The general theory under English corporate law is that civil liabilities could be incurred on behalf of a company by its agents (such as directors/employees). With regards to fraud, the perpetrator must possess the mental state of dishonesty. How does this apply to a company? For small companies where central management are more heavily involved in day-to-day operations, this would make sense, but for large organisations where management are distant from such operations, being charged with a serious crime (particularly in the UK) rarely happens. In the US however, under federal law, companies are subject to vicarious criminal liability if their employees commit crimes for the purpose of benefitting the company – it seems the UK Government is perhaps looking to take a similar approach.
If an organisation meets a certain size and turnover criteria, under the new legislation they would be guilty of an offence if it “fails to prevent” the criminal conduct of an employee, agent, or subsidiary and the intent of the perpetrator is to benefit the company. The offence only applies to corporates, not individuals.
The Government’s intention is to include only those companies that are considered a ‘large organisation’. To be categorised as such under the regime, two or more of the following conditions must have been met at the point of the financial year that precedes the year of the fraud offence:[1]
£36 M+ Turnover
£18 M+ Balance sheet total
250+ Number of employees
Therefore, companies that do not meet the above, will not be in scope for the new regime. Whether this changes in the future, time will tell.
The focus of the legislation appears to be ‘economic’ crime and relevant offences include:
Whether other crimes will be included in the future, remains to be seen.
According to the draft, companies will not however be held liable if they can establish that they had in place “reasonable procedures” to prevent the relevant offence. We are expecting some guidance from the Government as to what those procedures consist of before the law comes into force. However, it is likely the burden of proof of reasonableness will be on the defending company. Each case will likely be fact-specific and the test of reasonableness will likely vary.
The Bill is, at the time of writing this article, at Reporting Stage within the House of Lords.[2] Therefore, it is possible the scope of the legislation may evolve. The draft legislation is also looking at widening the Deferred Prosecution Agreements to include ‘failure to prevent fraud’. This is dealt with in a similar way as for bribery cases.
In the meantime, however, FIs may want to assess their risk exposure to being held liable for fraud, or other conduct by their employees or agents. Stakeholders are likely to scrutinise the proposals to get a better understanding of the scope. We shall see whether this new legislation adds to the regulatory burden for FIs, or whether it is just part of a board’s risk strategy.
The legislation applies to corporates, however it is likely there will be increased scrutiny for individuals. Professional Indemnity insurance is there to protect the company in relation to third-party claims, however Directors’ and Officers’ insurance will likely come into play should claims be brought directly against any senior management. This is indeed the case if they are accused of failing to supervise their employees appropriately. As always, close attention should be paid to the notification provisions under these insurance policies – the trigger for notification is often before the receipt of legal proceedings.
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