UK firms not prepared for ‘seismic’ change in corporate liability law, lawyers warn
The majority of UK companies are not prepared for the “seismic” change in corporate liability law that is set to come into effect next week, top City lawyers have warned.
The change in the law will make it easier to prosecute companies, holding them criminally liable for the actions of senior managers that commit financial crimes.
Until this change, UK prosecutors have been forced to prove that offences were committed by the “directing mind and will” of a corporation in order to prosecute a company, which often meant providing evidence that the board or C-suite execs were involved.
The government said the change removes the ability for a large company to hide behind complex management structures to evade scrutiny.
Barry Vitou, a partner at law firm HFW, told Morning Wire this is a “seismic” change in the law, and added that “many companies are unaware the law is changing on Boxing day.”
Jonathan Pickworth, head of the London investigations and white collar defence practice at law firm Paul Hastings, told Morning Wire that while “some companies are all over this change” he added that “there are many companies out there who are only vaguely aware – or even completely unaware – of how the landscape is changing and of the steps they need to take to protect themselves.”
Lawyers warned that companies need to start thinking about who qualifies as a senior manager in their firm.
Louise Hodges, a partner at Kingsley Napley, said that while the term senior manager is defined, the expanded definition in the law – as some playing a ‘significant role’ in ‘making decisions’ or the ‘managing or organising’ of ‘the whole or a substantial part’ of the firm’s activities – was “open to interpretation”.
“Each company will need to think about how these definitions apply to the business and review their current policies, training programmes and other controls to mitigate their legal risks,” she told Morning Wire
Sam Tate, head of white-collar crime at law firm RPC, agreed that the change generates some “uncertainty about who will create criminal liability”, while emphasising it “hugely increases” the number of people who can now expose companies to a potential prosecution.
“We’re going from 10 to 20 people to potentially hundreds of people in the largest companies” who will create liability, Tate told Morning Wire
He also warned that companies may need to look at their directors’ and officers’ liability insurance, also known as D&O insurance. This insurance covers the cost of providing separate legal representation for individuals in the event they are involved in a criminal investigation, and companies’ policies may not always cover senior managers, he said.
Although the new provision will only apply to potential misconduct that has taken place after the law comes into force, lawyers said that the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS) will still be keen to make use of this change when investigating and prosecuting future financial crime cases.
“The mood music from both the SFO and the CPS has been that this change in the law is something that will really assist them in their mission, which seems right,” said Ben Morgan, a former joint head of bribery and corruption at the SFO.
“I would expect teams in both agencies to have a real appetite to open cases that leverage the new regime, but that does not mean there will be a sudden blizzard of prosecutions,” Morgan, who is now a partner at Freshfields Bruckhaus Deringer, told Morning Wire
“As with the Bribery Act, the tangible effect of the change in the next few years is likely to be a corporate cultural one that is driven by more investigations being opened, but just a few notable enforcement cases,” he said. “The target for any board is to make sure their company is not one of them.”