Corporate Criminality and Liability for Fraud

Alison Cronin

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351716840
• Edition: 1
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

Through a rational reconstruction of orthodox legal principles, and reference to cutting-edge neuro-science, this book reveals some startling truths about the criminal law, its history and the fundamental doctrines that underpin the attribution of criminal fault. While this has important implications for the criminal law generally, the focus of this work is the development of a theory of corporate criminality that accords with modern theory of group agency, itself informed by advancements in contemporary philosophy and social science. The innovation it proposes is the theoretical and practical means by which criminal fault can be attributed directly to the corporate actor, where liability cannot or should not be reduced to its individual members.

1 Criminal fraud and the problem of the corporate actor

1.1 Introduction: when is a fraud not a fraud?

While fraud is a global problem,¹ in 2016 it was estimated to be costing the UK economy alone a staggering £193 billion every year.² Cost can be defined as a misallocation of resources or resources that have been diverted from where they were intended.³ Furthermore, although the methodology employed in the calculation of the Annual Fraud Indicator has become increasingly sophisticated,⁴ encompassing more sectors by business and victim type, any such calculation is fraught with difficulties such that this figure is likely to be a gross underestimate of the real extent of fraud. There are inevitable gaps of unaccounted crime, not least because fraud is by its very nature a hidden crime and, even if detected by the victim, it is an offence that is under-reported or not recorded for a variety of reasons.⁵ Furthermore, the Annual Fraud Indicator has traditionally focused on the costs sustained by the public and private sectors in relation to a number of specified frauds perpetrated against agencies, businesses and charities. One refinement in recent years has therefore been to estimate the loss caused to individuals through fraud and in 2016 this was placed at £9.7 billion, making up just 5% of the estimated total. In relation to frauds perpetrated against individuals, the current calculation is limited to just four discrete categories: the estimated losses due to mass marketing frauds, identity fraud, private rental property fraud, and repayment meter scams. While there are recognised types of fraud that are still excluded from the scope of the enquiry, there are also economically harmful activities that have yet to be recognised as criminal and the employment of a broader conception of fraud would therefore render a significant increase in the estimated losses. For example, if the systemic mis-selling of financial products in recent years were to be reconceived as criminal acquisition rather than regulatory breach, a staggering £26 billion may be added to the figures from January 2011 to September 2016 to reflect mis-sold payment protection insurance (PPI) alone,⁶ and this would be the tip of the iceberg. The Financial Ombudsman predicts that the conclusion to this particular scandal is still some years away⁷ and notes that PPI complaints made up just 74% of the total lodged in the banking and finance sector during this period, the mis-selling of interest rate hedging schemes, packaged accounts, interest only mortgages, investments and other insurance products making up the remainder.⁸ Although this particular raft of complaints may now have peaked, other practices of commercial misconduct are starting to attract similar attention. For example, it has been suggested that liability for mis-sold pension annuities may prove to be as extensive as the PPI scandal⁹ and the banks may also be facing multi-billion-pound fines for selling toxic mortgages.¹⁰ Indeed, in the aftermath of the global financial crisis, evidence is emerging of misconduct that has never before “occurred so systematically, in such a scale and across multiple jurisdictions.”¹¹ Notwithstanding the widespread outrage, scrutiny and claims processes this has spawned, under the regulatory cloak of the Financial Conduct Authority (FCA) and its predecessor, the Financial Services Authority (FSA), this genre of corporate wrongdoing has been framed as a regulatory breach, attracting civil remedies and sanctions, and has consequently escaped formal definition as fraud. Through such a conception the annual estimate of fraud excludes the sizeable losses borne by consumers and the analysis of this sector is therefore one-sided, confined to frauds committed by those who are not operating as regulated persons, namely customers who are committing offences against the financial providers. Accordingly, the quantitative estimate encompasses fraudulent insurance claims made against insurers and cheque, credit card and mortgage frauds perpetrated against regulated bodies.¹²

While the extensive losses sustained by consumers due to mis-sold products and commodities in the financial sector have been highly publicised, commercial wrongdoing of the trading standards or consumer protection ilk has attracted less attention in the press. Similarly, the Annual Fraud Indicator excludes consumer losses resulting from what is described as “unfair trading” and which therefore falls within the respective ambits of the Trading Standards Service and the Competition and Markets Authority. In this respect, it is acknowledged that the direct consumer detriment for the year from March 2015, estimated at £19.6 billion, is an underestimate.¹³ While there may be a degree of overlap with the mass marketing category that is included, this amount is double the figure estimated in the Annual Fraud Indicator and does not touch the financial misconduct dealt with by the other, 200 or so, bodies working in the consumer protection system.¹⁴ Were losses arising through sharp commercial practices of this nature to be integrated, through their categorisation as fraud, a dramatic increase to the current £193 billion annual cost, or misallocation of resources, would follow. With the possible exception of mass marketing scams, typically orchestrated by criminal organisations formed specifically for the illegitimate purpose, the current fraud analysis constructs the commercial entity qua victim and not perpetrator of crime. This one-dimensional account of the corporate form is, however, far removed from the observations made by Punch, some two decades ago, in his seminal work on corporate delinquency. In this respect, Punch articulated in terms of business organisations possessing an ineluctably ambiguous nature, providing ample illustration of the ways in which corporations commit serious violations of law during the course of conducting otherwise legitimate business. The corporate form not only provides the environment in which individuals can commit crime but can itself be a perpetrator of it.¹⁵ Notwithstanding that potential for causing serious criminal harms, most commercial activities are subject to the regulatory control of specialised agencies¹⁶ with the result that commercial wrongdoing typically evades the ambit of mainstream criminal prosecution.

The selection of categories included in the Annual Fraud Indicator is thus logical in that it simply reflects the existing criminal/regulatory divide indicative of the different ways that wrongdoing is constructed in different social arenas. However, notwithstanding the historic and enduring perception of corporate wrongdoing as a matter of regulatory breach, if put to the test in the criminal courts many of the “unfair” trading and mis-selling practices that have hit the headlines may, in substance, be found to constitute criminal fraud. The generic offence is contained in the Fraud Act 2006 and can be made out either through the making of a false or misleading representation¹⁷ where the defendant knows that the representation is, or might be, untrue or misleading,¹⁸ by failing to disclose information that a person is legally obliged to disclose,¹⁹ or by abusing a position occupied in relation to the financial interests of another.²⁰ If done dishonestly²¹ and with an intention to make a gain for himself or another, or to cause a loss to or to expose another to a risk of loss,²² a conviction can follow. While the mental characteristics of the offence, “dishonesty” and the “intention” to bring about one of the prescribed outcomes, seemingly import liability on the basis of individual human offenders who possess these metaphysical hallmarks of blameworthiness, the Fraud Act itself adverts to the commission of fraud by corporate bodies.²³ This possibility is, however, currently limited by the need to successfully apply the “identification principle” in the particular case. This means that a corporate conviction is possible only if an officer who is deemed to be a “directing mind and will” of the company has committed the fraud in question, with the requisite mental elements.²⁴ The mental elements of an offence, generically described by the Latin term “mens rea”, are what particularly define the proscribed conduct as a truly criminal matter. Mens rea is what distinguishes a crime from a civil wrong or a so-called strict liability “public welfare” offence that can be made out irrespective of moral culpability. In the case of criminal charges, it is the identification doctrine that serves as the mechanism to attribute the necessary mental state to the artificial corporate entity, the blameworthiness of the “directing mind” being equally attributable to the corporation which is perceived as that individual’s alter ego. It is of note that in the context of business activity and regulatory contravention, regulations are typically drafted without a mens rea requirement such that the problem of attributing blameworthy mental states to the non-human legal entity is avoided. While this sidesteps the mens rea obstacle in the context of corporate misconduct, it is also true to say that regulatory breaches, requiring no proof of blameworthiness, do not attract the same moral opprobrium that attaches to truly criminal behaviour.²⁵ Whatever the gravity of the prohibited conduct, it is effectively reduced to a level akin to a breach of a public welfare offence, minimising the stigma and sense of culpability attached. In the context of fraud, individual wrongdoing is considered a truly criminal matter, whether a statutory offence or common law conspiracy to defraud, while corporate misconduct amounting to fraud, save for the exceptional circumstances in which the “identification principle” may apply, is typically confined to the regulatory sphere.

1.2 The location of corporate crime in the regulatory sphere

Corporate behaviour in commercial markets is largely shaped by regulations prescribed by the particular industry’s regulatory authority. The regulatory agencies are also endowed with enforcement powers such that they are primarily responsible for identifying and addressing instances of regulatory breach. Accordingly, any discussion of the proposed expansion of the criminal liability of corporations must consider the traditional interplay between the criminal law and the regulatory regime. While this work does not propose a deconstruction of the whole regulatory edifice, a veritable industry in itself, it does seek to redraw the boundaries between the regulatory and the criminal in a way that reflects the contemporary understanding of the corporate form and corporate action. However, any exercise to rebalance the respective spheres cannot take place in a vacuum and an account of the law’s evolution is necessary to understand the factors that have led to the current status quo. Without necessitating a detailed historiography, some reference to the birth and growth of the regulatory regime goes some way to explain why commercial wrongdoing came to be constructed within the regulatory framework in preference to the mainstream criminal law.

Although the criminal law has been used for some centuries to address the problem of individual traders who perpet...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Table of cases
• Table of legislation
• Preface
• 1 Criminal fraud and the problem of the corporate actor
• 2 Corporate fraud: the case for a new approach
• 3 Orthodoxy and the twin canons of criminal fault
• 4 Mens rea, metaphysics and the manifest assessment of fault
• 5 Modern philosophy: mirror neurons and the manifest approach
• 6 Realism: back to the future?
• 7 The unmasking of the identification principle
• 8 Concluding thoughts: corporate fraud and the way forward
• Index