structures to account”.
Background to the Review
The UK has been gradually expanding the scope of CCL since the implementation of the Bribery Act 2010 which introduced the strict liability offence of ‘failure by a commercial organisation to prevent bribery’. While it is a strict liability offence (and therefore requires no allegation of wrongdoing by directors), a corporate will be able to rely on a statutory defence where it is able to prove that the business had adequate procedures in place to prevent the offence. This ‘failure to prevent’ model of attaching criminal liability to corporates has the effect of reversing the burden of proof and places the onus on the business to demonstrate why it is not liable. This model was followed by the offence of ‘failure to prevent tax evasion’, introduced by the Criminal Finances Act 2017. The introduction of both offences has sparked lively commentary about the direction of travel of CCL in the UK.
Last year, the debate was reignited when, in his decision in SFO v Barclays [2018] EWHC 3055, [2020] 1 Cr App R 28, Lord Justice Davis was required to consider the current law and the so-called ‘Identification Principle’, the principle that a company can only be made criminally liable by reference to the actions of those representing its ‘Directing Mind and Will’ (“DMW”).
In summary, Lord Justice Davis held that an individual’s mental state could only be attributed to a company where that individual had been given complete autonomy to act on behalf of the company in relation to the relevant function in which the misconduct occurred. The decision was significant because it effectively reversed the perceived willingness of the courts in previous cases, to be more flexible in attributing liability of the actions of more junior officers and employees to the business where those individuals were responsible for undertaking the relevant conduct on its behalf. This reversal is reflected in the LC’s discussion paper.
The options for reform
Amending and formalising the Identification Principle
Some argue that with some fine tuning, for example by incorporating certain aspects of CCL from other jurisdictions, the Identification Principle is capable of being appropriate and effective. For example, in Canada, where an offence requires a particular element of fault, the fault of a member of senior management can be attributed to the company. However, the Identification Principle is a highly fact-specific concept. For this reason, there is a concern that, however it may be augmented, it does not provide enough certainty to businesses as to whether liability for a particular individual’s actions will be attributed to the company. This in turn makes it difficult for businesses to put in place effective systems and controls to manage their liability.
‘Vicarious Liability’
This is the approach in the US where, broadly, a company can be held responsible for the criminal acts of any employee or agent acting within the scope of their position. It is considered unlikely that this approach will be recommended by the LC or adopted in the UK as it removes any requirement to consider whether the person committing the criminal offence has a guilty state of mind (i.e. they knew or suspected what they were doing was wrong but proceeded to do it nonetheless). This is a key element in most criminal offences in the UK.
The ‘Failure to Prevent’ Model
Perhaps the most likely recommendation to be made by the Law Commission will be to expand the scope of the ‘failure to prevent’ model to include all economic crime (which could include offences such as fraud, false accounting, money laundering and insider dealing). Proponents of this model, which like the other failure to prevent offences referred to above, would include a statutory defence that the company had ‘adequate procedures’ to prevent such criminal behaviour, argue that it is the only way to drive cultural change within businesses and ensure that a company’s compliance department take CCL in respect of wider economic crime seriously.
However, critics of this approach argue that it is wrong to criminalise entities that operate only through their officers and employees in order to encourage a greater culture of compliance, something which could be achieved by appropriate civil, regulatory rules processes and sanctions.
Whatever the LC’s recommendations, most expect that they will lead to the reform of CCL in the UK.
Implications for Insurers
Although the ‘targets’ of these reforms are undoubtedly companies themselves, whatever the route of attribution, it can only be achieved by reference to the criminal conduct (including a criminal state of mind) of individuals. For that reason, any reform which on its face makes it easier for the SFO and others to pursue companies, will also mean a greater spotlight is shone on culpable individuals, making it more likely that investigations and charges will necessarily be pursued against the individual directors and officers and senior management.
As more details are released as to the proposed reforms, Insurers will need to consider whether their policies extend cover to all individuals who might then be relevant when a company is facing charges for CCL – the broad definitions of Insureds may need revision. In relation to Side-C cover in particular, Insurers will also need to consider whether the language governing attribution of knowledge reflects any amended laws. If the reforms expand the ‘failure to prevent’ model to may include crimes that require the offender to have acted dishonestly then conduct exclusions may also need to be considered.
Details of the Law Commissions project can be found here.
