Cufflinks to Handcuffs

The dynamics of corporate governance are rapidly evolving. Executives need to maintain laser focus to keep in front of the deluge of new law coming down the pipes. From AI to Zero Tolerance policy shifts, and every flavour of ESG risk in between, every activity and organisational assumption surrounding risk and compliance may need to be prioritised for review.

A new era of economic vigilance is recognisable on both sides of the Atlantic and beyond. Emerging fields of criminal liability in the UK, novel enforcement strategies in the US and the newly recognised responsibility for ecocide may sharpen the focus of those who bear responsibility for operating within fields that may expose these risks, with criminal consequences for any failure.

Duty to Prevent Fraud

Efforts to tackle corporate criminal liability in the UK are now strengthened by the new Economic Crime and Corporate Transparency Act 2023 (as White & Case explains). With enhanced powers to investigate and prosecute serious economic crime, the Serious Fraud Office has made its mark, with statements about the increasingly global risk framework and assertive approach to go/no-go investigation decisions. The new offence of a failure to prevent fraud applies to companies with (i) more than 250 employees; (ii) more than £36 million turnover; and/or (iii) assets of more than £18 million and represents a shift beyond what was previously contained by the Barclays decision. Coupled with the widened range of individuals that can attract criminal liability in the corporate context, which the SFO's Chief Capability Officer, Michelle Crotty suggested as the SFO’s preferred prosecution tool, executives, and their compliance teams may be increasingly sensitive to vetting transactions, and organisational policy generally.

Whilst these changes were announced in the context of the Russia-Ukraine conflict, the implications for transaction managers carry direct personal implications for corporate managers, both at the operational and executive levels - locally. Against that backdrop, the commentary consistently recognises a cross-border aspect to serious fraud.

Against this backdrop, Slaughter & May suggests that the reforms are unlikely to have an impact on the online payment scams, identity theft, spoof calls and false invoice scams that are defrauding individuals and which are the subject of most of the Government’s anti-fraud rhetoric.

Ecocide

Around the world, ecocide is being considered as a new limb of environmental liability. Vietnam, Ukraine and Russia have criminalised ecocide and a growing list of others have adopted laws (France) or are considering adopting laws consistent with that proposed by Stop Ecocide, whilst others have moved forward with the policy debate. The EU has agreed to enshrine in law a new offence that aims to punish the most serious crimes against the environment. 

Defined as “unlawful or wanton acts committed with knowledge that there is a substantial likelihood of severe and either widespread or long term damage being done to the environment being caused by those acts”, there are increasing disparities between the governance pause on ESG initiatives and the gaining momentum behind policy initiatives and willingness amongst niche groups to take strategic litigation to the face of dominant incumbents in industries where lobbyists have typically performed the role of front line defence.

Companies are tasked with an obligation to understand supply chain risk in the context of nature related liability. In Australia, directors are considered to have a duty to consider nature related risks, with consequent exposure to executive liability for failure to properly address that risk.

The proposed EU penalty regime has minimum fine levels and the directive recognises the increasing need for cross-boarder cooperation for enforcement purposes (as Simmons & Simmons explains).

Voluntary Self-Reporting Misconduct

At the same time as new heads of liability are emerging, the attitude toward regulatory enforcement is expanding. Increasing activism is paired with innovation around novel enforcement techniques and remedies, such as divestment orders, for rule violations.

On 4 October, the US AG’s office announced a policy aimed at encouraging voluntary self-disclosure of misconduct that is discovered when an acquiring company identifies misconduct by the acquired company. The intention is that the policy will be applied to provide relief from prosecution where the acquirer reports the misconduct within 6 months of closing, and takes timely steps to remediate the issue and cooperate with related prosecutions, within 12 months of closing.

Along with potentially qualifying for comfort in the form of a declination to prosecute in relation to the misconduct, the policy position is that the misconduct will not be taken into account in the context of recidivism, should there be other events of misconduct.

In making this announcement, Deputy Attorney General Lisa O. Monaco warned that the tectonic plates of corporate crime have shifted. Whilst the announcements are presented as carrots, O’Melveny & Myers examines the proof behind the claims around the extent of protection and reward.

Law firms have analysed the implications of these emerging trends and made suggestions for compliance professionals and transactional operators to consider - links to which are on our website.