Enforcing Individual Accountability for Corporate Crime

Posted by

Ian Hare

on 17 Nov 2022

Of the 5 factors the US DOJ stated to tackle corporate crime, individual accountability is a priority. What does this mean, and how does it differ from the UK?

Enforcing Individual Accountability for Corporate Crime

At first sight, defining 'individual accountability' may seem blindingly obvious. It means each employee is responsible for their actions and faces prosecution if they commit fraud, money laundering, bribery or other corporate crime.

Right? Well, yes – and no. We explore individual accountability in the UK and the the US and why changes are urgently needed on both sides of the pond.

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UK individual accountability for corporate crime

Individual accountability law can be opaque and often impenetrable – especially in the UK. Under current UK law, a company has a legal personality and can be prosecuted, as can the individuals responsible.

However, time and again, individuals who have committed a crime on the company's behalf can hide behind the current legal standpoint that holds the company responsible.

The UK's Crown Prosecution Service (CPS) states that enforcing criminal law against corporate offenders will act as a deterrent, protecting the public while increasing confidence and supporting ethical business practices.

It adds that prosecuting companies is not a substitute for prosecuting the directors, officers, employees or shareholders responsible.

While this sounds fine in theory, the UK's Serious Fraud Office (SFO) – the authority that tackles the top level of serious or complex fraud, bribery and corruption – has suffered some monumental courtroom losses.

These defeats have largely been down to the interpretation of a piece of archaic legislation called the 'identification principle'.

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Why the identification principle needs to change

In essence, this 1915 law requires the prosecution to demonstrate the 'directing (or controlling) mind or will' (DMW) was personally engaged in the criminal conduct. Typically, this means the most senior person and/or managers.

However, the narrow definition of directing mind or will in recent cases has made it even harder to prosecute a business successfully. The problem is the sheer size of some of the corporations involved. A century on, the identification principle is unfairly skewed in favour of big businesses.

While today's average small to medium enterprise is likely to have easily identifiable senior, responsible people, many companies are global leviathans where decision-making is far more diverse or collective. Where people can simply claim they knew nothing, the result can leave prosecutors struggling to prove who is culpable.

Examples of the identification principle in practice

In a high-profile case against UK banking giant, Barclays, the SFO charged three executives with conspiracy to commit fraud following the capital investment of billions of pounds by Qatari-owned entities. The case collapsed when the judge ruled the individuals were not the directing mind or will and instead had deceived the true DMW –the Board above them. The defendants were acquitted.

This result and others have led the UK's Law Council to consider urgent reforms that allow a corporation to be convicted for collective negligence even if the negligent person is unidentifiable. These range from creating a raft of new Failure to Prevent (FTP) offences covering abuse, misuse and neglect, to a requirement for companies to publish their anti-fraud policies, publicity orders when someone is convicted of an offence, and monetary penalties.

Global law firm, Cooley, highlighted that the Law Council had rejected a wholesale move to the current US system. This system, Cooley points out, holds companies "responsible for any criminal act committed by any employee acting in the course of their employment with the intention of benefitting the company." Fortunate, they add, for companies currently under investigation.

Cooley's conclusion suggests that the Law Council has missed a trick in failing to mirror the US approach. However, the US is also looking to tighten the figurative noose around those committing corporate crime.

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US individual accountability for corporate crime

The US' outcomes are often no better than the UK's. So-called white-collar prosecutions make up just 3% of federal prosecutions and are down by over 50% compared to 2011. It's also estimated that 90% of white-collar crimes are unreported.

In her September speech, Director Attorney General (DAG) Lisa Monaco signalled the Department of Justice's (DOJ) intent to give companies' Compliance Officers the tools needed to ensure they do the right thing while empowering prosecutors to hold those who don't accountable. It also highlighted individual accountability as the clear priority.

This determination to prosecute people who commit corporate crime, regardless of position, status, or seniority, revolves around a combination of carrot and stick. In short, to speed up proceedings, the DOJ aims to maximise cooperation credit for fast and transparent voluntary disclosure of misconduct and cooperation with investigations. Companies that cause unwarranted or intentional delays will be penalised.

In contrast to the UK Law Council's apparent thinking, this reflects the US' intent to charge individuals simultaneously while resolving matters with the company.

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Multinational & corporate liability

In Global Compliance News, law firm Baker McKenzie explained the legal position applicable to multinationals. Given that UK law recognises a business as a separate legal personality, a foreign parent company is not automatically liable for criminal acts by its subsidiary or the latter's directors/managers.

The reverse also holds true for a criminal act carried out by the overseas parent company. However, all could be criminally liable if elements relating to the offence are proven.

One example of possible interaction between parent and subsidiary, cited by Baker McKenzie, is where criminal proceeds pass from one to the other.

So, if a US subsidiary passed criminal proceedings to its UK parent in the form of company dividends, the latter could be prosecuted for money laundering if they knew or suspected these resulted from criminal acts. Authorities could also seize the proceeds.

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Future of individual accountability in the UK & US

While UK businesses wait for the UK government to consider the Law Commission's paper, US commentators are watching their country's developments with interest.

Though Monaco's speech sets out clear guidelines and empowers prosecutors, the DOJ has typically lacked the necessary resources. Recognising this historical failure, Monaco has asked for targeted resources, including $250 million from Congress for corporate crime initiatives.

According to Reuters, a successful outcome in an individual prosecution will always be more challenging than prosecuting a corporation. Corporations in the UK and US are vicariously liable for their employees which can be included as part of a corporate case.

Individual prosecutors must prove a person both committed the crime and had the necessary intent – a tough task, given past events.

Regardless of the outcomes, it's clear that individual accountability is firmly on law enforcement agendas on both sides of the pond. Given that compliance is set to be placed front and centre when tackling criminal conduct, companies need to be ahead of the game and ensure that when new legislation finally lands, their compliance processes and policies are watertight.

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