UK Criminal Justice Bill proposes further reforms to the identification doctrine
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The Economic Crime and Corporate Transparency Act 2023 (ECCTA), passed in October, significantly changed the rules on whose conduct can be attributed to a company for an economic crime offence. With the ink barely dry on the ECCTA, the new Criminal Justice Bill will extend the change to all criminal offences, not just economic crimes. This will make it easier for businesses to be successfully prosecuted for any offences committed by their senior managers acting within scope of their authority.
Identification doctrine – directing mind and will
The ‘identification doctrine’ is the English law rule on how criminal liability is attributed to a company or partnership via the conduct of certain senior individuals. The general position has been that where a criminal offence requires proof of a specific mental state, or ‘mens rea’ (such as intent, recklessness or dishonesty), a company could only be found guilty if an individual who represents the company’s “directing mind and will” possesses that requisite state of mind. The test has proven a high bar for prosecutors to satisfy, particularly in regards to large, complex organisations.
The ECCTA introduced a new statutory rule of attribution for economic crime offences which comes into force on 26 December. If a ‘senior manager’ commits an economic crime offence, then the company is also guilty of that offence.
Expansion of reform of identification doctrine to cover all criminal offences
The Criminal Justice Bill expands this reform to all criminal offences. It means that where a senior manager of an organisation (a company or partnership of any size), acting within the actual or apparent scope of their authority, commits a criminal offence under the law of England and Wales, Scotland or Northern Ireland, the organisation also commits the offence. The Bill, when passed, will revoke the relevant portion of the ECCTA which limited liability to economic crimes.
As a matter of general legal principle and comity, domestic law does not generally apply to wholly overseas conduct unless there is some connection with the UK. These amendments to the identification doctrine preserve this principle for companies: offences committed overseas by individual senior managers will only be in scope where the relevant offence could also have been committed by the company. The degree of connection required to trigger UK criminal liability for the company depends on the offence in question. A sufficiently close connection may arise from the fact that a company is incorporated in the UK (such as for the substantive bribery offences), whereas for other crimes (such as key fraud-related offences), jurisdiction may arise where an element of the offence occurred in the UK or where harm has been suffered in the UK.
This is reinforced in the Explanatory Notes which state that criminal liability does not generally attach to an entity based and operating overseas, and where all the misconduct occurs abroad, solely because the relevant senior manager was subject to the UK’s jurisdiction (for example, as a British citizen).
Further clues on identifying senior managers
A senior manager is defined as someone who is involved with:
- the making of decisions about how the whole or a substantial part of the activities of the body corporate or partnership are to be managed or organised; or
- the managing or organising of the whole or a substantial part of those activities.
This test replicates the definition in the ECCTA and the Corporate Manslaughter and Corporate Homicide Act 2007. It focusses on a senior manager’s roles and responsibilities within the organisation, rather than their formal job title. This definition of ‘senior manager’ does not align with the regulatory Senior Managers and Certification Regime, although some overlap would be expected in practice.
The Explanatory Notes for the Bill clarify that:
- “senior managers” includes those in the direct chain of management, as well as those in strategic or regulatory compliance roles. It would normally include a company’s directors and other senior officers such as a Chief Financial Officer or Chief Operating Officer, whether or not they are members of the Board. However, it is not limited to individuals who perform an executive function or are board members, and covers any person who falls within the definition, “irrespective of their title, remuneration, qualifications or employment status”.
- a “substantial part of the business” relates to the importance of the activity over the operations of a business as a whole.
Authority: acting within actual or apparent scope
The business is only liable where the senior manager was acting within the actual or apparent scope of their authority.
This is likely to be a grey area in practice: of course an organisation would not normally provide specific authority to carry out a criminal offence. The Explanatory Notes clarify that it would be enough that the act (constituting the offence) was of a type that the senior manager was authorised to undertake or which would ordinarily be undertaken by a person in that position. The example is given of a Chief Financial Officer, who commits fraud by deliberately making false statements about a company’s financial position. In that case, the company would be liable since the act of making statements about the company’s financial position is within the scope of that person’s authority as a CFO, even though they were not specifically authorised to make the false statement.
This reform would mean that an even broader range of senior managers’ conduct within a business could give rise to criminal liability for the company.
As many larger businesses start the process of reviewing their compliance policies and training, in preparation for the expected new ‘failure to prevent fraud’ offence, many will want to build in an analysis of who the ‘senior managers’ are, and whether those individuals should have broad criminal liability awareness training for areas relevant to their business (as the proposed expansion means that liability is no longer limited to economic crimes alone).
The government’s impact assessment estimates the total cost to businesses from the change to be between GBP0.1 million and GBP1.0 million. This is on the assumption that the only costs involved are for familiarisation with the legislative changes, representing the opportunity cost for the time of company secretaries in large companies, and with an assumption that “SMEs will not take significant steps to familiarise themselves with the legislation as it is highly unlikely they will be directly impacted”. This does not seem to take into account the significant evolution in risk profile for businesses as a result of this change.
For prosecutors, it is a question as to whether and to what extent there will be interest and resource to pursue enforcement action against organisations alongside individuals. Although there is no ‘reasonable procedures’ defence, the presence of an effective compliance programme will be one of the factors taken into account by prosecutors in deciding whether it is in the public interest to pursue a case.
The expanded scope of criminal offences beyond economic crimes will test the boundaries of the SFO’s deferred prosecution powers, which are limited to use for fraud, bribery and other economic crime. It remains to be seen whether the government will similarly enlarge that power alongside this expansion in corporate criminal liability.
The Bill has passed its second reading in the House of Commons, and is now in Committee stage. The first sitting of the Public Bill Committee is expected on 12 December, with reporting scheduled by 30 January.