Regulatory Fines “Off the Chart”
25 June 2015
R v Thames Water Utilities  EWCA 960
Until recently, Courts sentencing environmental, health and safety and food safety offences have found themselves deprived of substantive tariffs or guidance as to what an appropriate sentence might look like.
In the past 18 months, the Sentencing Council has sought to provide more assistance. The Council’s definitive Guidelines for sentencing environmental offences has been in force since July 2014. A consultation on similar guidelines for health and safety offences, corporate manslaughter and food safety and hygiene offences was published in November 2014. The aim of the consultation guideline was to extend the principle of a consistent tariff based approach.
Both Guidelines use a tariff system, based initially on the size of the organisation being sentenced. Both Guidelines provide specific fine levels for micro, small, medium and large organisations; large organisations being those with a turnover (or equivalent) of £50 million or over. Both Guidelines also allude to the fact that fine levels could be significantly greater for ‘very large’ companies, but go no further. There is no guidance on what a ‘very large’ company might look like and how much greater fines should be.
Last week, the case of R v Thames Water, the first before the Court of Appeal dealing with the application of the Environmental Guidelines, provided some clarity which will be useful to businesses in the food and beverage and retail sectors.
Issue 1 – What is a ‘very large’ organisation?
The use of turnover as an indication of an organisation’s size has its limitations, but it is the current regime that the Courts are working in. The decision as to whether an organisation is ‘very large’ will be obvious in most cases, certainly for those with a turnover in the billions. The Court agreed with using a case by case approach, whereby “Doubtful cases must be resolved as and when they arise.”
The Prosecution tried to suggest an appropriate limit for ‘doubtful’ cases by proposing that ‘very large’ organisations should be those with a turnover exceeding £150 million per year on a three yearly average. The Court disagreed with the suggestion, but it is indicative of the potential approach by the Prosecution in the future.
Issue 2 – How should a ‘very large’ organisation be punished?
The emphasis from the Court was that a defendant company’s finances should be considered as a whole, looking at profitability as well as the simpler measure of turnover. Many of the sentencing remarks echo those seen in previous cases, punishing repeat offenders more severely, for example.
There are two important points to note, however. The first being that the Court was not willing to perform a simple mathematical exercise to extrapolate the Guidance tariffs applicable for ‘large’ organisations and use a form of multiplier to determine the range for ‘very large’ companies.
Secondly, when sentencing the most serious breaches, where the defendant has caused great harm by way of deliberate action or inaction, the Court was very clear as to what offenders should expect:
“In such a case, the objectives of punishment, deterrence and the removal of gain (for example by the decision of the management not to expend sufficient resources in modernisation and improvement) must be achieved by the level of penalty imposed. This may well result in a fine equal to a substantial percentage, up to 100%, of the company’s pre-tax net profit for the year in question (or an average if there is more than one year involved), even if this results in fines in excess of £100 million. Fines of such magnitude are imposed in the financial services market for breach of regulations.”
In R v Thames Water , Thames Water was appealing a fine of £250,000 and the Court noted that the fine had been lowered as the harm was localised. That said, the specific fine should be removed from the context of the current discussion because, whilst Thames Water is clearly ‘very large’; (with a turnover of £1.9billion and profits of £346 million), the severity of offending was not in the magnitude being discussed by the Court during the general remarks which are the subject of this article.
Those general comments should be taken on board by all corporate clients including businesses in the food and beverage and retail sectors.
The concept that an offending company might be fined its entire net profit for a year is clearly worrying. There is a clear push towards bringing environmental sentencing on par with more ‘white collar’ regulatory offending, something that the Sentencing Council has been keen to encourage.
Previous convictions will always be relevant aggravating features but the Court notes that repeated operational failures can suggest a “lack of appropriate management attention to environmental obligations” and every offence will become harder to explain in mitigation.
Additionally, the Court also highlighted the importance of senior management actions as a mitigating factor: “Clear and accepted evidence from the Chief Executive or Chairman of the main board that the main board was taking effective steps to secure substantial overall improvement in the company’s fulfilment of its environmental duties would be a significant mitigating factor.”
The impact of this recent case will need to be monitored closely as it has the potential to mark a turning point in sentencing. Given that large amounts of the proposed Guidelines for health and safety offences, corporate manslaughter and food safety and hygiene offences have been lifted from the Environmental Guidelines, it seems highly likely that the same approach will be taken for those offences.
For more information, please contact David Young (0845 497 1148) or Katharine Vickery (0845 497 1771).