In the United States, if a lower level employee engages in criminal activity on behalf of the corporation, the corporation can be held vicariously liable for the act of the employee. Vicarious liability is the basis of corporate criminal liability in the United States.

In the United Kingdom, there is no vicarious corporate criminal liability. Prosecutors in the U.K. have to prove that a directing mind – in most cases a member of the board of directors – was involved with the criminality before the corporation can be held liable.

While the U.K. has yet to import vicarious liability from the United States, it has imported deferred prosecutions for corporations. This has led to perverse outcomes such as corporations getting deferred prosecution agreements, the agreements naming directing minds as the culprits, those directors being charged with a crime and then those directors being found not guilty.

Richard Sallybanks has represented such directors at trial. He is a partner at BCL Solicitors in London.

Much of the corporate criminal defense practice in the United States is dominated by alternative resolutions such as deferred and non prosecution agreements. What about in the U.K.?

“For many years, the Serious Fraud Office (SFO) looked enviously across the Atlantic to how white collar cases were investigated and prosecuted and the resolutions that U.S. prosecutors were able to reach with corporates and the eye-watering penalties that corporates would pay,” Sallybanks told Corporate Crime Reporter in an interview last week.

“The question for the authorities was – how can we do something like that? What do they have in their armory that we don’t have? We have seen the introduction of deferred prosecutions in the U.K. as one example of American methods being imported here.”

“We have a different approach to corporate criminal liability than that in the United States. In the U.K., a corporate can only be criminally liable if somebody who is a directing mind of that organization is criminally culpable.”

“The difficulty in the U.K. in establishing corporate criminal liability is that you can’t do it unless you can show that somebody who is effectively on the board of directors of that company was involved. If it was a junior salesman who was paying a bribe for the benefit of the company, while that junior salesman has individual criminal culpability, absent the introduction of a failure to prevent bribery type of offense, the company could not be held criminally liable.”

“And that is where there is a fundamental difference in terms of being able to establish corporate criminal liability – other than offenses which are effectively strict liability, where you don’t require a guiding mind. The failure to prevent bribery offense is a new model of offense to capture corporates.”

“While we have seen the introduction of deferred prosecution agreements in the U.K., which are focused on companies only, that hasn’t overcome the fundamental problem that the authorities have and about which they are frequently complaining – which is the way the law works still makes it very difficult to pin criminal liability on a corporate.”

“Now as a consequence of the introduction of the deferred prosecution process, you have an alternative means of dealing with that problem. Before, you simply had a choice – do I prosecute a company or do I not? Now, the authorities have a choice of – shall I invite the company to enter into deferred prosecution negotiations to try and effectively reach an agreed settlement of their criminal liability?”

“That process was introduced in 2013. It has been used exclusively by the SFO, although other agencies can use these agreements. And it has been used five times so far in the five years it has been open to them. That is probably a reflection of the difficulty the SFO still has as a result of the state of the law.”

“We have seen five deferred prosecution agreements so far. The most significant was with Rolls Royce, as part of a combined settlement with the U.S. and the Brazilian authorities. For the SFO, it included a penalty of 497 million pounds. And that certainly has been the most significant DPA to date. Others have been on a smaller scale.”

“The problem with establishing corporate criminal liability in the U.K., and establishing that a directing mind was involved, is why we have seen the offense of failing to prevent bribery. And we have seen an equivalent offense of failing to prevent tax evasion. And there is pressure to introduce analogous offenses across the financial crime sphere so that the corporate can be held criminally accountable for failing to prevent the offense instead of being prosecuted for the offense itself.”

Is there any public pressure to broaden corporate criminal liability through vicarious liability?

“There is and it is forever in a state of consultation. I fear that it is not a priority for the government at the moment. A lot of government effort in the last three years has been concentrated on something called Brexit and things like enforcement of white collar offenses against corporates is simply not a priority for the government. But it is something that is permanently under consultation. As far as the prosecuting authorities are concerned, they want to see it addressed by Parliament. They want to make it easier to prosecute companies and hold companies accountable. And certainly Lisa Osofsky has been slightly more cautious in what she has been saying of late. Certainly early on in her tenure, she was talking about vicarious liability for companies as it exists in the United States.”

Given the narrow definition of corporate crime in the U.K., does it mean that the focus of prosecutors is individuals more than on corporations?

“It certainly has always been historically focused on individuals. The introduction of the failure to prevent bribery offense has meant more of a focus on corporates. And certainly the introduction of the DPA regime has meant that there is a greater focus on corporates. I don’t think we are seeing a corresponding reduction on the focus on individuals.”

“There is a greater focus on corporates. At the moment, the authorities here would say they are hamstrung in their efforts by the state of the law. The law can be changed to make it easier to make corporates accountable. But they are always going to be struggling because until you can say to a company – we can show that someone who is your directing mind was involved – the company doesn’t have to come to the table to talk. It will say – I have no criminal liability so why should I enter into a deferred prosecution agreement?”

“It is only when the company recognizes itself or can be persuaded by the SFO that it could be prosecuted that there is going to be any motivation to do a deferred prosecution agreement.”

What about general differences you see between the practice there compared to the practice here?

“In the US, you have vicarious liability for corporates and plea bargains. And of course, the speed with which the cases are dealt with – it’s very much quicker in the U.S. than in the U.K.”

“For individuals, we don’t have deferred prosecution agreements or non prosecution agreements. The SFO conducts an investigation of an individual and in the end, they either charge your client with offenses or they write you a very short letter saying – we are not charging your client with anything.”

Is there a sense that there is a double standard there – that corporations get deferred prosecution agreements but individuals don’t?

“Yes. There is a very real risk that a deferred prosecution agreement allows a corporate to buy itself out of a problem and the individuals then are prosecuted for the conduct in a case where the corporate has paid a penalty and entered into a deferred prosecution.”

“In the last two corporate deferred prosecution agreements, the individuals who have been prosecuted for the conduct, they have all been acquitted. That’s not necessarily an inconsistent outcome. The corporate may believe on the evidence presented to it that the best thing it can do is enter into a deferred prosecution agreement as opposed to contest criminal proceedings.”

“The individuals of course fight tooth and nail to establish their innocence. I was involved last year in one such case – a company called Tesco, a major supermarket chain, entered into a deferred prosecution agreement. The allegation was false accounting because the company had overstated its profits by a quarter of a billion pounds. But then when the SFO prosecuted the three directors who they believed were responsible for the profit overstatement – and I was representing one of those three – they were all acquitted. The case didn’t even get to a jury. The judge stopped the case and said – there isn’t enough evidence here for this case to go on.”

“So at the moment, you have the concept of a deferred prosecution agreement as a means by which a corporate can buy itself out of a prosecution. You have pressure that individuals should still be prosecuted because otherwise there is a risk that corporates will disregard the prosecution as just a cost of doing business and individuals won’t be deterred from engaging in the conduct if they don’t think they are going to be prosecuted.”

“The outcome is not great for the SFO. They don’t get the prosecution home. And then everyone says – why did the corporate enter into the deferred prosecution agreement?”

Did the Tesco case significantly weaken the SFO’s position?

“It may mean that a corporate that is negotiating a deferred prosecution agreement may look at what the SFO is presenting to them with a greater degree of scrutiny as to whether it is a case that will stand up to challenge at trial.”

“The problem for corporates in this situation is that in order for them to even get themselves into that deferred prosecution agreement situation, they have had to demonstrate exemplary cooperation with the SFO from the very outset. They may well have self-reported. They will have provided all documentation. They may well have waived privilege over their internal investigation. They will certainly have gotten rid of all of the individuals involved in the conduct so they can demonstrate to the SFO that they are a new and different corporation than the one that was there years ago when the conduct took place.”

“And then when they get themselves into a position to talk with the SFO to reach a resolution, it is unrealistic in those circumstances for a corporation to then say – actually, take us to trail because we think we can win this. That’s another two or three years.”

“It’s much more realistic that the corporate is going to take a commercial view which is — it is better for us to pay a penalty. We don’t have the stigma of a conviction, we pay a penalty and we move on. But the SFO is left with egg on their face when the individuals walk free from court. In the deferred prosecution paperwork, those individuals have been identified as effectively guilty. The individuals in that situation are in a terrible position. They are not involved in the DPA process. They have no insight into what is being agreed. They have no input into how it is being recorded.”

“In the Tesco case for example, you have individuals walking free from court having been cleared from involvement in fraud and false accounting. And yet, in the public domain and incapable of being challenged is an agreement between the SFO and the company agreeing that these people dishonestly falsified the accounts.”

“The SFO must be more cautious in how they document matters within the DPA paperwork with the corporate. But you have the pressure to prosecute the individuals because you need a deterrent. But of late, the SFO has not brought those prosecutions home.

Have there been other similar cases where the individual prosecutions have failed?

“Yes. This summer there was a case against a smaller steel company called Sarclad. There was a deferred prosecution agreement.  They paid a financial penalty. It was a corruption case. The individuals stood trial this summer on the substantive corruption offenses. And they were all acquitted. That doesn’t necessarily mean that the company did the wrong thing in entering into the deferred prosecution agreement at the time that it did. It may have been the best resolution for the company. But we do now have seemingly inconsistent outcomes.”

There must be incredible tension growing between corporations and their boards of directors. It appears as if in these cases, the corporations are throwing the directors under the bus.

“I would agree with that summary. In order for a company to put itself in the best position vis-a-vis the SFO, in an investigation, it has to cooperate from the outset. The die is cast very early on in these investigation. The matter is reported. The executives are suspended then pretty soon dismissed. The company may refrain from conducting too much of its own internal investigation because the SFO once notified and aware are very anxious that any internal investigation shouldn’t trample over the evidence. And so to the extent that as part of its cooperation the corporate has had to step back from conducting the type of thorough internal investigation it might wish to do, it is then presented with the product of the SFO’s investigation. The company is still looking for the best way out and won’t say to the SFO – I don’t want to talk to you. I’ll see you in court if you put up the charges. That is really unrealistic.”

“But there is a real concern on the part of those who represent individuals that the executives are being thrown under the bus. If the SFO has persuaded the company to write a check and enter a DPA on the basis that its directing minds committed a crime, it would be inconsistent for the SFO not then to prosecute the individuals. The SFO may feel that they are damned if they do and damned if they don’t.”

“The Rolls Royce settlement was based on twelve charges, the majority of which were based on directing minds’ liability. While the individuals were not identified, the basis of the corporate acceptance of liability was because its directing minds were liable. Yet, earlier this year, the SFO said – we are not prosecuting any individuals involved in the Rolls Royce case. Then everyone in this practice area said – how can that be? On what possible basis can you not prosecute the individuals?”

[For the complete q/a format Interview with Richard Sallybanks, see 33 Corporate Crime Reporter 41(11), Monday October 28, 2019, print edition only.]