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Directors' responsibility for compliance and financial crime failures

Nigel Morris-Cotterill

In May 2017, I addressed the global annual conference of the Institute of Enterprise Risk Managers. During that presentation, aimed at the CEOs of major corporations, I explained that board members are responsible for the whole of the Group, not merely a division or even the company of which they are expressly a director of. In this article, I publish those comments, as scripted.

It's not my job to be liked: it's my job to make those who control and manage companies understand that protecting their company against a range of offences is a duty to shareholders, debenture holders, directors, management and staff and, in the case of many businesses, customers or clients.

All too often, people imagine that if they didn't know, they can't be blamed. In a few minutes, I'll show you how that approach can land you in jail and make your company subject to big fines.

All too often, people imagine that their job is above the nitty-gritty of protecting the company, as if the purpose of board meetings is a social event where a bit of business is done. They see their role not as being actively involved in the operations of the business or how it does its business but almost as an avuncular guiding hand. Or, in some cases, a CEO sees the company as his own fiefdom, to run as he pleases and that, because of his golden parachute, he doesn't really care what risks he ignores. That might be so in relation to business strategy but, in relation to financial crime and an increasing range of areas, that is not so. It is no defence to say "it was someone else's job." You might be the Director of Overhead Fan Maintenance but, if you are on the board, you have, in many countries, personal responsibility for anything that happens in any division and, even, in any subsidiary or branch including those overseas.

It is my intention to make you uncomfortable?

Yes. Absolutely.

Why?

Because every week, you get hundreds or even thousands of pages of carefully phrased material full of management-speak which is designed to reduce the impact of the document and so the seriousness of your position is almost never made brutally clear.

talking about money laundering, terrorist financing and related laws is not esoteric. It is mission critical and if you get it wrong you, personally, can end up in jail, your assets frozen and/or confiscated. And the scary part is that you don't even need to have been part of the original crime and, worst of all, you don't even need to have known that an offence had been committed. You just have to have not asked the right questions at the right time.

Companies can be found guilty of criminal offences, including money laundering and terrorist financing.

It is established in many countries that a company can be guilty of money laundering, despite the obvious legal dilemma that, on the one hand, a money laundering offence includes an element of knowing and performing an act despite that knowledge and, on the other, it is generally accepted that a company cannot form mens rea.

There are no equivalent legal difficulties in the prosecution of individual directors and other officers. The question, then, is establishing actual knowledge. But the law takes account of that by the use of a wilful blindness test which is, in most legislation, enshrined in a provision that talks of "reasonable cause for.." knowledge, suspicion or belief depending on the specific provision.

These legal provisions are found in a wide range of legislation around the world from liability for the pollution of watercourses through health and safety law to bribery and corruption and breaches of sanctions.

The UK's Crown Prosecution Service in its guidelines to prosecutors says "Prosecution of a company should not be seen as a substitute for the prosecution of criminally culpable individuals such as directors, officers, employees, or shareholders. Prosecuting such individuals provides a strong deterrent against future corporate wrongdoing. Equally, when considering prosecuting individuals, it is important to consider the possible liability of the company where the criminal conduct is for corporate gain. "

http://www.cps.gov.uk/legal/a_...

The UK and other common law countries get around the fact that a company, like a vending machine, has no mind of its own and therefore cannot form mens rea, i.e. the intention to commit the offence, by what is termed a legal device. The UK's CPS says "'the acts and state of mind' of those who represent the directing mind will be imputed to the company" (a summary of decisions in several cases: Carrying Co and Asiatic Petroleum [1915] AC 705, Bolton Engineering Co v Graham [1957] 1 QB 159 (per Denning LJ) and R v Andrews Weatherfoil 56 C App R 31 CA. )

In 1972, the case of Tesco Supermarkets Ltd v Nattrass [1972] AC 153 restricts the application of this principle to the actions of the Board of Directors, the Managing Director and perhaps other superior officers who carry out functions of management and speak and act as the company. Prosecutors are looking for "the directing mind."

Therefore the actions or inactions of the Board and other senior managers can be imputed to the company and, therefore, the company can be prosecuted for criminal conduct.

Several decades ago, an Australian Court found that a director ordinarily resident in the UK who flew into Australia periodically for meetings was liable as a director and that the fact that he could not have had actual knowledge due to his infrequent presence was not a defence. Around the world, especially in relation to nominee directors (that is people who are registered as directors to meet local company law but actually take no part in the management or business of the company) are now expressly liable to the same extent as directors who take a full part.

Non-executive directors don't get a free pass in many countries. For example, in Ireland "Irish company law does not distinguish between the powers, duties or liabilities of executive and non-executive directors. As a result, non-executive directors are required to show the same duty of care and fiduciary duty to a company as an executive director." That might sound harsh given that the entire purpose of the non-executive director is to be independent of the management of the company. But "As non-executive director’s powers and duties are identical to executive directors, they need to ensure they challenge constructively and scrutinise the performance of management in meeting agreed goals and objectives." Therefore, they are in effect a super-board. They must have access to the same information as executive directors. "As directors are responsible for the general management of the company it follows that they are liable to some extent for their actions. A non-executive director will be subject to the same liability as any other director in relation to compensating their company for loss arising from breaches by directors of their duties. It is therefore important that they show that they have taken appropriate steps to exercise care, skill and diligence in the execution of their roles and responsibilities."

http://www.corplaw.ie/blog/bid...

I have chosen laws from around the world to demonstrate that there is a general homogenisation of company law and approaches. There is a similar homogenisation in relation to money laundering and terrorist financing and, increasingly, to bribery and corruption.

As you can see, by piecing together a patchwork of legal approaches we can prove to you, as directors of companies, that each of you and the companies you work for are at risk of prosecution for a wide range of offences, not only those that we are specifically concerned today.

Importantly, perhaps the one sentence you need to remember and repeat to yourself, is this: in the current climate, you cannot say "I delegated that responsibility."

 


 

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