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Low prosecution and conviction rates have driven a number of jurisdictions to debate reforms to their corporate liability and accountability laws. Neil Hodge examines what’s going wrong and what shape changes could take.

European countries are beginning to question whether there’s a need to reform their laws around corporate liability and accountability. A quick examination of most EU countries’ lists of convictions against companies for crimes ranging from bribery and corruption to tax evasion shows how sparse these documents can be.

But attempts to enforce existing legislation more aggressively or to introduce new laws to compensate for the gaps in current rules have been mixed. Meanwhile, efforts to change laws to hold companies and their executives to account for criminal behaviour may not be as rapid as first thought.

In late November Swiss voters rejected a proposal to make businesses liable for human rights or environmental violations. Even the Swiss government came out against the plan, worried that it would make Swiss companies liable for the actions of independent suppliers. Another proposal to ban public financing of arms manufacturers was also rejected.

The proposal, known as the Responsible Business Initiative (RBI), sought to allow victims of alleged human rights violations or environmental damage to sue Swiss companies in Swiss courts. The companies would have had to prove they had taken all necessary measures to prevent any harm.

Instead, a more moderate version, which will force companies to report on and strengthen scrutiny of their operations and suppliers overseas – particularly over issues such as conflict minerals and child labour – will come into force in 2021. However, as with the UK’s Modern Slavery Act, there is no criminal sanction attached.

Germany and France are currently debating whether their laws need overhauling, too. In April 2020 Germany released the long-awaited draft of its proposed corporate crime law. This legislation threatens large companies with fines of up to ten per cent of annual global turnover, promises wide extraterritorial scope, and would make individuals culpable for corporate offences.

Currently in Germany corporations cannot be charged in criminal proceedings. As a result, there has been strong criticism of the country’s weak sanctions in light of recent scandals, including the Volkswagen ‘diesel gate’ scandal. 

In 2017 France introduced a new anti-corruption agency under its so-called ‘Sapin II’ anti-corruption law, granting its enforcement agency the power to enter into arrangements akin to deferred prosecution agreements (called ‘Convention Judiciaire d’interet Public’).

In November, a judgment by the Cour de Cassation – France’s highest civil/commercial court – established for the first time that a company that merges with another can be held responsible for criminal acts committed by the pre-merger entity, so long as the merger was completed with the goal of evading criminal liability.

The ruling signifies not only a greater willingness to hold companies to account for wrongdoing, but also a shift away from the need to identify individual responsibility in order to secure a conviction.

Other European countries have also shown a greater appetite to tackle corporate crime. For example, Spain’s corporate criminal liability law came into effect in 2010. The legislation is wide-ranging, has extraterritorial reach, and covers such offences as illegal trafficking, computer hacking and environmental damage, as well as fraud, tax evasion, bribery and corruption. The law also contains ‘failure to prevent’ offences for directors and other individuals.

However, like several other European jurisdictions, Spain’s enforcement record has been patchy. For example, it was only in 2017 – some 17 years after Spain joined the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions – that Spanish prosecutors made their first convictions for foreign bribery against two individuals at Spanish publishing company APYCE, in respect of bribes paid to a foreign public official to win contracts to sell school textbooks.

The winds of change

Jaime Alonso Gallo, a partner in criminal law at Iberian law firm Uria Menéndez, says that ‘large criminal fines are still relatively rare in Europe but there are signs that this is going to change, particularly since there appears to be greater political will to hold companies and boards more directly accountable for their actions’.

Gallo adds that while progress is still slow, people should not confuse the appetite to prosecute companies for wrongdoing with a low rate of convictions. ‘Just because prosecutors cannot win cases – and for a variety of reasons – does not mean that there isn’t a desire to enforce the rules’, he says.

Sonja Maeder Morvant, Co-Chair of the IBA Business Crime Committee and co-founder of Reiser Avocats, says that generally, countries struggle to hold companies and executives to account for criminal behaviour, and that this is due to a number of factors.

Firstly, she says, the schemes underpinning corporate criminal behaviour are often complex, and rely on key specialists to unpick the relevant details from a significant number of documents. Investigations are resource-intensive and not all prosecution authorities are blessed with large budgets and large specialist teams.

Secondly, in many cases the facts will have large international components, sometimes in jurisdictions that are unwilling to co-operate.

Morvant gives the example of Switzerland, where, if it’s suspected that corruption has been committed at a Swiss-based company, it’s typical that any bribes involved will have been aimed at obtaining business in an overseas market.

‘This means that Swiss prosecution authorities will have to demonstrate that a foreign public official received or was promised an undue advantage to carry out, or to fail to carry out, an act in connection with his official activity which is contrary to his duty or dependent on his discretion,’ explains Morvant. ‘Not only is it very complicated to show this, but without the close co-operation of the concerned state, it is simply impossible.’

Morvant believes that the number of successful corporate criminal liability prosecutions can be improved by better enforcement of existing legislation. And Switzerland has tough sanctions against companies that are convicted. Entities convicted for bribery, for example, are barred from participating in many public tenders.

Switzerland also lacks a good legal basis for a plea bargain – such as deferred prosecution agreements – which means that entities and persons cannot come to the negotiating table if wrongdoing has occurred, and thereby jeopardise their whole business if they have engaged in illegal practices, says Morvant. 

The UK – which is under pressure because of its own chequered enforcement record against large companies – is also looking at ways of improving corporate accountability. In November the UK government asked the Law Commission, the body responsible for legal reform, to draft proposals for reform of corporate criminal liability laws.

It’s not a new discussion. In 2012, then director of the Serious Fraud Office (SFO), David Green, complained of the inadequacy of the UK’s legal framework in tackling corporate fraud.

His successor – the current SFO Director Lisa Osofsky – has also been vocal in her calls for reform to both the law and the legal process around investigations.

In recent years attempts to push for change have repeatedly fizzled out. Former UK Justice Secretary Dominic Raab announced plans to overhaul the legislation in 2016, but these did not progress.

The following year the Ministry of Justice launched its Call for Evidence on Corporate Liability for Economic Crime, which produced no clear consensus. The government now hopes the Law Commission can do better. It’s due to publish its list of options later in 2021.

Obstacles to prosecution

The law around corporate liability is considered one of the biggest obstacles to tackling economic crimes in the UK. Although companies can be convicted of bribery and tax evasion under a ‘failure to prevent’ offence in UK law under the Bribery Act 2010 and Criminal Finances Act 2017, it is far harder to secure corporate convictions in other financial crimes, including fraud, because prosecutors must identify a ‘directing mind’ – usually a senior executive – to hold it criminally liable.

David McCluskey, a consulting partner at law firm Taylor Wessing, says that the so-called ‘identification principle’ to determine the organisation’s ‘directing mind or will’ has been progressively narrowed over the years, so that ‘conviction on that basis, particularly in relation to large multinationals, has gone from being very difficult to all but impossible’.

‘This narrow interpretation works both ways,’ says McCluskey. ‘Companies can thus avoid prosecution despite criminal behaviour by a senior individual that benefits the company, while admission of liability by a corporate is seldom accepted by an individual who ought to bear responsibility for such behaviour and who insists on their right to have a case fully proven against them,’ he says.

McCluskey adds that, in the UK, there’s no doubt that the current rules on corporate criminal liability are poorly suited to their task. ‘Common law principles on corporate liability for individual criminal behaviour have been interpreted almost out of existence and are all but useless other than in respect of small, owner-operated companies.’

Consequently, attempts in recent years to mount prosecutions in this space have resulted in some high-profile failures for UK enforcement agencies.

The UK’s introduction of deferred prosecution agreements was meant to improve corporate accountability. But McCluskey points out that while several companies have finalised such deals with the SFO and cooperated with prosecutors, individuals charged with corporate offences (so far) have walked free from court. This could indicate an issue with the standard of proof being too high.

McCluskey believes that attempts to push a strict regulatory liability regime may only result in convictions against smaller companies that cannot afford the levels of compliance spend that larger corporates can afford. As such, large companies with large budgets would be able to – technically – cover themselves more effectively.

Instead, he says ‘a better route would be to strengthen and simplify the vicarious liability regime to make companies liable for acts of their employees committed in the course of their employment and with the intention of benefiting the company’ – bringing the UK more in line with the US.

What the US gets right – and where the UK can improve

Indeed, the US is widely recognised as having a much better record for holding companies and executives criminally liable than its European counterparts. For example, between 2008 and 2018, the US imposed nearly £3bn in criminal fines on New York-based banks and a further £6bn in regulatory penalties. By comparison, the UK imposed just £260m in regulatory penalties on London-based banks.

In respect of the FOREX and LIBOR rate-rigging scandals, US prosecutors managed to obtain £3.4 billion in criminal fines from 12 banks.

The US also has a more effective system to induce companies to self-report corporate crime in exchange for plea deals and reduced sentences/fines. Indeed, fewer than five per cent of corporate criminal cases go to trial, with the vast majority resulting in guilty pleas.

The UK Parliament’s Treasury Select Committee said in March 2019 that multinational companies currently appear beyond the scope of UK legislation designed to counter economic crime.

It’s a point that Ruth Paley, Website Officer of the IBA Criminal Law Committee and a legal director in the Corporate Crime and Investigations team at Eversheds Sutherland, agrees with. ‘Until we implement a bribery/tax evasion style “failure to prevent” offence for economic crime, the low prosecution and conviction rates are likely to continue,’ she says.

‘Existing legislation does not make a good fit for holding larger corporates to account. The current corporate criminal liability framework seems to favour enforcement against small and medium enterprises over larger entities,’ says Paley.

She says that under the present system, the identification principle requires a ‘directing mind’ to be identified in order to enforce against the corporate. This has the result of incentivising poor governance, and encouraging senior management to turn a blind eye to wrongdoing in order to shield the corporate body from criminal liability.

‘The lack of a level playing-field and the perceived unfairness this creates has been a recurring issue for many commentators, and the lack of success in holding larger companies to account seems to bear this out,’ she says.

Paley says that existing legislation in the UK is a ‘mixed bag’ and believes that there is a distinction to be drawn between the legislative obligations on regulated versus non-regulated sector businesses.

According to Paley, the UK government has previously excused the decision, for example, not to introduce a ‘failure to prevent’ money laundering criminal offence on the grounds that there are – apparently – no regulatory gaps for money laundering following UK financial services regulator the Financial Conduct Authority’s (FCA) introduction of the 2017 Money Laundering Regulations (MLR) and the Senior Managers Regime (SMR). The latter is a scheme aimed at holding key personnel in a company directly accountable.

However, she adds, ‘while it is correct that the UK has implemented a robust regulatory framework to govern the behaviour of regulated sector firms and senior individuals, including criminal penalties for breaches, this isn’t a substitute for corporate liability for criminal breaches of primary money laundering offences under the Proceeds of Crime Act (POCA)’.

The maximum sentence for a breach of the MLR is two years’ imprisonment. Set against penalties under POCA – which allow for up to 14 years’ imprisonment for a primary money laundering offence – the MLR offences, whether in respect of corporates or individuals, are ‘plainly viewed as a minor criminal offence’, says Paley.

‘The MLR criminalises a lack of proper governance of money laundering risk, whereas a failure to prevent offence would criminalise the failure to prevent economic crime; the two are easily distinguished and the former cannot substitute for the latter’, she says.

Paley believes there’s definitely a case for better enforcement of the existing regulation. She recently made a freedom of information request which reveals that the FCA has not yet brought a single prosecution under the MLR and has only two live investigations currently ongoing into MLR breaches with a criminal element.

Paley concedes that ‘even if the existing framework were better used, it would not catch the non-regulated sector and the gaps exposed by the recent spate of failed prosecutions would remain to be filled’.

Better enforcement

Many lawyers believe that enforcement not only depends on the effectiveness and clarity of the laws being enforced, but the resources enforcement agencies are given. In general, their budgets and staffing numbers are never enough.

Oliver Cooke, an associate in the commercial dispute resolution team at law firm Penningtons Manches Cooper, says that while new legislation could be an important enabler for a greater number of corporate crime investigations, prosecutions and convictions, ‘it would only be of limited use unless law enforcement and prosecutorial agencies are given the necessary resources to detect and deal with it’.

‘Without increased finances, specialist personnel, and new technologies, it is hard to see the situation changing materially,’ adds Cooke.

One way round this, says Gallo, is closer international cooperation between national enforcement agencies to see justice done. For example, in January 2020 prosecutors from France, the UK and the US worked together to agree a deferred prosecution agreement and global penalties of over $3.9bn for a bribery scandal that saw European aircraft manufacturer Airbus use third-party partners to pay bribes for contracts in 20 countries around the world.

This was the world’s largest global resolution for bribery, and, according to Gallo, ‘shows that European prosecutors are prepared to work together – and with other agencies worldwide – to tackle serious corporate wrongdoing if they need to’.