Corporate liability: A sledgehammer or double-edged sword?

by AMIR RASLAN NOR HISHAM/ graphic by MZUKRI

IT HAS been 16 months since the government introduced the new corporate liability provisions (Section 17A) in the Malaysian Anti-Corruption Act 2009 (MACC Act) and companies have nine months left to comply before the amendments come into force.

As Malaysia continues to grapple with mega scandals, many feel that the new amendments are exactly the radical game-changers we need to end corporate corruption.

There is plenty of ink spilled already, elucidating how Section 17A will be a strong weapon against corruption. However, there is no such thing as a free lunch.

Currently, there is a lack of literature exploring the ill-effects that the section would bring. Is it truly the all-good and all-powerful sentinel that many commentators are convinced it is? The previous position was that a company cannot be held liable for crimes unless the action was taken with the knowledge or at the direction of someone considered the “directing mind” of the company.

Now, Section 17A states that a commercial organisation (CO) will commit an offence if a person associated with the organisation engages in corruption with the intent of securing various types of advantages, business or personal.

Liability is strict; no awareness, consent or intent is necessary on the part of the CO for criminality. The only defence available is if the CO had put in place “adequate procedures” designed to prevent the offence in question. The Act does not define “adequate procedures”, though the government has issued high-level guidelines.

Section 17A was modelled after Section 7 of the UK Bribery Act 2007.

Nevertheless, the amendment goes further than the UK act by imposing personal liability via Section 17A(3): Where the offence is committed by a CO, individuals managing its affairs are deemed to have committed the same offence.

To escape liability, they will need to prove that the offence was committed without their consent or connivance AND that they have exercised proper due diligence. In other words, once a company is deemed to have committed a Section 17A offence by having no adequate measures, controllers are automatically presumed to have committed the same offence.

This is a novel development. Much of the point of setting up a company is exactly (and a lot of its success is owed to) the separation of the duties and liabilities of individuals and the company.

Individuals, shielded by the corporate veil, are allowed and encouraged to undertake a huge amount of entrepreneurial risk with very little downside to themselves.

“In The Company: A Short History of a Revolutionary Idea”, the authors (John Micklethwaite and Adrian Wooldridge) highlight how the corporate form allowed for unprecedented risk and the raising of gargantuan (previously-frozen) capital that was extremely influential in sustaining the industrial revolution.

It is therefore unsurprising that the English common law is very cautious in undermining the corporate form; especially by ascribing rights and liabilities of the company to underlying individuals (piercing the corporate veil).

As Lord Sumption pointed out in the landmark 2013 UK Supreme Court case, Prest versus Petrodel, piercing the veil is a very limited doctrine and should be used cautiously, ie only when the corporate form and function is abused. It is peculiar to say that actions of rank and file subordinates amount to acts intending to abuse the corporate form and function.

Furthermore, the issue with the corresponding section in the UK Bribery Act is the lack of precedence and cases that the provision generated. That means precise judicial tests for what counts as “adequate measure” is yet very uncertain. How would companies formulate their compliance strategy?

While the Prime Minister’s Office’s guidelines and soft law measures are welcome as general guidance, they only form high-level recommendations without regard of different company sizes, types or sectors.

They also do not detail the comprehensive judicial approach in how the amendments would be implemented on a practical level. Such uncertainties in setting up compliance strategies are self-evidently problematic.

What of the chilling effect?

The ever-present threat of criminal sanction may discourage controllers from undertaking entrepreneurial risks that are necessary for the companies’ growth and survival.

Section 17A affects every company indeterminately: From the biggest to the smallest, from the public to the private and companies in all sectors. The heavy-handed nature of Section 17A(3) I argue, will impose yet another layer of regulation that will add to costs of doing business; a very major issue already troubling small and medium enterprises or SMEs (note that 98.5% of businesses in Malaysia are SMEs and they contribute to 36.6% of the total GDP).

The government also has yet to undertake an impact assessment of Section 17A detailing the costs of reformulating compliance systems across corporate Malaysia. One may argue Section 17A(3) will inspire an overly risk-averse attitude contrary to an efficient and competitive market.

This author concedes that a lot ultimately hinges on details that we do not yet have. Despite this, I opine that if the amendments are to presume prima facie criminality, the principles behind the terms “adequate procedures” and “proper due diligence” must be articulated as clearly as possible in the interests of both corporate efficiency and more importantly, fairness. Courts must also balance this, being flexible in their approach and applying the law of adequate measures to different companies on their own terms.

Furthermore, the various authorities must come out with more detailed “adequate procedures” guidelines that are tailor-made to the plethora of company types, sizes and sectors.

A final thing to note is that the government would also do well to publish an official review after five years (like the UK does with their legislative amendments) detailing updates, cost-benefit analyses, statistics and also various stakeholders’ suggestions for the refinement of Section 17A.

While the provision looks to be a welcome step in the fight against massive corporate corruption in our country, it should not be a scorched-earth policy that torches the many valuable fruits of the corporate world as well.


Amir Raslan Nor Hisham is a research intern at the Institute for Democracy and Economic Affairs.