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The UK Legal 500 2017

TESCO: A QUESTION OF CORPORATE CRIMINAL LIABILITY?

May 2017 - Crime. Legal Developments by Rahman Ravelli Solicitors.

More articles by this firm.

Aziz Rahman examines what the deferred prosecution agreement the supermarket giant has reached with the SFO may mean for other corporates.

By agreeing to pay the Serious Fraud Office (SFO) £129m in fines for misreporting profits in 2014, Tesco has achieved two notable things.

It has avoided being prosecuted after a two-year SFO investigation. And it has thrust the issue of corporate liability even further into the spotlight, at a time when the government is taking a very close look at the difficulty in securing corporate prosecutions.

Tesco will pay the £129m financial penalty and the SFO's full costs under the terms of a deferred prosecution agreement (DPA). Crucially, however, it does not have to admit any liability for the scandal.

This was a scandal that involved accounting discrepancies which saw Tesco post profits in September 2014 that were overstated by £326M. There can be little doubt that Tesco will be pleased to see this ending without it being prosecuted.

Liability

What must be considered here is the issue of liability.

Tesco may be “out of the woods’’ when it comes to avoiding prosecution. But, on top of its fine, it is having to pay investors £85M. It has certainly been held to account, even if it has not been found to be criminally liable.

We may never know if this was because, as some have said, it is too difficult to prosecute a corporate. SFO Director David Green has spoken forcefully about the obstacles faced when trying to bring a corporate prosecution.

He argued that the need to identify the “controlling mind’’ of the company and show that this person was complicit in the criminality can actually make it easier to prosecute a small business in the UK rather than a large one. In a small company, it is harder for those at the top to keep their distance from what may be going on.

This may well be why the UK government has announced consultations reforming corporate criminal liability.

Prosecution

If the government is determined to see more corporates prosecuted, it could widen the net regarding who can be considered the controlling mind of a company. This would increase the scope for a corporate prosecution.

Alternatively, the creation of a strict liability offence could make it easier to prosecute corporates. Possible examples could be making a corporate liable for any conduct by its employees or representatives or any failing to meet its statutory duty to prevent economic crime. Such liability removes the controlling mind obstacle that David Green bemoaned.

The possibility of a failure to prevent offence has been suggested. But as this would most likely require the prosecution to prove both the initial offence and that it happened due to a failure of management, it is hard to see how this would increase the likelihood of there being more successful corporate prosecutions.

Whatever may be introduced in the future will not change the fact that Tesco has avoided prosecution. It could be argued that whatever may become law in the future regarding corporate liability, the eventual legislation is sure to expect that companies have devised and maintained business crime prevention procedures. Only by doing this will they have any chance of not being prosecuted if wrongdoing is identified.

Accountable

The Tesco situation differs from that of Rolls-Royce; which saw the engineering giant pay £671M under a DPA while decisions still had to be made about whether any individuals would be charged.

Yet they have much in common: a vast company found to have done wrong and a lengthy investigation that ends with a colossal fine but no corporate prosecution.

With the head of the SFO saying openly that it is almost too difficult to charge the big corporates, the ongoing consultation has to produce a way to remove the idea that big business is too big to be held accountable. Certainly, the SFO’s willingness to enter into DPA’s with both Tesco and Rolls-Royce indicates that the “big boys’’ are gaining the best possible outcome.

Compliance

If government consultation does produce results regarding corporate liability, it could signal a culture change through many corridors of power. If liability is to be placed firmly at the door of the corporates, each and every one of them will have to examine closely their compliance procedures.

If anything, they should have been doing this already. A proactive approach to crime prevention in any business involves strong, appropriate and well-maintained preventative measures.

Having these in place will be the best way for any corporate to reduce the chances of it becoming the subject of a criminal investigation. Such measures will also be the best possible defence to any accusations, whatever changes are made to the issue of corporate liability.

That is because however the law may change, companies have to make sure their procedures are fit for purpose when it comes to meeting their legal requirements. The law will always require corporates to be compliant and vigilant when it comes to crime prevention. A failure to meet that expectation could be costly.