Individual liability

Enforcement action against individual directors, officers and employees for corporate crime.

One growing trend in enforcement action against corporate crime is the focus on individuals. Regulators and prosecutors have come to see the threat of personal punishment as the best way to ensure companies take seriously their obligations to stamp out corporate crime.

This has arisen in part from the financial crisis that started in 2008. In the US, the prominent Judge Rakoff of the US District Court for the Southern District of New York gave a speech in November 2013 in which he noted that federal investigations into the financial crisis referred to endemic levels of fraud, but that “not a single high level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be”.

In the UK, the Parliamentary Committee on Banking Standards reported to Parliament on professional standards and the culture of the UK banking sector. In its June 2013 report entitled “Changing Banking For Good” it found that “a lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall.” It recommended a new regime, with a clearer allocation of responsibilities among senior managers of banks and more individual accountability.

The resulting Senior Managers’ Regime includes a system of Prescribed Responsibilities, whereby responsibility for key areas of risk is allocated to a named individual. Regulatory enforcement action could be taken against senior managers in the event that their firm contravenes a requirement in an area for which that manager is responsible, and they are unable to satisfy the regulators that they have taken ‘reasonable steps’ to prevent or stop the contravention. For more on the Senior Managers’ Regime, see our article.

The prosecutors’ view

It is not just regulators emphasising the need to take action against individuals. In the UK, the Serious Fraud office has made clear that, in order to be considered cooperative, companies under investigation will be expected to assist in the prosecution of individual officers and employees involved in the wrongdoing.

The Deferred Prosecution Agreements Code of Practice sets out a number of factors that the UK prosecutor may take into account in determining whether a case is suitable for a Deferred Prosecution Agreement, rather than a prosecution. When discussing co-operation by a company under investigation, the Code specifies that a company must

“ensure in its provision of material as part of the self-report that it does not withhold material that would jeopardise an effective investigation and where appropriate prosecution of those individuals” implicated in the wrongdoing.

The Code also lists as a public interest factor against prosecution the situation where the company has changed significantly since the offending, including “all of the culpable individuals have left or been dismissed”. It is clear that companies are expected to take swift and decisive action against those found to have engaged in criminal conduct on their behalf.

Similarly, various factors are considered by the US Department of Justice (DOJ) when determining whether to charge a corporation suspected of having committed criminal offences, or negotiate a plea or other agreement. One such factor is:

“the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or improve an existing one, replace responsible management, discipline or terminate wrongdoers, pay restitution and cooperate with the relevant government agencies”. (Principles of Federal Prosecution of Business Organisations, FCPA Resource Guide, Chapter 5: Guiding Principles of Enforcement, page 53).

The US Securities and Exchange Commission (SEC”) has also highlighted the need to demonstrate that errant employees have been dealt with. In agreeing a $16.4m settlement with Diageo plc in 2011, in connection with widespread violations of the US FCPA through improper payments to officials in India, Thailand and South Korea, the SEC considered:

“certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”

Convictions of individuals

Recent prosecutions for corporate offending in the UK have brought with them separate actions against the individuals implicated. During 2014, the SFO successfully secured the convictions of two of the four directors of Innospec Limited for conspiracy to commit corruption (the other two having entered guilty pleas). Innospec Limited pleaded guilty to bribery in March 2010 in return for a plea agreement pursuant to which Innospec would pay the SFO $12.7m. More than a year after Innospec Ltd was sentenced, four of its former directors were charged with conspiring to bribe officials in Indonesia and Iraq. At trial, the four defendants were handed prison sentences of between 16 months (suspended) and three years. For further information on this case, see our article.

December 2014 saw the SFO secure a total of four convictions against directors and officers in two separate cases, in both of which a company had been the primary defendant. Sentences ranged from 18 months to 13 years’ imprisonment. For more on these cases see The SFO in 2015 and for regular updates on enforcement actions, see our UK Corruption Enforcement Tracker.

This trend is expected to continue in investigations and prosecutions still in the pipeline.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.