‘Too Scared to Prosecute and Too Scared to Jail?’ A Critical and Comparative Analysis of Enforcement of Financial Crime Legislation Against Corporations in the USA and the UK

The Doctrine of Corporate Criminal Liability in the USA

The US approach can be traced back to the seminal decision of the Supreme Court in New York Central & Hudson River Railroad Company v US. ³⁵ The key issue in this case was whether the defendant corporation could be held liable for the illegal acts of its agent, who was acting within the scope of his authority. Here, the defendants, in conjunction with an agent of the company, were convicted for breaching the Elkins Act 1903, ³⁶ which proscribed the payment of rebates. In its unanimous opinion, the Supreme Court boldly declared that ‘the old and exploded doctrine that a corporation cannot commit a crime’ was no longer appropriate. ³⁷ Specifically, the Supreme Court held that a corporation could be held criminally responsible for the illegal acts of its agent. The US judiciary has adopted the respondent superior model to deal with the doctrine of corporate criminal liability. ³⁸ This is a variation of the vicarious liability doctrine, and it allows the extension of civil liability on employers for the actions committed by their agents. ³⁹ It is important to note that the Supreme Court in New York Central did not offer any specific guidance in what circumstances this model could be imposed. The decision of the Supreme Court has since been broadened to comprise the actions of agents of corporations who are acting without authority or breaching specific directions. ⁴⁰ Therefore, a corporation could be held liable for the conduct of ‘low-level employees who acted contrary to the corporate policy and to the compliance program of its firm’. ⁴¹

The Prosecution of Corporations

The instigation of criminal proceedings in financial crime cases initially concentrated on persons and not corporations. This was illustrated following the 1980s Savings and Loans Crisis, which resulted in the collapse of over 2,100 financial institutions and losses exceeding $150 billion ⁴² and resulted in over 1,000 senior executives being convicted of fraud and receiving lengthy custodial sentences. ⁴³ However, it was not until the later that decade that the DoJ began to indict corporations for breaches of financial crime legislation. For example, in 1987, the stock brokerage firm EF Hutton, which was initially accused of ‘check kiting’, ⁴⁴ revealed that some of the firm’s brokers had laundered money for the Patriarca Crime Family. ⁴⁵ In light of this disclosure, EF Hutton was indicted and eventually convicted of 2,000 counts of mail and wire fraud. ⁴⁶ As a result of the conviction, EF Hutton entered into a plea bargain with the DoJ and it was ‘forced to merge with a competitor’. ⁴⁷ Interestingly, none of the employees of EF Hutton were prosecuted and only the company was held criminally responsible.

Whether this move away from the prosecution of individuals towards the prosecution of corporations is merited needs to be ascertained in light of the impact of such prosecutions. The prosecution of the investment banking corporation Drexel Burnham Lambert undoubtedly illustrates well the impact of a corporate conviction. After the firm’s managing director, Dennis Levine, who had a history of illegal conduct, pleaded guilty to several insider trading charges, ⁴⁸ the US Attorney for the Southern District of New York launched an investigation into Drexel Burnham Lambert under the Racketeering Influenced and Corruption Organisations Act 1970. ⁴⁹ As a result of the threat of prosecution, Drexel Burnham Lambert entered into an ‘Alford plea’ ⁵⁰ for several market manipulation charges and agreed to pay a fine of $650 million to the SEC. ⁵¹ In consequence, Drexel Burnham Lambert was forced to close several of its departments which resulted in the loss of 5,000 jobs. This illustrates the far-reaching consequences of a corporate conviction, almost to the point of a corporate death penalty.

The Move Towards DPAs

A DPA is a contractual agreement between a financial regulatory agency or government agency and a corporation, who is under investigation for breaching the law. The main purpose of a DPA is to permit the offending corporation to illustrate good conduct, to cooperate with the investigating agencies, pay a fine and improve its internal corporate governance procedures. Additionally, DPAs have imposed substantial financial compliance costs for offending companies of £30 million in some cases. ⁵² DPAs are granted for a number of years and once the corporation is able to demonstrate that they have complied with the terms of the DPA, the charges are dropped. Conversely, if a corporation breaches the terms of the agreement, the investigation will be restarted. One way to mitigate the impact of corporate conviction is by using DPAs, which was illustrated by the ‘1990s Treasury Bond scandal’. Here, the investment banking corporation Salomon Brothers was investigated for breaches of the False Claims Act 1986 ⁵³ and the Sherman Act 1890 for making unlicensed bids for Treasury bonds. ⁵⁴ The corporation submitted to a DPA where it agreed to pay a large fine ⁵⁵ to continue assisting investigators and to introduce a new compliance structure. ⁵⁶ This was followed by the imposition of another DPA on Prudential Securities Incorporated which defrauded 400,000 investors of $8 billion. ⁵⁷ Prudential Securities Corporation agreed to pay a $330 million fine, continued to cooperate with the investigation and made several corporate governance alterations including the appointment of an independent director. ⁵⁸ Here, the aim of DPAs was to discipline the offending corporations and eliminate the financial advantage derived from the illegal conduct. If the financial penalty imposed as part of the DPA is too high or excessive, that the corporation folds the impact is then on employees, customers and supply chain. This has been referred to as the collateral consequences (as outlined below) of a corporation losing its licence. These two cases can clearly be contrasted with the damaging impact of the corporate convictions of EF Hutton and Drexel Burnham Lambert.

Undoubtedly, the use of DPAs is fraught with legal, ethical and political concerns. It was not until the conviction of Arthur Anderson LLP, one of the ‘Big Five’ accounting firms, that the DoJ reconsidered the indictment of corporations and fully used DPAs. ⁵⁹ Arthur Andersen had acted as an outside accountant for Enron, which collapsed in 2001 due to wide-scale fraudulent activities. ⁶⁰ Arthur Andersen was accused of shredding audit documents during the DoJ investigation into Enron’s conduct and subsequently agreed to surrender its practising licence as a Certified Public Accountant following its conviction for obstruction of justice. It is important to note here that the DoJ didn’t seek to impose a DPA on Arthur Andersen. As a result, Arthur Andersen filed for bankruptcy and approximately 30,000 employees were made redundant. The impact of the conviction on Arthur Andersen was catastrophic and ‘there was nothing left of the firm to be salvaged’. ⁶¹ Subsequently, the Supreme Court overturned the conviction of Arthur Andersen in 2005 due to inaccurate jury instructions by federal prosecutors. ⁶² On the other hand, ‘Andersen was at least negligent of…fraudulent accounting’ ⁶³ and it had previously been subject to several fines for similar schemes by the SEC. ⁶⁴

In the wake of this judgment, the DoJ decided to rethink its use of corporation prosecution and increase its use of the safer, generous and more flexible option, the DPA with a view to minimising the impact of corporate death. ⁶⁵ To ensure consistency in the use of this option, the Deputy Attorney General published the Federal Prosecution of Corporations or ‘Holder Memo’. ⁶⁶ The Holder Memo (later amended by the ‘Thompson Memo’, ⁶⁷ the ‘McNulty Memo’ ⁶⁸ and most recently the ‘Filip Memo’ ⁶⁹ ) contained factors that prosecutors are required to consider before deciding to commence criminal proceedings against a corporation, ⁷⁰ one of which being that the potential ‘collateral consequences’ must be considered before any financial crime charges are brought against corporations. ⁷¹ This includes the likely impact of a prosecution on employees, investors and the economy more generally. ⁷² However, not all commentators are convinced by the collateral consequences argument. For instance, Clarkson noted:

With regard to the argument that punishing companies amounts to punishment of innocent shareholders and creates risks of redundancies, it must be borne in mind that such persons are not themselves subject to the stigma of conviction and criminal punishment. Those who take the benefits should also shoulder the burdens. A company should not be permitted to cut corners in its desire to make profits for its shareholders, and in particular it must not cut overhead costs at the expense of safety. ⁷³

Despite this questionable use of DPAs, US federal prosecutors are too scared to indict corporations following the collapse of Arthur Andersen. The way HSBC was treated is an excellent point in case. In December 2012, the DoJ announced that it had reached an agreement with HSBC for violating US anti-money laundering (AML) laws, the United Nations (UN) sanctions regime and related criminal offences. ⁷⁴ In particular, HSBC admitted to breaching the Bank Secrecy Act 1970, ⁷⁵ the International Emergency Economic Powers Act 1977 ⁷⁶ and the Trading with the Enemy Act 1917. ⁷⁷ The DoJ noted that

HSBC’s blatant failure to implement proper AML controls facilitated the laundering of at least $881 m in drug proceeds through the US…[its] willful flouting of US sanctions laws…resulted in the processing of hundreds of millions of dollars in OFAC-prohibited transactions. ⁷⁸

There are two factors which contributed to the DoJ agreeing a DPA in this instance and both relate to the wider consequences of corporate prosecution. First, HSBC was not indicted because a criminal conviction would weaken an already fragile financial system that was still recovering from the most recent financial crisis. This factor was acknowledged by the former Attorney General Eric Holder who stated that a prosecution ‘will have a negative impact on the national economy, perhaps even the world economy’. ⁸³ In this regard, the prosecutors followed the Holder Memo that required them to examine the collateral consequences. Secondly, HSBC was not prosecuted due to unprecedented levels of political interference from the UK. The House of Representatives Committee on Financial Services published several correspondences from the Financial Services Authority (FSA) and HM Treasury who pleaded with the DoJ ‘against a prosecution, [because] it was clear they were very concerned about the reverberations such an action could have within the financial system’. ⁸⁴ Their report continued ‘an official in the UK government reached out to a US official to complain that US regulators were taking aggressive action against UK banks in an effort to make British banks a less attractive place to do business’. ⁸⁵ Remarkably, again the justification of the wider consequences of corporate prosecution was used, though by the UK, as a way to block indictments.

One of the aims of punishment is deterrence. HSBC, like Arthur Andersen, was a repeat offender who had previously been sanctioned by law enforcement agencies in France, ⁸⁶ the UK, ⁸⁷ Switzerland, ⁸⁸ the USA ⁸⁹ and Hong Kong. ⁹⁰ Therefore, it could be suggested that DPAs are an inadequate enforcement tool against corporations for financial crime offences because they do not prevent future breaches by these offending corporations.

Interestingly, Eric Holder noted that ‘the greatest deterrent effect is not to prosecute a corporation…[it] is to prosecute the individuals in the corporations that are responsible for those decisions’. ⁹¹ In spite of this, the DoJ has declined to prosecute any employee or agent of HSBC since entering the DPA and comparisons can be drawn with the collapse of Arthur Andersen as outlined above, where no prosecutions were brought against any of its employees either. Conversely, there are some instances of corporations entering into a DPA and the DoJ instigating criminal proceedings and securing convictions of the corporations’ employees. For example, in 2005, KPMG entered into a DPA after the firm ‘admitted that it engaged in a fraud that generated at least $11bn in phony tax losses’. ⁹² In 2013, Michael Parker pleaded guilty to conspiracy to defraud and was sentenced to 54 months’ imprisonment for his role in the KPMG tax fraud, ⁹³ yet a majority of the indictments brought against KPMG’s employees were thrown out by the courts. ⁹⁴ The use of criminal proceedings against employees has been questioned because an individual’s conviction will ‘seldom affect the way the corporation…will behave itself’. ⁹⁵ The indictment of employees or agents of a corporation must be used in conjunction with a DPA if they are to act as a deterrent for future misconduct. The combination of these two forms of punishment would present a stronger deterrent than if they were used separately. The DoJ has been crippled, not by ineffective legislation, but by its weak enforcement stance and the ‘fear of that the collateral consequence would have on the economy’. ⁹⁶ The evidence is clear that the rattling of sabres by the DoJ merely amounts to no more than entering into high-profile and media-friendly DPAs with corporations for breaches of financial crime legislation.

The DoJ can make use of a variety of other measures to punish corporations for failing to abide by the law. First, it can impose financial penalties in pursuance of the Sentencing Reform Act and secondly, it can instigate civil proceedings under the Financial Institutions Reform, Recovery and Enforcement Act 1989. It is argued that a combination of criminal prosecution, possibly using DPAs, as well as use of these measures is likely to yield the most appropriate results in terms of deterring illegal conduct by corporations.

Civil Sanctions

As an alternative form of enforcement mechanism to tackle corporate financial crime, the Sentencing Reform Act was introduced as part of the Comprehensive Crime Control Act of 1984. ⁹⁷ The Act allows law enforcement and financial regulatory agencies to impose civil financial penalties on corporations for a wide range of criminal activities. With this in mind, the SEC has imposed a record number of financial penalties. ⁹⁸ The Commodity Futures Trading Commission (CFTC) has adopted a similar enforcement strategy since the introduction of the Sentencing Reform Act 1984. ⁹⁹ The introduction of the Sentencing Reform Act 1984 has permitted law enforcement and financial regulation agencies to impose a number of large financial penalties on corporations who have breached financial crime legislation. This is the most frequently used enforcement power against corporations in the USA and it is regularly used in association with a DPA, as was illustrated in the HSBC case outlined above.

Another important legislative measure that has been used against corporations is the Financial Institutions Reform, Recovery and Enforcement Act 1989. ¹⁰⁰ The Act was introduced as a response to the Savings and Loans Crisis in the 1980s and permits law enforcement and financial regulatory agencies to instigate civil proceedings against corporations for a wide range of financial crimes. This includes mail fraud, wire fraud, providing false statements and bank fraud. The 1989 Act provides that prosecutors are only required to illustrate a civil burden of proof and not a criminal burden in order to impose civil liability on the offending corporation. ¹⁰¹ This civil measure has been used by the DoJ on numerous occasions for corporate financial crime offences and it has generated billions of dollars in financial penalties and compensation for victims where identifiable. For example, the DoJ reached an agreement with Bank of America who settled the ‘the largest civil settlement ($16.65bn) with a single entity in American history’ under the 1989 Act. ¹⁰² Other examples include the largest settlement for robo-signing, ¹⁰³ fair lending settlements with Countrywide Financial Corporation ¹⁰⁴ and Wells Fargo Bank. ¹⁰⁵ The importance of the 1989 Act is further illustrated by figures published by the DoJ in December 2016 when it announced that it had collected more than $15.3 billion in civil sanctions. ¹⁰⁶

The introduction of financial penalties and civil proceedings are to be broadly welcomed as these measures have imposed some form of liability on corporations for financial crime breaches. Then again, the impact of financial penalties on corporations is negligible as they are often smaller than administrative actions and related civil actions and therefore did little to prevent misconduct. ¹⁰⁷ Similarly, Jones noted that ‘corporate fines are both ineffective and ill-conceived…the sanctioned firms are so wealthy that even a fine running into the hundreds of millions of dollars is often viewed as a mere cost of doing business’. ¹⁰⁸ It is recommended that financial penalties and civil proceedings should be used in conjunction with DPAs to act as a greater deterrent against corporations.

The UK’s Approach to Corporate Prosecution

The UK’s legislative efforts to tackle financial crime came to fruition with the enactment of the Prevention of Fraud (Investments) Acts of 1939 and 1958. Previous legislative efforts included the Public Bodies Corrupt Practices Act 1889 and the Prevention of Corruption Act 1906, while the common law criminalised conspiracy to defraud and the offences of bribing and accepting a bribe. It was not until the creation of the SFO via the Criminal Justice Act 1987 that there was a concerted effort to tackle financial crime. ¹⁰⁹ Its establishment was sandwiched between the Financial Services Act 1986 and the Banking Act 1987 during an unprecedented era of banking deregulation, ¹¹⁰ which contributed towards increasing the UK’s exposure to financial crime. ¹¹¹ Efforts to tackle financial crime were revisited following the introduction of the Financial Services and Markets Act 2000 and the statutory objective of the FSA to reduce financial crime. ¹¹² This, combined with their investigative and enforcement powers, was an innovative attempt to tackle financial crime that arose from, within or targeted the financial corporations. In 2002, the Proceeds of Crime Act 2002 was introduced, a piece of legislation that effectively codified the existing AML legislations contained within the Drug Trafficking Offences Act 1986 and the Criminal Justice Act 1993. In 2006, the fraud legislation was overhauled by the introduction of the Fraud Act 2006 and this was followed by the extension of the enforcement powers of the new city regulator, the FCA, by the Financial Services Act 2012. The measures tackled financial crime committed by individuals and not corporations. The only mechanism to tackle corporate financial crime was the unsatisfactory doctrine of corporate criminal liability. In order to address this problem, the Bribery Act 2010 and the Criminal Finances Act 2017 have introduced two new corporate criminal offences: failing to prevent bribery ¹¹³ and failure to prevent the facilitation of tax evasion. ¹¹⁴ This section begins by outlining the development of the doctrine of corporate criminal liability.

The Doctrine of Corporate Criminal Liability in the UK

The doctrine of corporate criminal liability has attracted a great deal of criticism from within the existing literature, most of which has been directed at the common law rules that have considered the imposition of corporate criminal liability. The courts began to consider the restrictive application of criminal law to companies in the 19th century, which included cases involving public nuisance, criminal libel and breach of statutory duty. ¹¹⁵ The doctrine was further extended by three Court of Appeal decisions in 1944, which concluded that a corporation could be held directly accountable, as opposed to vicariously liable, for the actions of their employees. For example, in DPP v Kent and Sussex Contractors Ltd, the Court of Appeal concluded that a company could be held criminally liable where it had produced false documents and provided false information. ¹¹⁶ The Court of Appeal reached a similar conclusion in R v ICR Haulage Co Ltd, where it held that a company could be held criminally accountable for conspiracy to defraud by the acts of one of its directors. ¹¹⁷ The final case was Moore v Bresler Ltd where the secretary of the company, who was also the general manager of a branch of the company, was accused of defrauding the company. Here, the company was found criminally liable because one of its officers was acting within the scope of his responsibilities. ¹¹⁸

The leading authority on the doctrine of criminal liability of corporations is the House of Lords decision in Tesco Supermarkets v Nattrass. ¹¹⁹ This decision has become synonymous with the evolution of the identification doctrine, yet this had already been considered by the House of Lords in Lennard’s Carrying Co Ltd v Asiatic Petroleum Ltd, ¹²⁰ where the court concluded that the owner of a vessel was the ‘directing mind and will of the company’ because ‘he was the alter ego of the company’. ¹²¹ In Tesco Supermarkets v Nattrass, the House of Lords concluded that a company is allowed to provide a defence to a prosecution under the Trade Descriptions Act 1968 provided the company had established an effective procedure to avert the commission of a criminal offence. While giving the leading opinion, Lord Diplock stated that when the court considers how it will identify who has the directing mind of the company it can refer to its memorandum and articles of association, thus also to the directors of the company and other senior company officers. ¹²² Therefore, in order for a company to be found guilty of a criminal offence, a person who has the directing mind of the company and the self-determination of the company must also have criminal intent. This decision in Tesco resulted in the creation of the ‘identification doctrine’, the test to determine whether corporations are to be held liable for breaches of criminal law.

It is argued that this test has become the principal reason that prevents prosecutors bringing criminal proceedings against corporations. ¹²³ It has been correctly asserted that the identification doctrine ‘does not reflect modern corporate practice, particularly in larger companies. The doctrine ignores the reality of modern corporate decision-making’. ¹²⁴ For example, the restrictive interpretation and the nature of large corporations have been highlighted by several subsequent cases including the Herald of Free Enterprise, ¹²⁵ the Clapham rail disaster, ¹²⁶ the Transco gas explosion, ¹²⁷ the Hatfield Disaster ¹²⁸ and the sinking of the Marchioness. ¹²⁹ As a result, the Corporate Manslaughter and Corporate Homicide Act 2007, which criminalised harm that leads to a person’s death, was adopted. ¹³⁰ However, the impact of the Act is negligible as there have only been 19 criminal charges brought under the 2007 Act between 2008 and 2016. ¹³¹ The decision in Tesco and the subsequent judicial interpretation as well as the lack of success of the 2007 Act were unsatisfactory and resulted in the publication of a consultation paper by the MoJ which presented five options for reform, ¹³² which additionally seeks to build on the failure to prevent offences under the Bribery Act 2010.

The Success of the Bribery Act 2010

This section concentrates on providing a brief discussion of the aim of s. 7 of Bribery Act 2010 and notes that the offence has resulted in a number of prosecutions. The Bribery Act 2010 introduced a new form of corporate criminal liability where a corporation can be found guilty of an offence if a person associated with the organisation bribes another, intending to obtain or retain business or a business advantage for that organisation. ¹³³ In essence, it creates an additional direct rather than alternative vicarious liability, when the commission of a s. 1 or s. 6 bribery offence has taken place on behalf of an organisation. However, for there to be any liability, the organisation must be stipulated as a ‘relevant commercial organisation’. ¹³⁴ An ‘associated person’ is seen as an individual who ‘performs services for or on behalf of’ the organisation, ¹³⁵ with the person being, for example, the organisation’s agent, subsidiary or employee. ¹³⁶ This has been stated to be a ‘matter of substance rather than form’, ¹³⁷ with it being necessary for all surrounding circumstances to be taken into account, although a presumption will exist if the associated person is an employee of the organisation. The scope of s. 7 is broad, so as to encompass the whole range of individuals who may be committing bribery on behalf of a third-party organisation. To be held as an ‘associated person’, ‘the perpetrator of the bribery must be performing services for the organisation in question and must also intend to obtain or retain business or an advantage in the conduct of business for that organisation’. ¹³⁸ Section 7 has been described as a significant move ‘away from the current [identification doctrine] approach’, ¹³⁹ with the MoJ stating that under this section ‘a commercial organisation will be liable to prosecution if a person associated with it bribes another person intending to obtain or retain business or an advantage in the conduct of business for that organisation’. ¹⁴⁰ Moreover, the existence of the s. 7 offence does not affect the common law principle which governs the liability of corporate bodies for criminal offences. Under this provision, prosecuting bodies must prove a mens rea or fault element in addition to the actus reus or conduct element. This common law principle, also known as the identification principle, should still be used instead of s.7 where it is possible to prove ‘that a person who is properly regarded as representing the “directing mind” of the body in question possessed the necessary fault element required for the offence’. ¹⁴¹

Interestingly, the introduction of the failing to prevent bribery offence has been enforced by the SFO which has used DPAs by virtue of the Crime and Courts Act 2013. ¹⁴² According to the SFO, DPAs only apply to corporations, they are concluded under the supervision of the judiciary and they seek to avoid expensive and time-consuming trials. ¹⁴³ Therefore, the UK’s adoption of DPAs can be contrasted with that in the USA where DPAs were used to avoid the negative consequences, or collateral consequences, of prosecuting corporations. The UK is largely using DPAs for their expediency.

Although s. 7 of the Bribery Act 2010 was introduced to address the limited application of criminal law to corporations, it has resulted in the use of DPAs, which as discussed above is questionable as such. The SFO obtained its first DPA for breaches of the failing to prevent bribery offence against Standard Bank Plc, which was ‘ordered to pay financial orders of $25.2m and required to pay the government of Tanzania a further $7m in compensation’. ¹⁴⁴ This was followed by a second DPA against XYX Ltd who agreed to ‘pay financial orders of £6.5m, comprised of a £6.2m disgorgement of gross profits and a £352,000 financial penalty’. ¹⁴⁵ In 2017, Rolls-Royce agreed to enter into a DPA that ‘involve[d] payments of £497m…[and] Rolls-Royce [were] also reimbursing the SFO’s costs in full’. ¹⁴⁶ In April 2017, the SFO announced that it had entered into a DPA with Tesco which was required to pay a fine of £129 million for overstating its profits. ¹⁴⁷ The MoJ asserted that the s.7 offence has provided a ‘powerful incentive for the inclusion of bribery prevention procedures as a component of corporate good governance. Its utility as an enforcement tool has been recently demonstrated’. ¹⁴⁸ Interestingly, in each of the four DPAs obtained by the SFO, no criminal prosecutions have been brought against any of the offending corporation’s employees or agents, thus drawing similar comparisons with the US approach as outlined above. This is not surprising given the initial lack of enthusiasm shown by the SFO and Crown Prosecution Service towards prosecuting individuals under the Bribery Act 2010. It is somewhat disappointing that no prosecutions have been brought in each of the four DPAs agreed between the corporations and the SFO, thus similarities exist between the approach in the USA and the UK. If prosecutions were pursued against the employees or agents by the SFO for breaches of the Bribery Act 2010, it would represent an additional form of deterrent and would go some way to avoid any more ‘profound apologies’. The UK’s approach towards DPAs can be differentiated from their use in the USA. In the UK, DPAs have been used because they are cost-effective and avoid lengthy trials. Another similarity between the use of DPAs in the UK and the USA is that no employees of the offending corporations have been prosecuted for related offences. Therefore, the same recommendation applies to the UK, when a DPA is agreed with the SFO, prosecutions should also be pursued in conjunction with the DPA.

Financial Regulation

The final section of the article provides a critical review of the enforcement powers of the FCA towards corporations who have breached financial crime legislation. This is important and necessary due to the regulator’s statutory objective to reduce financial crime. As a result of the Financial Services Act 2012, the FSA was replaced by the FCA, and its statutory objective to reduce financial crime now forms part of its integrity objective. ¹⁴⁹ This section concentrates on the ability of the FCA to impose financial penalties for breaches of its financial crime rules and the obligations under the SMCR. The most frequently used power against corporations for financial crime breaches by the FCA are financial penalties. For example, in January 2017, the FCA imposed a record financial penalty of £163 million on Deutsche Bank for failing to maintain an adequate AML system. ¹⁵⁰ Specifically, the FCA determined that Deutsche Bank had performed inadequate customer due diligence, had deficient AML policies and procedure and it concluded that the ‘failings of Deutsche Bank are simply unacceptable’. ¹⁵¹ The decision by the FCA to impose this record financial penalty can be contrasted with the stance of its predecessor, the FSA, towards HSBC when the regulator decided not to take any action. This must be questioned and criticised given the contrasting content of each case. For instance, HSBC flouted US AML laws and the UN sanctions regime, which resulted in no enforcement action by the FSA. Conversely, Deutsche Bank was fined £163.1 million for not having adequate AML rules as proscribed by the FCA Handbook, even though there was no evidence of any money laundering. The FCA has imposed large financial penalties for breaches of its money laundering rules, even though there was no evidence of money laundering. For example, such fines were imposed on Turkish Bank (UK) Ltd, ¹⁵² Habib Bank AG Zurich ¹⁵³ and Coutts & Company. ¹⁵⁴ Writing in 1996, Clarkson concluded that

it is the individuals within the company that are most amenable to deterrence and that in order to deter a company the fines would need to be massive. A company will only be deterred if its expected costs exceed its expected gains. ¹⁵⁵

The introduction of the SMCR by the FCA presents an opportunity to possibly overcome the problems associated with the identification doctrine, as highlighted above. The SMCR has two objectives: to encourage all staff within the financial services sector to take responsibility for their actions and that authorised firms and employees can clearly illustrate where the responsibility lies. ¹⁵⁹ The introduction of the SMCR was heavily influenced by the recommendations of the Parliamentary Commission for Banking Standards that had been asked to investigate how standards could be improved following the market manipulation scandals of LIBOR and FOREX. ¹⁶⁰ The SMCR provides that a corporation’s senior management is responsible for the policies, systems and controls that are designed to reduce the threat posed by financial crime. Therefore, the SMCR places the obligation of the regulated corporations to limit the risk posed by financial crime on its senior management. The FCA stated that

the extension of the SMCR is key to driving forward culture change in firms…this is about individuals not just institutions…the regime will also ensure that senior managers are accountable both for their own actions, and for the actions of staff in business areas they lead. ¹⁶¹