Piercing the Corporate Veil for Criminal Liability?

Thursday 21st July 2022

The Law Commission has set out a series of options which could be taken forward by the Government to reform criminal liability. This would affect corporate entities and their directors/senior management.

Liability:

Companies can be subject to civil and criminal liability separately to their owners and employees by operating under the principle of the ‘corporate veil’.  Directors, and other senior officers, may however make a company liable if they are found to be its “directing mind and will”.

However, in large companies with complex decision-making structures and seemingly endless reporting hierarchies, directors and managers can be further removed from the offending conduct of a company. As such, it’s often easier to attribute criminal and civil liability to small companies which have very few directors or are family-owned. In these cases, it’s often more obvious who the company’s “directing mind and will” is.

The Law Commission has proposed the following options to reform who could make a company legally liable:

  1. a) by clarifying, in law, whose conduct within a company can make a company liable through their actions; or
  2. b) option a, but with the addition that a company’s CEO and CFO would always be considered as the directing mind and will of the company, thus always putting the company in the firing line through their actions.

If either option was taken forward, businesses would need to carefully consider who constitutes ‘senior management’. Along with this, they should consider what actions they can take to safeguard the business from the actions of rogue senior employees.

Offences:

‘Failure to prevent bribery’ and ‘failure to prevent tax evasion’ are already very serious offences that can result in large fines. A company can be found guilty of these offences through an ‘associated person’ – typically an employee or agent, acting for the benefit (or purported benefit) of the company. A company’s only defence is if it can show that it had ‘reasonable prevention procedures’ in place. This reverses the burden of proof from the prosecution onto the company to prove its innocence. In other words, the company is guilty until proven innocent.

The Law Commission has mooted the creation of further ‘failure to prevent’ offences, including:

  • Failure to prevent fraud by an associated person;
  • Failure to prevent human rights abuses;
  • Failure to prevent ill-treatment or neglect; and
  • Failure to prevent computer misuse.

Civil options against companies could also be expanded. These may include an administrative fines regime, actions in the High Court, and reporting requirements for anti-fraud procedures.

Sentencing:

As a general rule, the only option available when sentencing a guilty company is fine. The Law Commission has endorsed the availability of publicity orders in corporate criminal liability cases. This would mean any company convicted of a criminal offence would be required to publicise everything. This would include their conviction, the amount of fine imposed and any details of the offence as specified by the courts.

Currently, publicity orders are rare. However, a move to make them compulsory would have a large impact on public opinion and the reputation of any company convicted of a crime.

 What does this mean for your business?

The next step is for the Government to review the Law Commission’s reform paper. Currently, they haven’t published any timescales. It is vital that businesses keep up to date with changes to corporate criminal liability as any reforms are sure to be accompanied by new requirements.

If you have any questions about the above, our Regulatory experts are on hand to help. Please contact Peter Hampson or Harvey Blake for further information.