Biggest reform of the identification doctrine in more than 50 years

The UK Government has proposed radical reforms to corporate criminal liability for the first time in more than 50 years by making it easier to prosecute companies for economic crime offences committed by their senior employees.

The amendment to the Economic Crime and Corporate Transparency Bill (the Bill) would replace the common law “directing mind and will” test for corporate criminal liability with a statutory “senior manager” test. If approved, an employer will be found criminally liable where a senior manager who was “acting within the actual or apparent scope of their authority” commits one or more of a long list of specified economic crime offences. Notably these offences are much wider than the existing and proposed failure to prevent offences; they include fraud, bribery, money laundering, sanctions, tax evasion, terrorism, accounting and FSMA offences.

The current law

In the UK, corporate criminal liability is generally determined according to the common law identification doctrine, which attributes the actions of an organisation’s “directing mind and will” to the organisation itself. Courts have interpreted the “directing mind and will” narrowly by having regard to the company’s memorandum, articles of association, and whether responsibility and authority for the particular actions which constituted the offence had been entirely delegated to an individual by the company’s directors. In the modern corporate world, where large companies have numerous layers of management and business decisions are often decentralised, it is often impossible to link a company’s principal decision-makers with the criminal act. Conversely, small companies often have simple management structures making it much easier to evidence a link between the decision maker and the criminal act, and so easier to prosecute them.

The proposed amendment

Under the proposed offence, an organisation will be criminally liable when part or all of a specified economic crime is committed in the UK by a senior manager of that company or partnership.

The test proposed to determine who is a “senior manager” is the same test found in the Corporate Manslaughter and Corporate Homicide Act 2007. This means that, rather than look at an employee’s job title, it will be necessary to consider the roles and responsibilities of the employee within the organisation and the level of managerial influence they exert. Notably, the new law will cover instances where the senior manager is a person who plays a significant role in the making of decisions about the whole or a substantial part of the activities of the organisation. The Home Office believes that this senior management test strikes a proportionate balance in capturing those who have genuine decision-making authority over a large section of business against over prosecuting for the actions of low-level employees. The latter may of course be caught by failure to prevent offences such as the UK Bribery Act and the proposed new failure to prevent fraud offence.

The specified economic crime offences are wide-ranging and numerous. They are proposed to include money laundering and proceeds of crime offences, the three bribery offences that can be committed by individuals, tax offences, fraud offences, some FSMA offences (i.e. Sections 23, 25 and 85 contraventions and the Section 398 offence of misleading the regulator), market manipulation offences, terrorism offences, and sanctions offences. The Government has also committed in the Second Economic Crime Plan, the Fraud Strategy and in committee debates to introduce full reform by repealing the reference to economic crime as soon as it has the Parliamentary opportunity to do so. This would mean the list of relevant offences would become considerably wider than is already proposed and would include non-economic crime offences such as sexual offences.

What impact will this have for businesses?

The proposed reform, if approved, will supplement the proposed new strict liability offence of failing to prevent fraud and the existing strict liability offences of failing to prevent bribery and tax evasion. This is a significant development for organisations. In addition to making it much more likely that organisations will be successfully prosecuted and fined for relevant criminal offences, there is also an increased likelihood of companies being automatically debarred. A conviction under Section 1 of the Bribery Act 2010, for example, results in automatic debarment. Companies will need to look much more closely at their compliance programmes to prevent relevant offences occurring, and may wish to ensure that senior managers receive more detailed training.

The Bill is currently at the Report Stage of the House of Lords and the proposed amendment has yet to be debated. However, given the Government’s commitment to reforming the identification doctrine, the Law Commission’s Options Paper for Reform of Corporate Criminal Liability and public pressure to reduce economic crime, it seems likely to be passed into law in some form.