The Barclays Case – Criminal Corporate Liability
The UK Serious Fraud Office's (SFO) final attempt to prosecute Barclays in connection with Qatari loans ended on October 26 with the rejection of its High Court application to reinstate criminal charges against the bank.
This article briefly considers some of the major implications of the Barclays Bank case, including the bank's remaining exposure to fines and litigation, the possible impact of the case on the laws relating to corporate criminal liability and practical issues for 2019/2020 that will have to be addressed as part of any change to those laws.
The SFO's investigation
In 2012, the SFO began investigating Barclays regarding a capital raising it undertook at the height of the financial crisis in 2008. As part of that capital raising, Barclays reportedly loaned £2.4 billion to the state of Qatar around the same time that it received more than £7 billion in emergency funding from two Qatar entities.
Through the fundraising, Barclays avoided the need for the type of bail-out that resulted in government ownership of banks such as Lloyds and RBS.
The SFO's investigation centred on whether the Qatari loan was used to fund the capital investment, which is a criminal offence under English law for listed companies, known simply as "unlawful financial assistance".
Following a lengthy five-year investigation, Barclays Plc was charged in June 2017 with conspiracy to commit fraud and the provision of unlawful financial assistance to Qatar. Similar charges then followed for another Barclays entity, Barclays Bank Plc, in February 2018.
Despite public pressure to see successful banking prosecutions relating to the financial crisis, all charges against both Barclays entities were dismissed by the crown court in May 2018. The SFO sought the High Court's consent to reinstate the charges by way of an unusual procedure known as a voluntary bill of indictment, but this application was also dismissed on October 26, 2018, ending the SFO's prosecution.
Continued risk to Barclays
Notwithstanding its success against the SFO and avoidance of a potentially significant fine, the SFO was never the only authority interested in Barclays in relation to the Qatar funding. As a result, Barclays is not necessarily "out of the woods" in relation to corporate liability.
Specifically, the UK Financial Conduct Authority's (FCA) investigation into the matter could now continue and Barclays is still battling a $1 billion lawsuit brought by another investor in relation to the fundraising. In addition, it is possible the U.S. Department of Justice may revisit this matter under the U.S. Foreign Corrupt Practices Act 1977 now it knows the SFO cannot take any further action.
The risk of fines and multiple proceedings could therefore continue for several years.
What impact does the Barclays case have on the future for corporate criminal liability?
While many may consider the end of the SFO case against Barclays to be a significant blow for the whole area of criminal corporate liability, detailed analysis is difficult until the reasons for the charges being dismissed are made public.
In that regard, given the reporting restrictions on the Barclays Bank judgments (because of the related trials of individuals which will take place in 2019), it is unclear at this stage why the SFO's case against Barclays was not allowed to proceed.
Whatever the fact-specific rationale, however, the charges against Barclays probably required the SFO to show not only that the law had been broken in some way but also that the company was liable according to a 19th century rule of corporate liability known as the "identification principle". This rule is therefore likely to be thrown back into the spotlight in 2019/2020; it could well become a focus for UK legislation, and material changes to criminal corporate liability could follow in the UK.
The identification principle and corporate liability
The "identification principle" governs almost all areas of corporate crime except bribery (since 2011) and tax evasion (since 2017). This principle requires prosecutors to prove that those individuals constituting "the directing mind and will" of the company, usually directors, knew about, condoned or played a part in the wrongdoing to secure a conviction against the company itself.
The test is difficult for prosecutors to meet, especially in relation to large international corporations.
This test was, for instance, an obstacle to the prosecutors in the phone-hacking scandal several years ago, where charges could not be brought against the employer of the journalists responsible, News Group International.
"The present state of the law means it is especially difficult to establish criminal liability against companies with complex or diffuse management structures," the Crown Prosecution Service's statement announcing the decision not to prosecute the corporate said.
By contrast, English cases where prosecutions of corporates have been successful usually relate to small companies, such as Smith & Ouzman Ltd, a company which specialises in printing security documents. The company, along with two of its employees, was found guilty in January 2014 of making corrupt payments to influence the award of business contracts in Africa.
The different outcome in cases such as Smith & Ouzman and News International has, for some time, led commentators and prosecutors alike to identify an inherent advantage for large companies over small companies when it comes to criminal liability.
Alternatives to the identification principle
Cases such as News International and now Barclays will likely result in the UK legislature looking again in 2019 or 2020 at corporate criminal liability. When they do, they will have an obvious alternative to consider. Specifically, the SFO no longer has to struggle to meet the "identification" principle for two important areas of economic crime: bribery and tax evasion.
Under the UK Bribery Act 2010, a company commits a strict liability offence if it fails to prevent bribery that takes place for its advantage by any employee or associated person, unless the company can demonstrate that it had "adequate procedure" in place to prevent the bribery.
The same principle applies to tax evasion under the Criminal Finances Act 2017, whereby a company commits an offence if it fails to prevent the facilitation of tax evasion by those who provide services for or on its behalf, unless it has reasonable prevention measures in place.
For both bribery and tax evasion, the detailed requirements to prevent offending are contained in guidance documents that are, in effect, mandatory.
In this context, it is not hard to imagine that the Barclays case will lead to calls to end the "identification principle" and legislation to extend the UK Bribery Act 2010 and tax evasion laws to create strict liability offences in other areas of economic crime (mirroring calls made in 2016/2017). Like much in this area, however, this may not be straightforward and any changes would need to resolve several practical difficulties satisfactorily.
First, analysis will be needed as to whether it is appropriate to move the law so quickly from directors creating liability to any employee, no matter how junior. In addition, complying with new guidance on adequate procedures, e.g., regarding economic sanctions and fraud, could create significant costs to UK business at a time of national cost-cutting and Brexit-related uncertainty.
Finally, regulatory requirements already exist for a number of entities, for instance, in relation to money laundering. To avoid duplication and confusion, clarity would be required where new guidance and current regulations overlap.
Toward a fairer system?
In the short term, the end of the SFO investigation into Barclays does not necessarily mean the end of any investigation and litigation relating to the Qatar fundraising. The FCA and the U.S. Department of Justice may both decide to step in. In the medium term, the decision to dismiss the SFO's prosecution may be more important as a case that leads to a fairer system of corporate liability across all sizes of corporates. In the longer term, however, any such change to the law will need thoughtful planning and practical, professional and business input to be truly successful.This blog was first published by Thomson Reuters Accelus Regulatory Intelligence.