Overhaul would aid complex cases

A plea bargaining system would help courts to tackle corporate misbehaviour, says Seán Ó Conaill

THE crisis in the banking system and in corporate governance more generally have painfully exposed numerous weaknesses at various levels in our legal framework which in many cases hinder attempts to bring those responsible for white-collar crime and corporate misbehaviour to book.

In addition, and perhaps more worryingly, the various systems we have in operation do not have a strong deterrent factor and do very little to prevent those responsible from returning to similar positions of influence.

In Irish law the roles and responsibilities of directors of companies such as banks are subject to significant regulation by way of legislation and further elaboration from more than 100 years of case law. What is less clear are the practical consequences of when a director or senior figure in a company fails to act in an honest manner or, alternatively, fails to act with requisite levels of responsibility expected from such a person.

In so-called white-collar crime weaknesses in the ways in which we conduct criminal investigations and run trails cause such prosecutions to be rare, lengthy and complex.

Unlike the United States, there does not exist a formal structured plea bargaining system in Ireland whereby an accused can obtain a guarantee of a short sentence or in some cases immunity from prosecution based on co-operation with the prosecutor.

While the current criminal justice system functions relatively well at district court level, where the majority of accused plead guilty, the absence of a plea bargaining system seriously hinders white-collar crime prosecutions which by their nature are extremely complex and difficult to prove.

In the United States, the use of plea bargaining allows prosecutors to prise open cases by offering deals or immunities to parties that are lower down the corporate ladder and co-operate with prosecutions. The experience is that once one party breaks cover others higher up the corporate ladder will follow, which allows the prosecutors to build up a full picture of the crime to the highest level.

This process is quick, cost-effective and results in those most responsible paying the greatest price. A recent statement from the Office of the Director of Corporate Enforcement (ODCE) has highlighted the difficulty in conducting such investigations here.

It refers to alleged criminal offences in relation to assistance provided by Anglo Irish Bank to certain customers in order to buy the bank’s shares, which is prohibited under Section 60 of the 1963 Companies Act.

The ODCE has highlighted the sheer volume of work which is required to conduct such an investigation, with more than 8,500 pages worth of documents being provided to the DPP. Without the assistance of an “insider” who is willing to accept a plea bargain it is no surprise that the investigation has taken a considerable amount of time to progress.

The lack of formal plea bargaining in Ireland in white-collar crime cases means that such investigations take considerable time and resources. However, the problem does not end there. If the accused pleads not guilty the onus is on the state, via the DPP, to prove that a crime was committed beyond a reasonable doubt.

Due to the complex nature of white-collar crimes the trials tend to be long and resource intensive. Experience from Britain shows that empanelling a jury that is truly representative of the people in such cases is very difficult. Potential jurors, particularly those with professional experience, would have to be available for jury service for prolonged periods.

Creditable proposals have been advanced that in order to address this situation in complex fraud cases a panel of judges or a combination of judges and financial experts would replace the traditional juries. Such a solution would require considerable legislative intervention and most likely a constitutional amendment but is certainly worthy of debate.

A final difficulty in criminal law is the lack of a full suite of white-collar crime type offences with which to charge alleged offenders. While the Companies Acts, for example, create an offence of fraudulent trading prosecutions in this area are extremely rare and cumbersome. Much of the focus of the Companies Acts is on directors and there is a lack of legislative attention paid to senior executives.

Even in cases where a criminal prosecution is not initiated the civil remedies and deterrents available lack sufficient bite. Much has been made of late of the fact that there exists a very limited pool of potential directors in Ireland for our largest companies. This situation is further compounded by weaknesses in the manner in which we seek to censure those directors found to have failed in their duties.

The Companies Acts allows for persons who have been convicted of offences in relation to a company or those who have been convicted of any offences of fraud or dishonesty to be disqualified from acting as directors for such a period as the court directs. In the absence of such a conviction the threshold required to disqualify a director is overly burdensome.

Significant errors of commercial judgment will not be sufficient to warrant a disqualification order. Instead extreme cases of gross negligence or total incompetence are required to be proven in order for a court to grant a disqualification order.

Of particular relevance to the banking system is the differential treatment of executive and non-executive directors. While the courts have held that the non-executive directors cannot delegate all of their responsibilities there have been some suggestions that non-executive directors are subject to a possible lesser test whereby it would be even more difficult to obtain disqualifications orders against them.

The difficulty in securing disqualification orders can be primarily attributed to the difficult wording of the legislation. The fact than the “less than nuclear option” of a restriction order is available to the courts may also be influential. A restriction order serves to restrict a person from acting as a director unless the company in question has a particular level of paid-up share capital.

However, the levels of share capital required by the legislation have no impact on directors of large companies such as banks which have significant issued share capital. In addition, a restriction order usually only arises in cases where the company in question has already been liquidated or in cases where the court has held there to be insufficient proof to grant a disqualification order. Provisions of Irish law which allow for directors and senior figures within companies to be held personally liable for debts accrued due to their gross negligence usually only apply in cases where the company is taken through insolvency procedures.

There is little recourse available to deal with directors and senior figures in companies such as banks who are seen to have erred in a serious way which does not lead to insolvency. If we are serious about moving forward and learning lessons from this crisis there needs to be a serious strengthening of our legal framework when it comes to dealing with corporate misbehaviour and criminality within our major corporate institutions.

If such measures only serve to function as a deterrent this alone would represent a serious improvement on the situation which currently exists.

- Seán Ó Conaill is a lecturer in company law in the Faculty of Law at University College Cork.