On May 6, 2024, Professor Jeremy Horder, Global Chair Scholar at Peking University Law School, Professor of Criminal Law at the London School of Economics and Political Science, Fellow of the British Academy of Humanities and Social Sciences, and Honorary Bencher of the Middle Temple, delivered an academic lecture titled 'Recent Developments in Corporate Criminal Liability in the UK.' The lecture was hosted by Wang Huawei, Assistant Dean of Peking University Law School, with Assistant Professors Zhang Zixian and Wu Yuhao serving as commentators. Nearly 100 faculty members and students from within and outside the university attended the event, which received an enthusiastic response.

 

This article presents the core points of the lecture in the form of a verbatim transcript.

Jeremy Horder:

Introduction to the Criminal Liability System for Corporations in the UK

In the United Kingdom, judges have the authority to make rulings on legal issues necessary for resolving disputes. The rules established through these judgments have a binding effect on judges when deciding similar cases in the future. It is precisely from the rulings made by judges in specific cases that the rules for corporate criminal liability have emerged.

The principle of vicarious liability is one of the important principles governing corporate criminal liability in the United Kingdom. When employees commit strict liability offenses, the company assumes vicarious liability. In 1902, a London shop violated criminal law due to an employee's sale of substandard butter, and the court ruled that the employee's crime was deemed the company's crime. However, for offenses requiring subjective fault, courts have adopted a more cautious approach. In the 1889 case of Chisholm v. Dalton, the judge stated that employers (including corporations) should not bear criminal liability for deaths resulting from the negligence of employees. To establish that a company committed such an offense, it must be proven that the company itself was at fault, rather than merely its employees. In the 1971 case of Tesco v. Nattrass, Tesco, a large chain supermarket, faced allegations after the manager of one of its branches committed an offense by incorrectly labeling product prices. The UK Supreme Court held that Tesco should not bear criminal responsibility because, for a company to commit such an offense, the criminal act must be carried out by individuals who exercise actual control over the company’s operations, namely its directors.

The Economic Crime and Corporate Transparency Act 2023

Based on the background mentioned above, I would like to discuss the Economic Crime and Corporate Transparency Act of 2023 (the "Act"), which will come into effect at the end of 2023. Originally, a company would only be held criminally liable if its directors, the highest-level managers, committed fraud or bribery. However, the Act expands this scope to include senior managers. Additionally, the Act introduces the offense of "failure to prevent fraud," which holds a company accountable for not preventing its employees from committing crimes.

Here, two cases are used to specifically demonstrate the changes in legislation. The first is the expansion of the scope of corporate crime to include the actions of senior management. Suppose a company has two financial advisory centers in London, each managed by a manager. These two managers are considered senior management, and they both decide to commit fraud to benefit the company. Under the old law, the company would not be guilty of fraud because the managers were not the absolute top executives of the company. However, under the new law, the company will be recognized as committing fraud.

The impact of the "failure to prevent fraud" offense can be demonstrated through the following case. A regular employee at a subsidiary of an international bank in Guangzhou intentionally commits fraud against a customer for the benefit of the company. If the international bank is a large corporation, it may face criminal liability for failing to effectively prevent the fraudulent behavior of its subsidiary employee, unless the bank can prove that it has implemented reasonable preventive measures to avoid such fraud. This "failure to prevent fraud" offense is complementary to the existing "failure to prevent bribery" and "failure to prevent tax evasion" offenses in the Anti-Bribery Law.

It is worth noting that there are some exceptions to the determination of the "failure to prevent fraud" offense. First, if the company itself is a victim of the fraudulent behavior, it will not be considered to have committed the "failure to prevent fraud" offense. Second, if the company has appropriate procedures in place to prevent fraud, it will not be deemed to have committed this crime. Third, if the fraudulent behavior is carried out by an external third party and the company has taken reasonable preventive measures, the company should not be held liable for "failure to prevent fraud." For example, if an external actor deceives customers into conducting transactions, causing customer losses, and the bank has implemented reasonable preventive measures, the bank should not bear criminal responsibility for this.

The government states that the provisions of the bill will encourage companies to improve their fraud prevention programs and strive to create a corporate culture that resists fraud. However, I believe there are still areas worth discussing in terms of specific legislative measures. First, extending the scope of responsibility to senior management is unnecessary. Second, the application of the "failure to prevent fraud" offense is limited to large companies and does not apply to small and medium-sized enterprises.

Apart from this, the crime in question improperly expands the scope of "affiliated persons," which not only includes subsidiaries but also extends to the employees of those subsidiaries. For example, in the case of a multinational corporation headquartered in the UK, an investigation revealed that it had 22,464 subsidiaries worldwide. In another example, Barclays Bank had 85,000 employees working in its subsidiaries, and the company is held responsible for any bribery within these entities. I believe that employees of subsidiaries are generally accountable only to the subsidiary itself and not directly to the parent company. Therefore, it may be overly harsh to hold the parent company directly responsible for fraudulent actions committed by employees of its subsidiaries.

Review Session:

Zixian Zhang:

The theory of corporate criminal liability in the UK has undergone a continuous evolution: from omission to commission, from "vicarious liability" to the "identification principle," and eventually to the enactment of the Corporate Manslaughter and Corporate Homicide Act 2007, which highlights the legal responsibility of organizations, expanding the scope of liability. At the same time, the types of corporate crime have expanded from those limited to crimes affecting public welfare, to quasi-criminal actions, and eventually to most types of natural crimes. The UK has not imposed restrictions on the scope of corporate punishment based on the types of crimes but has instead limited the scope of persons who can be identified with the company.

With the advancement of theory, legislation has also been evolving. In response to Brent Fisse’s concept of "responsibility to prevent," corporate criminal liability has shifted from being based on the commission of a criminal act to liability for the failure to take reasonable preventive measures. The penalties and defenses related to "failure to prevent bribery" under the 2010 Bribery Act and "failure to prevent fraud" under the 2023 Fraud Act reflect this shift. Based on this, I would like to raise the following questions:

First, does this legislative path, which expands corporate organizational liability without limiting the scope of offenses, face opposition or criticism in the UK? In other words, what is the effectiveness of a practice that increasingly makes it easier for various enterprises to bear the "criminal" label?

Second, as for the issues raised by Professor Horder regarding the requirements such as "senior management" and "large companies," there may be other aspects of the provisions in the "Bill" worth reflecting on. For instance, the Bill imposes unlimited fines on companies that fail to prevent fraudulent behavior. My question is: in the context of organizational liability, is an unlimited fine always reasonable? Are there areas for improvement?

Yuhao Wu:

The issue of corporate criminal liability not only involves criminal theory but is also closely related to criminal policy. First, when the UK formulated laws to prevent fraud, it took different approaches toward large enterprises and small businesses. This practice may create a conflict between efficiency and fairness. If the goal is to promote economic development, it may be better to impose more responsibility on large companies while relaxing requirements for small businesses, which is often the perspective considered by economists. However, from the viewpoint of legal scholars, we would argue that the law should treat all companies equally. Therefore, I believe this reveals the ongoing conflict between efficiency and fairness that often arises in both law and economics.

My second point concerns the failure to prevent crimes. China has implemented reforms in criminal compliance. These measures also require companies to establish prevention mechanisms to reduce the occurrence of potential criminal behavior. Interestingly, the UK has taken a criminalization approach by introducing new criminal offenses in this regard. In contrast, China has adopted an opposite strategy. When a company faces prosecution, a committee provides an opportunity for the company to reform. By establishing appropriate preventive procedures, the company can reduce its penalties. This approach leans more toward decriminalization. The contrast is intriguing because both countries encourage companies to set up prevention programs, but their policy orientations differ significantly.

Professor Horder mentioned that in the past, lawsuits against companies were only initiated when the offender was a company director, but now this responsibility has expanded to include senior executives. In my view, both in Chinese law and in the U.S. Model Penal Code, the approach to such issues may focus more on the substance of the matter. Chinese criminal law theory holds that the collective will of a company's members can represent the company's will, rather than emphasizing whether the individual committing the crime is a director or senior executive. My question is, in the UK, if a lower-level employee commits a crime based on the collective will of the company, would this be recognized as corporate criminal liability?

My other question is about cost-benefit analysis. You mentioned that expanding corporate criminal liability could effectively reduce the occurrence of fraud, thereby saving social resources, as fraud itself consumes a lot of funds. However, if a company establishes specific procedures to cope with potential prosecutions, or if legal processes such as bankruptcy or liquidation are involved after prosecution, these procedures themselves also incur costs. In conducting a cost-benefit analysis of criminal policy, have the costs associated with these procedures been taken into account?

Jeremy Horder:

Designing a fraud prevention program should be tailored to specific factors such as the company's size, business scope, and other relevant circumstances. For example, companies without a full compliance department can establish more flexible procedures, and even a verbal warning may be sufficient. For a labor service company responsible for cleaning windows, complex anti-bribery procedures may not be necessary, whereas a company selling weapons faces higher risks and thus requires more stringent procedures.

Although theoretically the amount of the fine is unlimited, in practice, its economic feasibility is considered. Prosecutors will take into account the impact of the fine on the company's future development, ensuring that the company can still operate after paying a hefty fine. This is because if a massive fine leads to the company's bankruptcy, it effectively punishes innocent employees, and may even impact the entire market. For example, if three companies provide prison or correctional services to the government, and a huge fine causes one to go bankrupt, the other two companies are more likely to raise their prices.

The theory of corporate compliance is also reflected in the UK's Deferred Prosecution Agreement (DPA) system. The content of the DPA is that, as long as the company pays a fine and takes measures to remedy its deficiencies, it will not be prosecuted. However, the company must establish a new board of directors, and the responsible board members must be dismissed.

Huawei Wang:

Thanks to Professor Horder's lecture, we gained insight into the significant differences between the UK and China in the field of corporate criminal liability. These differences are reflected not only in the existing legal systems but also in legislative trends.

In recent years, China has been actively exploring the issue of corporate criminal compliance with the aim of reducing or eliminating corporate criminal liability. The consequences of criminal charges go far beyond fines; in some cases, they may lead to corporate bankruptcy, inflicting significant losses on innocent employees and shareholders, and sometimes even causing disruptive impacts on entire industries. This is one of the main reasons why China has been promoting corporate compliance reform in recent years. However, we have not emphasized universally strengthening corporate criminal liability. Professor Horder's exposition on English criminal law provides us with a broad perspective, helping us to think about this issue more comprehensively.

From a practical perspective, the expansion of corporate criminal liability in the UK means that Chinese multinational companies must pay closer attention to these changes, as they are directly related to corresponding criminal legal risks and the construction of criminal compliance systems.

Translator: Yuan Chenfeng

Reviewer: Yu Xianfa