What are the potential UK criminal consequences for Volkswagen as a corporate entity and individual employees caught up in the scam?
In the absence of specific statutory provision creating corporate criminal liability, the powers of UK investigators to prosecute corporate entities are surprisingly limited. In order to convict a company in the UK of a criminal offence, the “identity principle” must be satisfied. In order for the company to be guilty of an offence, the “directing mind” of that company must be guilty of the offence. In effect, that controlling mind is limited to board members and other very senior officers.
Proving that the controlling mind of a corporate entity was engaged in criminality can be an extremely high threshold to overcome for prosecutors; in circumstances where the corporate is a huge multinational like Volkswagen, the difficulty increases by several orders of magnitude. In practice it would be virtually impossible to bring a corporate prosecution for fraud against VW itself.
The UK has recently legislated to increase the powers available to prosecutors to deal with corporate entities engaged in or suspected of criminality and to provide incentives for those organisations to “self report” to prosecutors.
The most potent weapon in this developing arsenal is the “Deferred Prosecution Agreement”, first introduced into the UK in February 2014. The idea behind DPA’s is to encourage self reporting to the SFO and, through a process of cooperation and negotiation avoid a criminal prosecution. Rather than criminal sanctions, a DPA would involve the parties agreeing to civil penalties, such as a fine, the payment of compensation to victims and the introduction of internal measures and procedures to prevent future offending.
Thus, at first sight, the potential benefits of a DPA seem attractive. The company can avoid prosecution and thus the risk of criminal conviction and the ensuing severe reputational damage, of being prevented from tendering for government contracts in some jurisdictions, and the risk of draconian criminal confiscation proceedings that may threaten the viability of the company as a going concern.
However, DPA’s in the UK are flawed in two major respects;
Firstly, given the inherent risk of self reporting, the DPA structure does not offer guaranteed benefits to reassure companies considering pursuing this avenue. There is no guarantee that a company that self reports will be offered a DPA. It is entirely at the prosecutor’s discretion.
Furthermore, the process is subject to Judicial oversight that is outwith the control of the parties; if a DPA is offered a Judge must give permission for negotiations to progress and if an agreement is reached, that agreement must be approved by the Court as being both in the interests of justice and fair reasonable and proportionate.
Despite the fact that DPA’s were introduced in early 2014, none have yet been successfully concluded. It is thought that negotiations in respect of DPA’s are ongoing in a number of cases and the Director of the SFO, David Green QC has stated that he expects two to be concluded this calendar year. However, additional uncertainty surrounding the attitude of the Courts to DPA negotiations will continue until a DPA is tested and approval given.
The second area of weakness is the lack of prosecutorial “bite” set out above. The threshold for obtaining a conviction is so high that in practice there is little incentive for companies to self report in matters of fraud. Why seek a DPA when there is little or no possibility that a successful prosecution could be brought anyway?
However, that lack of “bite” is something that can also be addressed. Notably, s7 of the Bribery Act 2010 specifically created a corporate offence of failure to prevent bribery.
The offence is committed in circumstances where an individual associated with a commercial organisation bribes another person intending to obtain or retain business, or an advantage in the conduct of business, for that commercial organisation.
Thus, s7 of the Bribery Act obviates the requirement of the “identity principle” that a prosecutor must show that the controlling mind of a company was engaged in or aware of criminality. Now, the prosecutor must simply prove that anyone “associated” with the company was paying bribes; this is widely defined by s8 as anyone who provides services for the commercial organisation, including (by way of example) an employee, an agent or subsidiary.
Whilst s7 provides that the commercial organisation has a defence if it can prove that adequate procedures were in place to prevent bribery by persons associated with it, it is clear that the effect of the Bribery Act is to significantly bolster the powers of prosecutors in respect of corporate entities and to put companies at much greater risk of prosecution. The greater incentive to self report and to seek a DPA in such circumstances is obvious.
The Director of the SFO had argued that in order to be fully effective, DPA’s required an extension of the law to cover corporate failure to prevent other economic crime, such as Fraud and Money Laundering, to make prosecutions of companies for these offences easier. However, somewhat surprisingly on 28th September this year the Parliamentary under Secretary of State for Justice Andrew Selous MP wrote in response to a parliamentary question that:
Ministers have decided not to carry out further work at this stage as there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished.
Whilst it seems likely that this plan will be revisited as and when successful prosecutions are eventually brought under the s7 of the Bribery Act, the failure to create a parallel offence for fraud leaves the SFO significantly disadvantaged against institutions habitually engaged in (non bribery related) financial crime.
If the SFO face insurmountable difficulties in successfully prosecuting corporate bodies for criminality, the spotlight falls on to the liability of individuals employed by those commercial entities for their actions.
In these circumstances it can be argued that a community of interest exists between the corporate entity and the criminal investigators, often to the detriment of individual employees who are at risk of being used as a scapegoat.
The criminal investigation needs evidence in order to progress. Serious and complex crime is often high profile; an outraged public may demand progress. That evidence is, initially in the possession of the corporate entity. In simple terms, many corporate entities are too large, and too powerful for investigators, to take them on aggressively, the more so when chances of securing convictions, as set out above, are low. Conversely, the corporation involved will undoubtedly be keen to limit the impact of the investigation on its business, its reputation and its most senior management.
Thus it is rare indeed to see investigators in the UK executing search warrants at the offices of large multinationals as a device to obtain evidence. More subtle means are used to compel the provision of information such as issuing notices pursuant to s2 of the CJA 1988. This, perhaps, is of benefit to both parties; the investigation obtains information (and occasionally this includes evidence that may be held at offices out of the jurisdiction that could not be obtained easily without co-operation) but the corporation also has knowledge of and a limited degree of control over the information that is provided to the authorities.
Furthermore, it is increasingly the case that criminal prosecutions against individuals in respect of the most serious and complex allegations of fraud are actually the final link in a chain of investigations. When information comes to light implicating a corporation in fraud, it will take steps to conduct an internal “fact finding” investigation to establish what has actually happened. This may then progress to disciplinary investigations against individuals identified during that process who subsequently lose their jobs. Often the next layer of investigation involves the industry regulatory bodies and then finally, criminal investigators move in.
Invariably in those circumstances the first move of the criminal investigators is to obtain the fruits of the other investigations. This essentially provides the corporate entity with a limited but still significant opportunity to influence the narrative of the criminal investigation which usually adopts the conclusions of the internal investigations as at least a starting point. It is invariably those employees identified as culpable within the company’s own internal investigation that are most at risk in any subsequent criminal investigation.
The risk for individual employees is that they are used as scapegoats and characterised as having been “rogue employees.” However, where the possibility exists that an organisation has a corrupt culture, individuals acting within that culture may not always give their actions the level of consideration that one might expect; as a result they may not necessarily realise that their actions could be considered wrong or criminal. Rather, they may view themselves as simply doing their best for their employer. Circumstances may reinforce this feeling; individuals may not have received training on the extent of their legal obligations (which may not always be clear cut in any event); they may believe that senior managers know and approve of their actions. They may well have qualified or been trained at that institution and have no practical experience of working in any other way.
When faced with an initial “fact finding” investigation by their employer, an employee may not immediately recognise that they are at risk of disciplinary sanction, let alone criminal investigation further down the line. Senior managers of multi national corporations are unlikely to self identify as criminals. Thus they may feel inclined or even obliged to assist in the internal investigations and to participate without first seeking legal advice as to their position. Any individual faced with an investigation at work or disciplinary action should take care to obtain legal advice on the potential consequences in both the short and long term.
Cartwright King has one of the largest teams of Criminal Defence solicitors in the country and can assist in defending individuals and businesses subject to investigations by regulatory bodies and the police. For further information, please contact Gary Broadfield on 0161 833 1411 or email firstname.lastname@example.org.