United Kingdom: A new, more American world?

Author: | Published: 1 Apr 2009
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Assumptions that might previously have been made about the relatively low risk of a criminal prosecution of a company in the UK require re-evaluation. We are living in unprecedented economic times. Whether what is already a recession turns into a longer-term depression remains to be seen. However there can be little doubt that recent events will cause policy makers to re-consider whether corporate behaviour can be adequately sanctioned under existing regulatory regimes and criminal law. It is expected that we will see a movement away from the so-called light touch approach and that new laws will be passed to tighten regulatory regimes and criminal offences. Any move to strengthen regulation and the criminal law will not be without recent precedent as there is already a trend towards more enforcement action against companies.

Another product of the adverse economic climate will be increased scrutiny and the re-examination of existing business processes. In some instances that re-examination may expose practices which, when looked at afresh, are questionable and it may also identify previously undetected fraud perpetrated on the company by employees or outsiders. For example, an expansive, entrepreneurial attitude and pressure to produce results in the good times may have led to a culture that encouraged corner-cutting or where, in an effort to appear to be achieving targets, results were massaged. Warren Buffett's comment that it's only when the tide goes out that you learn who's been swimming naked has been much quoted in recent months for good reason. There have also been predictions by the forensic accounting and fraud investigation arms of Big Four accountancy firms that harder economic times will cause an increase in fraud. In February 2009 KPMG reported that fraud cases in 2008 were at the highest level since 1995, while commenting that they expected more fraud to come to light as the effects of the credit crisis were felt more fully.

Keeping out of the firing line

No system of controls can ever reduce risk to zero. However there are some steps that companies can take to help manage and reduce risk.

  • Assess the risks of your business model and the markets in which you operate.
  • Have clear lines of responsibility for compliance with law and regulation.
  • Have and promote a corporate ethics policy appropriate for the risks you face.
  • Have a compliance programme that sets the tone from the bottom to the top and is more than mere lip service.
  • Promote compliance and ethics as the only route to long-term business success.
  • Don't ignore warning signs of problems if they emerge.

The historical and comparative context

It is settled English law that a corporation is, broadly, in a similar position to a natural person in respect of liability for criminal offences. A company can be convicted of common law and statutory offences, including offences that require a mental element, although certain offences, for example bigamy and dangerous driving, are apparently impossible for a company to commit. Despite this general position, even well known English criminal prosecutions relating to corporate activities (such as Guinness/Distillers, Blue Arrow and Independent Insurance) have tended to be brought against individuals rather than their employers. The reason for this in many cases may well be that relevant offences require proof of the defendant's state of mind (for example, dishonesty or an intent to make a gain). Proving a company's state of mind is notoriously difficult, as it requires the prosecution to identify an individual as the "directing mind and will" of the company in respect of the relevant activity and to attribute that individual's state of mind to the company. In circumstances where an individual is capable of prosecution in his or her own right, there is little incentive for the prosecution to take on the additional burden of also seeking to prove that the person was the directing mind and will of their employer so as to obtain a conviction against the company.

By contrast, in the US corporations are frequently subject to criminal investigation and individual directors are also often pursued in their personal capacity. In addition to the criminal investigation there is often an applicable regulatory regime, for example the one enforced by the Securities and Exchange Commission (SEC), which conducts a parallel investigation. The US authorities have a tried and tested method of dealing with corporate scandals using a range of tools and tactics. Their approach often results in the defendant corporation agreeing to large financial penalties (some examples of which are given below). By threatening the corporation with criminal prosecution in a system that allows sophisticated plea bargaining, the US authorities come to a relatively swift settlement of criminal charges against the corporation. This can be achieved through a so-called deferred prosecution agreement, approved by the courts, by which the corporation agrees to modify its conduct in certain respects (including in some cases by accepting the imposition of injunctions restraining certain conduct), to submit to a degree of monitoring, to pay fines or penalties and to disgorge illegitimate revenues or profits.

In addition, the US authorities will also require the corporation to give wide-ranging co-operation to their efforts to pursue individual directors and employees. Credit is given for the degree of co-operation the corporation provides to the authorities. The prosecution is, in return for all of the promises of the corporation, deferred for a certain period during which time the corporation is at risk should it fail to live up to the promises it has made in its agreement. This model of persuading the corporation to co-operate fully with the investigation rather than seek to fight, to come to a settlement and to assist in going after former directors and employees is highly effective.

The potential impact of such US investigations can be demonstrated by a number of recently reported corporate cases. In December 2008, Siemens paid well over $1 billion in fines, penalties and disgorgements to US and German prosecutors and to the SEC in connection with corrupt business practices overseas. In January 2009, Lloyds TSB entered into a deferred prosecution agreement and agreed to pay $350 million in fines and forfeitures in connection with allegations of breaches of US sanctions legislation. In February this year, Halliburton and its former subsidiary Kellogg Brown & Root (KBR) agreed to pay $579 million in fines and penalties in connection with bribes said to have been paid in connection with business in Nigeria. Also in February of this year, UBS entered into a deferred prosecution agreement and agreed to pay $780 million in fines, penalties, interest and restitution in connection with allegations of illegal promotion of US tax evasion schemes.

As mentioned above, it is often a feature of the approach that the corporation's assistance in pursuit of individual directors or employees will be required as a term of the settlement. For example, the Halliburton/KBR Nigerian corruption case described above also involved the prosecution of the former CEO of KBR, who now awaits sentencing. In a related development two British nationals allegedly involved in these matters were arrested in the UK in February 2009 and are subject to extradition requests from the US authorities. The UBS case also involved the prosecution of individual UBS bankers.

The absolute level of fines and penalties is, of course, only part of the picture. The costs and expenses of dealing with the investigation and any remedial action, the reputational damage to the company, the destabilisation of management (which might well include senior management departures), adverse market reaction reflected in share price falls and the possibility of associated civil claims, all have to be factored into the assessment of the damage done to the company by the scandal. This is as true in the UK as it is in the US.

New UK laws and a culture of enforcement

Despite, or because of, the lack of a track record of vigorous enforcement against companies, there have been a number of initiatives in the UK in recent years designed to step up enforcement efforts.

Legislative initiatives of particular relevance to companies have included the establishment of the FSA, new criminal offences in the Enterprise Act 2002 for cartels, simpler fraud offences in the Fraud Act 2006, the implementation of the Corporate Manslaughter and Homicide Act 2007 to make prosecution of companies that cause deaths far easier, strengthening of the anti-money laundering regime by the Proceeds of Crime Act 2002 (POCA) and the creation of asset recovery and other powers in POCA and the Serious Crime Act 2007.

In addition to these legislative changes, there have been a number of practical developments, particularly in the last year or so, which suggest a changing landscape. There is evidence that the level of fines or civil penalties and disgorgements levied against companies in the UK is increasing. For example, in mid-2008 Severn Trent Water was subjected to a fine of £35.8 million ($49.3 million) by its regulator, Ofwat, and a fine of £2 million was imposed in a prosecution by the SFO in respect of the supply of false data. Fines and penalties imposed by competition regulators are also often on a par with those in the US. For example, in 2007 British Airways was fined £121.5 million by the OFT in the UK and around £148 million by the US Department of Justice in connection with allegations of the illegal fixing of long-haul fuel surcharges. Long prison sentences under the criminal provisions of the Enterprise Act have, for the first time, been passed on individuals involved in cartels. Three UK businessmen received sentences of up to three years at Southwark Crown Court in mid-2008 for their roles in a cartel in the marine hoses market. Two were also subject to asset confiscation orders totalling £1 million.

There has also been change at the Serious Fraud Office (SFO). Not long after Richard Alderman became Director in April 2008, an independent report into the workings of the SFO was published. Although this had been commissioned before his time, it cannot have made comfortable reading for the new Director. It drew unflattering comparisons between the SFO and its US equivalents, which were said to achieve far higher conviction rates more quickly and using fewer resources. In response, Alderman has launched a Transformation Programme aimed at modernising the SFO. The FSA has also been enhancing its enforcement capability, including the appointment on March 9 2009 of a new Chief Criminal Counsel.

Another practical change has been an increased understanding and acceptance of the money laundering notification and consent regime under POCA. This has led to companies making self-reports of suspicious activities, whether their own or others'. Whether this will provide a valuable source of intelligence for law enforcement is uncertain.

The primary focus of the authorities' efforts in enforcing corporate criminal liability appears to be overseas corruption cases, although there are other active cases at the SFO including an investigation into Torex, Iraq sanctions (Oil for Food) and recently announced investigations into Madoff's London operations and AIG Financial Products. In addition to cases being investigated by the SFO, the FSA is active in examining allegations of market abuse and insider dealing and activity by the OFT in pursuing cartels is likely to continue.

As regards overseas corruption cases, the Al Yamamah/BAE Systems investigation attracted a great deal of publicity particularly as regards the SFO's decision to discontinue that investigation on national security grounds. Compliance with the UK's obligations under the OECD Convention was called into question and the decision to discontinue the investigation drew criticism from the OECD itself as well as being challenged in judicial review.

The unsatisfactory state of the law on corruption generally was also highlighted by a Law Commission report in November 2008, which concluded that the present corruption laws are outdated and, in some instances, unfit for purpose. The Law Commission has made a series of proposals for new offences, including a corporate-only offence of negligently failing to prevent bribery by an employee or agent. This is designed to sidestep the "directing mind and will" obstacle to a corporate criminal prosecution. A Bribery Bill, based on the Law Commission's recommendations, is due to be brought before the UK Parliament this year.

Despite these difficulties, the SFO is pursuing, arguably more vigorously, investigations of possible corruption offences. As of January 2009 the SFO reported that it had 19 corruption cases under investigation, had an increased budget of £10 million a year dedicated to corruption and had upped its team in that area from 60 to 100. Recently there have also been two important corruption-related cases, albeit not cases where criminal prosecutions were brought.

In the Balfour Beatty case, reported in October 2008, the SFO made the first use of powers given to it by amendment to the Proceeds of Crime Act 2002 to obtain a civil recovery order (CRO). A CRO is a statutory civil claim in the High Court by the SFO to recover property that is or represents property obtained through unlawful conduct. There is no requirement that the defendant to a CRO claim has been convicted of, or charged with, the offence representing the alleged unlawful conduct and it is therefore a free-standing claim. Balfour Beatty agreed to pay £2.25 million and costs in settlement of the claim to a CRO. The alleged unlawful conduct was a failure to keep adequate accounting records under the Companies Act, as a result of "irregular payments" in relation to a contract overseas. It is notable that the SFO chose to proceed with a civil claim (and thus a lower standard of proof) rather than a criminal charge. Credit was given to Balfour Beatty for having self-reported the problem in the first place, for having provided co-operation during the investigation and for agreeing to a compliance programme, including external monitoring, aimed at preventing a repetition of the problem. In many ways this looks like a US-style approach to enforcement. The use of civil penalties and pursuit of books and records offences have long been very effective tools in the US prosecutors' kitbag.

The other case was brought not by the SFO, but by the FSA. Aon Limited, the insurance broker, accepted a financial penalty of £5.5 million from the FSA in connection with breaches of the FSA's Principle 3 by failing to organise and control its affairs responsibly and effectively with adequate risk management systems. The failures concerned a lack of controls to counter the risk of payment of bribes through overseas third parties in connection with winning business in high-risk jurisdictions. Payments made to these third parties were subsequently identified as suspicious.

The Aon case bears a number of similarities to the Balfour Beatty case in that there was no prosecution of any criminal offence but rather the use of another tool to secure a result. Aon appears to have benefited, as did Balfour Beatty with the SFO, from co-operating and entering an early settlement as it received a 30% discount on the penalty it would otherwise have received. Recognition also appears to have been given for having identified the problem itself and then self-reported under the money laundering regime, for co-operation with the FSA, for having demonstrated the seriousness with which its was treating the issue and for having taken steps to remedy defects in internal controls.

In addition to these two developments, a specialist Overseas Anti-Corruption Unit of the City of London Police has been established. It obtained the first convictions for overseas corruption in late summer 2008 in respect of approximately £83,000 of payments made by a British company in connection with a contract in east Africa. The director of the British company and the African recipient of the bribes were both convicted.

The future

The Balfour Beatty and Aon cases are the clearest evidence yet of a new approach to corporate criminal liability in the UK. Richard Alderman of the SFO has sought to explain this new world in a number of speeches. His vision is remarkably similar to the US model of investigation and prosecution. He expects companies to self-report and then to co-operate with the SFO's investigations. He expects to examine the remedial steps being taken by the company to address the causes of the problems it has uncovered. He intends to review the role of individuals involved in the problem, irrespective of the investigation in to the company. He wants to use CROs in more cases and is talking of using Serious Crime Prevention Orders (another tool given to him by recent legislation and effectively a criminal injunction) in appropriate cases. He is interested in a detailed plea-bargaining regime being introduced in this country and in the use of deferred prosecution agreements. He has emphasised liaison with other law enforcement and regulatory authorities in this country and internationally. Hector Sants of the FSA said in a speech on March 12 2009 that a principles-based approach to regulation would be abandoned and that "There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA". All of this adds up to an enhanced enforcement landscape.

In addition there are legislative measures afoot beyond the Bribery Bill. The Law Commission's Corporate Criminal Liability review is due in late 2009 and may make proposals that lead to easier prosecution of companies. The proposed corporate offence of negligently failing to prevent bribery by an employee or agent is perhaps a foretaste of the sort of approach that might be adopted.

There are, however, sceptics calling for a more radical overhaul of the existing law enforcement arrangements in this area. In an article in The Times on February 23 2009, Sir Ken Macdonald (Director of Public Prosecutions between 2003 and 2008 and therefore somebody with a valuable perspective on the system) called for "a new financial regulatory and law enforcement authority that inspires respect and, when it's needed, fear" in place of "the failed Financial Services Authority and the embattled Serious Fraud Office". He also called for a reassessment of the priority of law enforcement away from anti-terrorism type laws and for "a few more laws to confront the clever people who have done their best to steal our economy."

Whether the tough talk from the SFO and FSA translates into results sufficient to satisfy the likes of Macdonald remains to be seen. However, there is no doubt that the world of corporate criminal liability is changing fast. Companies that fail to appreciate that reality are more likely to find themselves defending criminal charges than those who recognise the new world order.

Author biography

Jonathan Cotton

Slaughter and May

Jonathan Cotton became a partner in the dispute resolution group at Slaughter and May in 2004, having trained and practised at the firm since 1994. He has acted on investigations and disputes in a broad range of sectors, including telecoms, investment banking (such as derivatives), investment management, heavy manufacturing and natural resources and fast-moving consumer goods. Cotton is particularly interested in corporate criminal liability and has acted on many internal investigations and fraud cases, both domestic and international. He has extensive experience of the money-laundering regime and has advised in many cases where overseas corruption and unethical business practices have been uncovered.

Email: jonathan.cotton@slaughterandmay.com