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Corporate offending: Time to get tough?

29/10/2021

Richard Furlong and Alexandra Scott consider whether the changing mood around corporate offending means it is time to review penalties faced by companies.


The Law Commission’s consultation on corporate criminal liability (touched on previously by our colleagues Charles Bott QC and Vanessa Reid) has led to some interesting discussions about whether the identification principle should be reformed, whether an extension of the ‘failure to prevent’ doctrine used in bribery and tax evasion cases is appropriate for wider economic crime, or whether in fact the civil courts and deferred prosecution agreements (DPAs) are the way forward.

The frequency with which high-level dishonesty is exposed in UK corporates and yet increasingly dealt with by DPAs remains a matter of concern. This fact, combined with the fairly woeful record that UK law enforcement has in prosecuting legal persons, mean that the UK is developing something of a reputation as (in the words of mafia expert Roberto Saviani) the most corrupt country in the world

The Law Commission recognises that under the current ‘identification’ model it can be difficult to hold a large company to account “where responsibility for decision making is more diffuse”.

Much discussion triggered by the Consultation has revolved around the merits of the Australian model of ‘organisational’ corporate liability, which focuses on the ‘culture’ of the corporation – policies, practices and management – juxtaposed with the ‘identification’ model currently in effect in the UK, under which the offences of individual senior employees or officers can be imputed to the corporation in their role as its ‘directing mind and will’.  For the most part, the American model of vicarious liability has not received the same degree of attention, and the issue of the sanctions – financial and otherwise – that flow from any corporate liability has in large part been overlooked in the debate.

Federal Corporate Liability

The approach of the United States to corporate criminal liability has been very much broader than that of the United Kingdom and other common law jurisdictions. Since 1909, federal prosecutors have been able to pursue corporations on the basis of what is known as the “respondeat superior” standard, a different variant of the ‘derivative’ liability system adopted in the UK (N.Y. Cent. & Hudson River R. R. v United States,212 U.S. 481491-95 (1909)).

This allows the prosecution of a corporation for actions of an agent of the corporation ‘within the scope of employment’. The employee’s crime must have been committed with an intent to benefit of the corporation, but may also have benefited (or even primarily benefited) the employee. In contrast to the ‘identification’ model, the employee concerned does not have to be a high-level employee or officer. Likewise, unlike the ‘organisational’ model, policies against such conduct or instructions to employees not to engage in it, do not amount to a defence: the company is nevertheless strictly liable. Whilst this is of benefit to federal prosecutors, individual states sometimes have lower standards of what is called the Model Penal Code requirement that the conduct of an employee be permitted or tolerated by management.

Because the United States has, at a federal level, this supercharged power to prosecute corporations, the US Department of Justice has a bulging bag of tools when it approaches recalcitrant offenders. So, for example, the Antitrust Division’s ‘Leniency Program’ incentivises firms to report cartel behaviour, relying on the inherent instability of cartels. Similarly, the Tax Division incentivises self-reporting and cooperation in relation to tax evasion with corporations operating in the US.  To a degree a parallel can be drawn between this and the way that DPAs in the UK are structured to encourage self-reporting.  Both go some way to altering the attitudes and improving the culture and conduct of corporate entities.

Both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have had major successes in prosecuting and/or recovering funds from offenders under the US equivalent of the Bribery Act, known as the Foreign Corrupt Practices Act. In 2016 in the DOJ’s Enforcement Plan and Guidance, they celebrated the prosecutions of, amongst others: Archer Daniels Midland, Alcoa, Alstom, Dallas Airmotive, Hewlett Packard, IAP, Marubeni, Parker Drilling, PetroTiger, Total, Vadim Mikerin and VimpelCom.

In 2021, following enforcement action by the SEC, Amec Foster Wheeler limited agreed to pay $22.7 million to settle FCPA charges, Deutsche Bank AG agreed to pay more than $43 million in relation to breaches of the same act, and in 2020, Goldman Sachs Group, Inc agreed to pay more than $1 billion to settle charges relating to the 1Malaysia Development Berhad bribe scheme. Figures in the hundreds of millions are not uncommon. Novartis AG paid over $340 million in 2020, Ericsson paid over $1 billion in 2019, Walmart paid over nearly $300 million in 2019 and Fresenius Medical Care $231 million in the same year.

These are staggering sums. The list of successes in the United Kingdom in relation to corporate prosecutions and recoveries in the hundreds of millions of pounds is rather shorter.

The reasons are easy enough to see.  The legal arsenal of the Serious Fraud Office is considerably more limited than that of the US federal law enforcement agencies, with the result that the lawyers defending UK corporates can often negotiate considerably better deals then their US equivalents.

Redressing the Balance

So how to re-balance the situation? The Deferred Prosecution Agreement Code of Practice (§8.3) specifies, following Schedule 17 §5(4) of the Crime and Courts Act 2013, that any financial penalty is to be broadly comparable to a fine that the court would have imposed upon the offender following a guilty plea. This is intended to enable the parties to have regard to relevant pre-existing sentencing principles and guidelines. However, the residual discretion is broad.

Turning to the sentencing guidelines for corporate offenders in the case of fraud, the starting point is based on a calculation of the amount obtained or intended to be obtained. The financial penalty is then calculated as a multiple of that amount: in the most egregious cases of high culpability, at a starting point of 300% with a range of 250% to 400%.

There is an obvious disconnect between the basis of the sanctions for corporate offenders and the penalties faced by human offenders, since human offenders face jail terms which have no corporate equivalent.

However, as Brandeis J noted, in the US Supreme Court in the well-known dissent in Louis K Liggett Co. v Lee (1933) 288 US 517certainly in the US, the right to establish a corporation was something of a privilege:

“The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So, at first, the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided. The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality of opportunity.”

In the nineteenth century, the use of powers of revocation of corporate charters as punishment for corporate offending was relatively widespread in the United States. Taking an international example from the last century, in 1945, the German company IG Farben was seized by the Allies and after the trial of its directors, was split up into BASF, Bayer and Hoechst, although then the shares were handed back to the original owners as the idea of destroying the company was abandoned.

Particularly following the financial crash of 2008, something of a movement developed in the US towards the introduction (or reintroduction) of what has been termed rather hyperbolically a ‘corporate death penalty. Judicial dissolution in the case of particularly egregious offending undoubtedly has a long history, but has fallen into desuetude in recent times as penalties for corporations have (certainly in the United Kingdom) been expressed as a percentage of the gain from offending rather than some percentage perhaps of the turnover or market capitalisation of a company.

Potential problems with judicial dissolution

We recognise that there is undoubtedly in Europe a tension between judicial dissolution as a sanction and bilateral investment treaties which normally have provisions similar to the following:

Investments of nationals or companies of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Party on a non-discriminatory basis and against prompt, adequate and effective compensation” (Source: UK Model BIT)

Under Article 1 Protocol 1 of the European Convention on Human Rights, however, confiscation of the proceeds of crime is a legitimate exception to the right to the peaceful enjoyment of possessions: where a company is guilty of egregious criminality and an independent judicial decision is taken that this warrants effectively dissolution of the company or a financial penalty which has that effect, it is difficult to see that the ECHR or an investor-state tribunal would interfere.

Reform, it would appear, needs to come from the Sentencing Council as well as the Law Commission. In its 2014 consultation on corporate offending, the Council rejected the SFO’s representations that the determinant of the level of punishment should be turnover. The International Chamber of Commerce and various magic circle firms made representations towards reducing the level of penalties, reflected in the Sentencing Council’s ultimate approach.

The problem is that the reputation of ‘UK plc’ has suffered as a result, and perceptions of the buccaneering nature of our private sector (buccaneering being a word which literally derives from piracy) are causing us reputational damage. It is time for another look.

Richard Furlong and Alexandra Scott have a considerable range of experience in advising corporate clients facing criminal investigation.

29/10/2021

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