This article was originally published in Thomson Reuters Regulatory Intelligence on 12 March 2020 and is reproduced with permission from the publisher.
On Friday, 6 March 2020, a jury cleared three former Barclays senior executives accused of conspiracy to commit fraud in connection with the bank's 2008 recapitalisation. Aside from bringing the seven-year case to a close, this verdict finally lifts the lid on the earlier rulings in the case which led to Barclays, the corporate entity, being thrown out of the case.
Although the most recent trial related to individuals, the case previously also included both Barclays Bank PLC and Barclays PLC as defendants. However, in May 2018, Mr Justice Jay dismissed the SFO's corporate prosecution at first instance on the basis that the individuals responsible for negotiating and securing investments from the State of Qatar and its then-Prime Minister, Sheikh Hamad (Qatar), could not be said to constitute the directing mind and will of the bank for the purpose of the fundraisings - and that the ultimate authority and responsibility for the recapitalisation remained with the board of directors and its relevant sub-committees. The SFO subsequently applied to the High Court to have the charges reinstated, but the case was thrown out by Lord Justice Davis in November 2018.
These decisions have been subject to strict reporting restrictions up until now (in order to protect the integrity of the senior executives' trial), but their public release now reveals Lord Justice Davies' judgment to be a seminal ruling on the principles of attribution of corporate criminal liability under UK law - which will have seismic implications for the concept of corporate criminal liability in the UK, and for the SFO as a prosecutor.
Lord Justice Davis' decision
Corporate liability for criminal offences can be established in two ways. Firstly, where statute imposes vicarious or strict liability on a company for the actions of its employees or agents, and secondly, where liability arises under the identification principle - namely, where the acts and state of mind of an individual (or group of individuals) can be imputed to a company if that individual (or group) represents the “directing mind and will” of the corporation.
As his starting point, Lord Justice Davis considered the judges' speeches in Tesco Supermarkets Ltd v Nattrass 1972 AC 153: varying from Lord Diplock's emphasis on the constitution of the company for ascertaining which individuals are to be treated as the company for the purposes of the acts done in the course of its business, to Viscount Dilhorne's perspective that the individual should not be “responsible to another person” for the manner in which his or her duties are discharged. He settled on the test promulgated by Lord Reid, which states that an individual will only constitute a directing mind and will of a company if he or she has “full discretion to act independently of instructions” with regard to the relevant company function and should not be responsible to the board for the manner in which his or her duties are discharged.
Using this, the most restrictive interpretation of the definition of directing mind and will, Lord Justice Davis had no choice but to uphold Mr Justice Jay's assessment at first instance. While there was no question that each of the senior executives had played a significant and distinct role in the deal, their involvement was limited to the 'front end' - wooing investors, negotiating investment terms and managing the relationships.
When it came to concluding the legal and technical matters (the 'back end' of the deal), the responsibility and authority remained with the board of directors and/or its various sub-committees with the power to pass the corporate authorisations required to approve the transactions. Even though the executives had some measure of discretion in the way they conducted the negotiations, they did not have “entire autonomy to do the deal in question” – they were ultimately carrying out orders from above. As such, when looking at the “primary rules of attribution” within the bank, the respective boards and committees were the ultimate decision makers; even if the CEO or others had “de facto” authority, this was not enough.
Lord Justice Davis also considered the SFO's further argument that the court should fashion a “special rule of attribution” as in the Privy Council decision in Meridian Global Funds Management Asia Ltd v Securities Commission 1995 UKPC 5, in which Lord Hoffman held that where the general and primary rules of attribution (i.e. the principle of agency and the company's constitution) fail to effect the parliamentary intention behind a particular statute there is scope to deviate from the traditional interpretation of the directing mind and will. In such circumstances the court has the power to add and apply a special rule to determine whose act, knowledge or state of mind is to be attributed to the company. In general, the criminal courts have not embraced the Meridian extension – and Lord Justice Davis did not either, confirming that there was no reason to justify deriving a special rule – the Fraud Act 2006 was a standard piece of criminal legislation, applicable to individuals and companies alike and there was no need to fashion a new rule to make the prosecution of corporates any different.
What does the Barclays decision mean for corporate criminal liability in the UK?
Lord Justice Davis' judgment effectively removes companies with widely devolved management and functioning boards and sub committees from the reach of criminal prosecutors. Tesco v Nattrass has typically been interpreted as limiting the directing mind and will of a company to the board of directors, the managing director and, in certain circumstances, other superior officers. However, while acknowledging the practical necessity of such devolution and delegation within a business, Lord Justice Davis' judgement confirms that the directing mind and will of the company cannot be attached to individuals operating at this level unless they have been delegated full responsibility and autonomy for that function and they do not report, nor are responsible, to anyone else. In practical terms, this means that unless such authority has been put into writing and is plainly being followed and acted upon, it is highly unlikely that de facto authority to make decisions alone will ever be enough to make that individual the directing mind and will of the company, and therefore highly unlikely that companies can be held liable for their actions.
Looking forward, it is clear that either case law or legislation will have to change to better reflect the modern, multi-national companies that the law is attempting to govern. Lord Justice Davis flagged this himself, noting that it “is always open to parliament to draft statutory offences with the position of corporations in mind.” There are two main options to achieve this: either the government could extend the law to create a strict liability 'failure to prevent economic crime' corporate offence, or it could re-work the identification principle to grant prosecutors the ability to attribute criminal culpability to a wider group of individuals within a company. Discussions on this theme have been ongoing for some time now - the Treasury Committee opened a consultation on corporate liability for economic crime back in January 2017 - but progress has been slow against more pressing concerns like Brexit.
The push for a “failure to prevent economic crime” offence may be buoyed by the 2019 results of the House of Lords Bribery Act 2010 Committee's consultation on bribery legislation in the UK. The committee concluded overall that the law was exemplary and did not need further reform; a significant part of this acclaim is derived from the section 7 “failure to prevent bribery” offence, which was originally the first of its kind but has already been mirrored in the sections 45-46 Criminal Finances Act 2017 “failure to prevent facilitation of tax evasion” offences. Although to date prosecutions under both acts are limited, these offences in theory make it much easier for prosecutors to attribute liability to companies, whilst also having the secondary benefit of obliging companies to implement procedures to prevent bribery and tax evasion facilitation issues.
More recently, the focus appears to have shifted to reforming the underlying identification principle itself. In a response to the Treasury Committee's consultation (pre-dating the Barclays decision), the SFO suggested doing away with the identification principle altogether in favour of a new method for attributing corporate liability. Under its proposal, a company would be guilty of the substantive offence if a person associated with it committed that offence intending to obtain or retain business, a business advantage or other financial benefit for the company. Again, this language follows that used in the Bribery Act 2010. Alternatively, given the outcome of the Barclays decision it may be that government also directs the principle to the Law Commission for further review.
What does the Barclays decision mean for the SFO?
The SFO has long bemoaned the difficulties it faces in getting corporates in the dock, but this decision makes the task virtually impossible when dealing with a company operating under any kind of devolved or delegated responsibility structure involving effective and functioning boards and sub-committees. Accordingly, going forward the SFO may choose to focus its attention on misconduct committed within what Lisa Osofsky has termed “mom and pop shops”: small and medium-sized enterprises (SMEs), where (often through a simple process of elimination) it is much easier to prove that an individual was the directing mind and will of the company. Indeed, we have seen hints of this approach already in the Güralp Systems and Sarclad DPAs, however, these comparatively lower value cases (settlements of GBP2.1 million and GBP6.6 million, respectively) are not a natural fit with the public interest element of the SFO's role. Tasked with investigating and prosecuting companies and individuals alleged to have committed the most serious levels of complex fraud, bribery and corruption, the SFO is duty bound to take on “the big guys”. Further, both industry and government have cautioned the SFO against unfairly targeting SMEs.
Alternatively, the SFO may be forced to adjust its preferred set of offences for prosecuting companies: either liming itself to the strict liability 'failure to prevent' offence under the Bribery Act 2010 or perhaps significantly reducing its focus on corporate criminal fraud cases altogether until legislation changes.
The decision also has implications for Lisa Osofsky's four-year tenure as SFO Director. Now well into her second year, any changes to the law would take a couple of years to come into force, meaning that it is quite possible that she might not see any successful corporate fraud prosecutions during her tenure at all - which would be surely disappointing for a former US prosecutor who has spoken proudly of bringing over 100 cases to justice.
What does the Barclays decision mean for companies?
While the Barclays decision by no means guarantees that companies cannot face prosecution for criminal offences such as fraud, the odds are now certainly stacked in their favour. Companies should use this decision as opportunity to consider the workings and effects of their own constitutions, decision-making processes and control structures.