Fines in excess of £100 million may even be appropriate where a repeat offender is a company with a large turnover, as observed by the Court of Appeal in a recent judgment against Thames Water. Although the case related to an environmental prosecution, the judgment has far wider implications for regulatory and business crime cases and is also significant due to the factors that the court pointed to as mitigating and aggravating in relation to sentencing.
Companies should bear the courts' stricter approach to handling second and subsequent offences in mind when making compliance-related investment and resourcing decisions. The judgment should also be considered when it comes to important decisions relating to the appointment of external lawyers and defence strategy in regulatory investigations and prosecutions.
Reflecting an offender's financial circumstances
Thames Water was fined £250,000 in Reading Crown Court and was the first company to be sentenced under the new Sentencing Council guidelines for environmental offences. The company appealed against the size of its fine to the Court of Appeal on the ground that it was manifestly excessive.
The Sentencing Council's guidelines were developed with the objective of improving consistency in sentencing, and set out various steps that should be taken to arrive at a range of appropriate sentences. A similar approach is taken in economic crime and health and safety cases.
Thames Water's appeal boiled down to an argument that the crown court had wrongly established a new higher level of penalties for large companies in environmental prosecutions, which had not been sanctioned by the Sentencing Council or by statute. This was rejected by the Court of Appeal. The court considered Thames Water's fine to have been lenient in the circumstances and commented that it would have had no difficulty in upholding a very substantially higher fine.
The Court of Appeal repeatedly affirmed the need for fines in cases involving very large companies to reflect their financial circumstances, and to ensure that the penalty brings home to management and shareholders the need to protect the environment. Indeed, in cases of the worst environmental harm caused by deliberate action or inaction, the court commented that an appropriate fine may equal up to 100% of a company's pre-tax net profit even where this results in fines in excess of £100 million. A parallel was drawn with the very substantial regulatory fines that are commonplace in financial services regulatory enforcement.
A wider trend
There have now been several sentencing decisions in environmental, health and safety and corporate bribery cases where judges have expressed the view that large corporate offenders that commit serious breaches should face fines of tens of millions of pounds. In the corporate bribery case against Innospec in 2010, the then Lord Justice Thomas commented on the "duty" of the courts to impose penalties appropriate to the serious level of criminality characteristic of that offence, which in the Innospec case amounted to tens of millions of pounds. Now the Lord Chief Justice, the same judge observed last year that a fine of £500,000 imposed against Network Rail in a health and safety case could have been "materially greater".
These observations by the highest ranking judge in England and Wales will inevitably lead to sentencing judges having more confidence in passing significant sentences in corporate cases. Following the Thames Water judgment, we anticipate that fines measured in the millions of pounds will become more common.
Investing in regulatory compliance
The prospect of such significant fines increases the need for companies to invest in regulatory compliance. Targeted investment in specialist compliance personnel or teams for overseeing financial crime prevention and regulatory compliance will enable firms to demonstrate an awareness of the seriousness of these issues and the steps that they need to take to minimise risk. It is also likely to impact on how companies respond to regulatory incidents and on the decisions made in relation to defending proceedings.
Where regulatory breaches do occur, courts will consider corporate compliance programmes, good character and acceptance of responsibility as mitigating factors when following the steps set out in the relevant sentencing guidelines. Companies that self-report breaches and can demonstrate evidence of steps taken to remedy the problem and any voluntary compensation paid will also see this reflected in final sentences.
Companies should establish a compliance and ethics committee, reporting directly to the chair or chief executive, and conduct regular compliance reviews and audits. Regular training on ethics and regulatory compliance issues should be compulsory for staff at all levels of the company, with personnel required to certify compliance with the company's policies and procedures.
Tom Stocker and Christopher Hopkins are regulatory and compliance law experts at Pinsent Masons, the law firm behind Out-Law.com.