Carmelite Chambers are pleased to announce that Gerard Pitt one of our first six pupils has been awarded first place in this year’s Kalisher essay competition.

The prize was awarded last night at Inner Temple and was presented by Max Hill QC.  www.thekalishertrust.org

The essay can be read below:-

Despite serious wrongdoing by companies there has been a number of cases where there was insufficient evidence to prove that the company’s “directing mind” knew about, actively condoned or played a part in the offending.

To what extent does this doctrine undermine the effective criminal law enforcement of economic crimes?

Has the time arrived for a corporate offence of failing to prevent such crimes and if so what would need to be proved by whom and to what standard?’


In the wake of the LIBOR scandal the Government came under immense pressure to prosecute the banks involved. The fact that only a handful of traders were eventually prosecuted, and only one was convicted, reinvigorated calls to do away with the ‘directing mind’ doctrine of corporate criminal responsibility and expand ‘failure to prevent’ to cover the full bouquet of devious financial mischief.

Using the example of the LIBOR fixing frauds this essay will argue that the directing mind doctrine does not undermine the effective criminal law enforcement of economic crime, it was simply never designed to achieve what critics now demand is necessary, namely artificially attribute criminal liability to companies. Failure to prevent offences are appropriate for certain economic crimes, but a ‘catch-all’ offence would allow corporations to be prosecuted for failing to prevent offences that are entirely outside the bounds of what it is reasonable to expect they prevent. It would also equate to the backdoor privatisation of investigative policing of fraud, shifting the responsibility onto corporations themselves in a way that is neither practical nor justifiable.

The ‘effective’ criminal law enforcement of economic crimes

The starting point, I suggest, is to define clearly what the effective criminal law enforcement of economic crime should look like. Economic crime includes bribery, for which we already have a failure to prevent offence as of 2007 , criminal facilitation of tax evasion, also now covered by a failure to prevent offence,  insider dealing, money laundering, false accounting and fraud. What constitutes effective criminal law enforcement of these offences is complex and turns, I suggest, on appreciating two key points.

First, that unless one stretches the meaning of moral culpability to its intellectual breaking point - companies can only be guilty of strict liability crimes. Mens-rea is what distinguishes theft from borrowing and corruption from generosity, and only individuals can have the necessary mens-rea to properly be the subject of moral condemnation.

The second point is that at the heart of public dissatisfaction with the prosecution of economic crime is not the inability to prosecute companies via the directing mind doctrine, but the apparent inability to effectively prosecute anyone. In the eyes the general public the ‘effective criminal law enforcement of economic crime’ should involve wealthy, powerful, seemingly untouchable business leaders, being cuffed in the rear stack position and lead away by police, their shame splashed all over the national tabloids.

What then is meant when critics lament cases that a ‘lack of evidence’ has prevented the directing mind from being prosecuted? In no other field of criminal law do we allow the difficulty of proving allegations militate toward making prosecution easier. Nor should we here.

Attributing liability for the criminal conduct of employees

It is true, however, that the directing mind doctrine creates an absurd situation when large corporations are involved. The criminality must go all the way to the top. Prosecutors must bring the whole house of cards crashing down, or, if they cannot uncover such rampant high-level corruption, the company gets off. But in truth, the worst that can be said against the directing mind principle is that its very existence has impeded progress toward a lesser, more achievable, form of criminal liability in these cirumstances.

The Bribery Act achieves a lesser form of liability with a form of vicarious liability cogently qualified with a requirement that the bribery is intended to benefit the company and a defence based on adequate preventative procedures. This approach criminalises poor compliance with those professional standards intended to make life difficult for rogue clients.

The problem is that not all forms of economic crime are amenable to this type of liability. In my submission, an economic crime is suitable for a failure to prevent offence only if the following criteria are present. First, the offence is uniform, second, that it is possible to implement adequate counter measures and third, that the beneficiaries are readily identifiable.

The first and second criteria are of course linked, if there is a lack of uniformity then that makes designing adequate procedures very difficult. The first and third are linked because if an offence is not uniform the beneficiaries are unlikely to be readily identifiable in each individual case.  If these three criteria are not present then the appropriate institution to tackle that particular offence is the State.

The significance of uniformity

By uniformity I mean simply that almost every instance of the offence shares certain common features. For example, bribery to will almost always involve a decision maker; an objective, which may or may not be lawful; a relatively large gift, and of course, nefarious motives. There will always be more creative criminals who come up with novel schemes deviating from the norm, however, the class of offence must exhibit relatively uniform features.

The availability of adequate counter-measures

If offences are relatively uniform then it becomes possible for companies to develop effective strategies to combat them. Risk can be assessed on the basis of past cases; proportionate decisions can be made; due diligence conducted; suspicious activity can be escalated up the decision making chain; reports can be sent; connections made; and cases built against individuals without departing from an organisation’s monitoring of data generated in the ordinary course of business. Add to that a dash of top-level commitment, clear communication of the company’s policies through training, and of course, on going monitoring and review and you have the foundation of an adequate procedure to prevent that species of economic crime.

Uniformity and the criterion that the beneficiaries are clearly identifiable

The Bribery Act was drafted to ensure that only failure to prevent bribery committed with an intention to benefit the company is unlawful. The rationale is clear, it would be grossly unfair to expect companies to prevent corruption outside the course of the their business. The logic of this applies equally to all forms of economic crime. The difficult area is, I suggest, where the benefit to the company is incidental to the criminal enterprise.

Applying the criteria: Bribery, Tax Evasion and Insider dealing

That bribery is a uniform offence has already been discussed. Money Laundering is a uniform offence, it almost always involves cash of dubious provenance being moved between locations in suspicious patterns by clients. There will almost always be a service provider, whether it is an international bank or a local casino, and there will almost always be some attempt to disguise the real identity of the people involved which range from the very sophisticated to the very crude. Tax evasion is also sufficiently uniform, it almost always involves income (be it profits or revenue for VAT purposes); a tax, and a misstatement to HMRC or a clandestine attempt to hide funds using sophisticated structures of shell companies and off-shore accounts to wads of cash under the floorboards.

Whether a bribe is paid for the benefit the company can be straightforwardly inferred from the beneficiary of the bribe and the nature of the corruption purchased. The benefit to the company of money laundering and the criminal facilitation of tax evasion is implicit in the client services relationship. The company benefits directly and indirectly through service charges.

Insider dealing falls into a slightly more difficult category. At first brush it appears to be a fairly uniform offence. There have to be trades, often preceding major price moving events or placed in opaque parts of the market such ‘dark pools’, and of course, there has to be information not known by other market participants. Compliance staff should be able to can keep track of trades placed on their exchanges, and significant price moving events and submit suspicious transaction or order reports (STOR) when appropriate. The trader, who may not know about the insider dealing, will likely be motivated by private gain, but the incidental benefit to their employer will usually be automatic.

Fraud – the difference is dishonesty

Fraud, by contrast, can be committed in a bewildering plethora of ways and while benefits may accrue to an employer there is no rhyme or reason as to when they do. There is therefore no coherent rubric to apply this essential criterion necessary for a failure to prevent offence to work.

To return to the alleged fraud involved in LIBOR fixing (dishonestly misleading statements), the banks made a great deal of money as a result of those submissions and associated trades, but the traders involved were motivated by personal financial gain. The benefit to the bank was a necessary by-product.

The most significant hurdle is the possibility of adequate procedures. While it may an unpopular reality to highlight, bribery, money laundering and tax evasion, and even insider dealing to an extent, can all be enabled or facilitated by employees who lack malicious intent and make no particular effort to cover their tracks. This is, in part, because there is not always a clear line marking the beginning of criminal conduct. A lawful facilitation payment under the law in one jurisdiction is a bribe in another. And after how many suspicious cash deposits do we expect a bank clerk to raise suspicions? And in the enormously (and intentionally) complex world of tax law it only takes a poor judgment call about how the so called ‘sniff test’ would apply to turn an honest tax advisor into a repugnant criminal.

In the drudgery of an endless stream of faceless clients and distant projects a toxic cocktail of apathy, moral realism and ethical malaise can lead good, honest professionals to turn a blind eye to suspicious activity, to avoid sticking their head above the parapet if it means getting out of the office in time to get a seat on the train home.

This is not meant as either endorsement or excuse of such behaviour. It is merely an observation that certain kinds of economic crimes are more effectively prevented through effective compliance procedures than others.

Fraud, I suggest, is therefore a class apart from other economic crimes. To establish a case for fraud requires proof not only that the conduct was dishonest according to the standards of reasonable and honest people, but also that the accused must have realised that what he was doing was dishonest. The perpetrators, in short, must be knowingly engaged in dishonest behaviour and will therefore be alive to the risks of discovery.

And therein lies the problem, a person who is engaged in knowingly dishonest behaviour will be alive to the risks of discovery. They will exercise discretion, act clandestinely and try to cover their tracks. In this context adequate procedures to prevent fraud would have to include an internal investigative team with powers similar to the police. Otherwise, what risk assessments, reporting schemes and monitoring will stop a dedicated fraudster avoid discovery.

Procedures to prevent economic crime work on the basis of honestly inputted information converging to catch out the principle offender. The accountant who notices un-allocated payments to the project manager of a new mining scheme, the researcher who allocates the location as being high risk for corruption, and the compliance the professional who puts it all together. But what, by way of example, would have been ‘adequate’ to prevent traders from committing fraud by submitting misleading LIBOR numbers. This conduct was not, at the time, considered to be dishonest by many people in the industry, the traders were using an encrypted invite only chat server for many of their discussions, the relationship between LIBOR submissions and trading positions was opaque.

For these reasons fraud is simply not amenable to a functional or fair failure to prevent offence. I suggest the difficulty with a failure to prevent fraud offence goes further than simple impracticality. As a matter of policy it represents a dangerous departure from the rule that the police should be responsible for the investigation and prosecution of crime.

The ‘backdoor privatisation’ of fraud investigation

Giving those who call for a failure to prevent fraud offence the benefit of the doubt, it is enough to say that it makes no sense to charge a company with criminal failure to do the impossible, or as the case may be, the very impractical. From the admittedly paranoid perspective of an aspiring defence counsel the situation is more sinister.

If companies are required to do more than rigorously and diligently monitor for known identifying patterns then they would, in effect, be carrying out the role of the police and serious fraud prosecutors: trying to catch rogue employees hatching unique, possibly novel, and certainly devious frauds for their own benefit. This is what I call the privatisation of fraud investigation and it is both dangerous and pointless to leave this crucial job in the hands of the companies themselves.

Instead, the Government needs to grasp the bull by the horns and invest seriously in the Serious Fraud Office, the Financial Conduct Authority and the National Crime Agency. The newly created National Economic Crime Centre should have the resources it needs to route out and prosecute individuals involved in fraud.

Leaving this essential task in the hands of already strained compliance staff, through a catch-all failure to prevent fraud offence, is an inadequate half measure which will undermine the credibility and effectiveness of our criminal justice system.


Gerard Pitt

Pupil at Carmelite Chambers


 

 

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Date: 14/11/2018