25 February 2020

The Director of the Serious Fraud Office (‘SFO’), Lisa Osofsky, recently commented that the UK’s system for prosecuting corporate fraud is ‘antiquated’, ‘not at all reflective of today’s world’ and that she wished the UK ‘had some of the lower standards for fraud'. Ms Osofsky’s comments appear to stem from frustration with the longstanding legal requirement that to convict a corporate entity for a criminal fraud offence, prosecutors must establish that wrongful act(s) were carried out by a person representing the ‘directing mind and will’ of the company (the identification principle) - a notoriously difficult hurdle. Ms Osofsky’s comments could be interpreted as a timely reminder to the Government, while we await its response to the 2017 consultation on reform of the law on corporate liability for economic crime. In light of Ms Osofsky’s comments, we briefly consider some of the key hurdles in prosecuting corporate entities in the UK for fraud and whether reform in this area is now imminent.

Prosecuting corporate fraud in the UK

The primary fraud offences

The principal fraud offences are set out in sections one to four of the Fraud Act 2006. These are:

  • Fraud by false representation (Section Two)
  • Fraud by failure to disclose information (Section Three), and
  • Fraud by abuse of position (Section Four)

While the offences criminalise different behaviours, the same elements are at the heart of each. In each case:

  • the offender's conduct must be dishonest
  • his/her intention must be to make a gain, or cause a loss or the risk of a loss to another, and
  • no gain or loss needs actually to have been made

Prosecutors also have recourse to the ‘catch-all’ common law offence of conspiracy to defraud, which requires the prosecutor to show an agreement by two more or people to dishonestly deprive a person of something which belongs to that person or to which they might be entitled. For conspiracy to defraud, the offence is the mere agreement to commit a fraud, rather than the fraud itself – and can therefore be charged in circumstances where there is limited evidence of an actual fraud.

Additional evidential hurdles to prosecute a corporate

Prosecution of corporate entities for fraud (and other) offences remains notoriously difficult. In order to attach criminal liability to a corporate for fraud, a prosecutor must prove that:

  • a person who had the ‘directing mind and will’ of the company at the relevant time
  • carried out the dishonest act(s), and
  • had the necessary mental state

Businesses in the modern world are typically large and complex. In such organisations, decision-making is devolved and key decisions and actions are often taken by mid-level managers and their supporting staff. It is typically, therefore, very difficult to demonstrate any knowledge of or involvement in the wrongdoing by directors and senior officers who represent the ‘directing mind and will’ of the company.

The difficulties caused by the identification principle have been maligned publicly for some time. The SFO itself has acknowledged the identification principle as a barrier to prosecution of offences (for example, in relation to the News Group International phone-hacking scandal) and has in a number of cases chosen to pursue prosecutions only against individual employees, rather than their employers.

Is reform of the law imminent?

The Government ran a consultation in early 2017, to call for ‘evidence on the extent to which the identification doctrine is deficient as a tool for effective enforcement of the criminal law against large modern companies’ and to survey options for reform of the law. Options considered include:

  • broadening the scope of those regarded as having the directing mind of a company
  • the introduction of a new offence of failing to prevent economic crime (which would mirror the offences of failure of commercial organisations to prevent bribery and failure to prevent the facilitation of tax evasion)
  • introducing strict vicarious liability, whereby a company is liable for any acts of an employee committed during the course of their employment, which benefits the company (potentially without the need to prove fault or knowledge), and/or
  • introducing a direct strict liability offence – akin to a breach of statutory duty

Though the call for evidence closed in March 2017, the Government is yet to publish its response. The Economic Crime Plan published in July 2019 stated that the Ministry of Justice would do so ‘shortly'.

It remains to be seen whether comments such as those of Ms Osofsky will influence the content and/or timing of the Government response.

What other options exist for victims of corporate fraud?

Notwithstanding potential reform of the criminal law, actions for civil fraud remain an attractive route for individuals or entities who have suffered loss as a result of fraudulent action. The same acts which may give rise to criminal liability can often form the basis of a civil claim.

Civil claims offer a number of potential advantages to a victim of fraud. The victim is only required to prove ‘on the balance of probabilities’ that the defendant committed the alleged fraud (by contrast, the same must be proven ‘beyond reasonable doubt’ in criminal proceedings). Proceedings can be commenced (and ancillary orders obtained) quickly, with a greater prospect of recovering compensation. Civil fraud cases can also provide victims with the opportunity ‘pierce the corporate veil’ and pursue the directors of the company that is responsible for their loss.

Burges Salmon’s Business Crime and Regulatory Investigations team works with corporates to ensure they do not unknowingly commit, or become the victim of, fraud or financial crime. Our expertise at the coalface of criminal investigations means we understand how stressful these situations are and we are well equipped to help both corporate and individual clients navigate their way through the criminal process. Our 80-strong team of specialist dispute resolution lawyers also has considerable experience of pursuing and defending civil fraud claims on behalf of clients.

This article was written by Sam Aldous

Key contact

David Hall

David Hall Partner

  • Dispute Resolution
  • Banking Disputes
  • Business Crime and Regulatory Investigations

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