Reform of the UK identification doctrine - significant expansion of corporate criminal liability for economic crimes
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The current identification doctrine
Where a criminal offence requires proof of a specific mental state, or ‘mens rea’ (such as intent, recklessness or dishonesty), currently a company can only be found guilty if an individual who represents the company’s ‘directing mind and will’ possesses the requisite state of mind. That has proven a high bar for prosecutors to satisfy.
In recent years, supporters of reform have said that the rule is no longer adequate to deal with misconduct in larger companies with complex decision-making structures where ultimate responsibility is diffuse across multiple individuals or committees. In its 2022 ‘Options Paper’, the Law Commission concluded that the principle in its current form is an “obstacle to holding large companies criminally responsible for offences committed in their interests”.
To sidestep this well-known difficulty, the government has so far relied on introducing ‘failure to prevent’ corporate criminal offences. These offences cover bribery, tax evasion, and, very soon, fraud. ‘Failure to prevent’ offences do not directly attribute primary liability to the company for the substantive offence, but instead impose liability for an omission in preventing it.
Amendment of identification doctrine
Under the reform, a company or partnership will commit an economic crime offence where the offence is committed with the involvement of a “senior manager”. This will broaden the category of individuals who can trigger liability for the business. This would make charging decisions for prosecutors, and subsequent prosecution of companies, and partnerships more straightforward.
The proposed reform would amend and expand the basis on which companies and partnerships can be fixed with primary liability for criminal conduct for a wide range of economic crimes. UK and Non-UK businesses are in scope.
Definition of “senior management”
This comes from the Corporate Manslaughter and Corporate Homicide Act 2007 (CMCHA).
“Senior management” means a person who plays a significant role in:
the making of decisions about how the whole or a substantial part of the company or partnership's activities are to be managed or organised, or
the actual managing or organising of the whole or a substantial part of those activities.
The Explanatory Notes to the CMCHA state that this covers both those in the direct chain of management, and those in, for example, strategic or regulatory compliance roles.
If this new reform becomes law, prosecutors will consider what an individual's role and responsibilities are within the organisation and the level of managerial influence they exert, rather than solely their job title. It is clear that those with significant strategic and operational responsibilities would be in scope. When the Law Commission considered the definition of senior manager, it considered that it should include a senior manager if their responsibilities involve taking decisions relating to corporate strategy and policy in areas such as health and safety, finance or legal affairs. It also commented that the population of “senior management” will vary depending on the size and complexity of the organisation involved. The Ministry of Justice's Guidance on the CMCHA said that "apart from directors and similar senior management positions, roles likely to be under consideration include regional managers in national organisations and the managers of different operational divisions".
Whilst it is not hard to identify individuals that might sit well in, and well out, of this definition, it is bound to give rise to some debate in grey areas. As the Law Commission remarked in 2022, there is no case law interpreting the definition in the CMCHA. One can foresee arguments about the meaning of ‘substantial part’ of a company’s activities - is this a qualitative or quantitative test? A function may be quite small within a larger organisation, but have significant impact across many business lines – does that make it ‘substantial’? There may also be debate on whether the senior manager was acting within the scope of their actual or apparent authority, as required by the proposed reform.
So whilst the reform would certainly broaden the identification doctrine, it does not necessarily make it entirely clear how broad it will be extended in practice.
Reforms apply to economic crimes only – for now
At present, the reform to the identification doctrine would only apply to a defined (and long) list of “economic crime” offences. Interestingly, the list includes some bribery, tax, fraud and false accounting offences notwithstanding the current and proposed failure to prevent offences in those areas.
The listed offences which are not currently, or soon to be, covered by failure to prevent offences include those relating to sanctions, money laundering, terrorist financing, misleading the market, customs and excise duties, and certain financial services offences under FSMA. The only positive note is that at least for these offences, which are not currently covered by a failure to prevent offence, a junior individual committing the offence would not trigger potential criminal liability for the company.
Looking ahead, the government has committed to roll out the reform of the identification doctrine more broadly to all criminal offences in future – meaning ultimately this could lead to a wholesale expansion of liability.
As noted, these reforms would mean that a broader range of individuals’ conduct within a business could give rise to criminal liability for economic crimes for the business.
For in-house counsel and investigations lawyers, this would mean that when misconduct is uncovered which post-dates the entry into force of the new law, and there is a prospect of such misconduct being criminal, detailed consideration of the new rules on attribution will need to take place in order to determine whether corporate criminal liability could also be triggered. This would be alongside consideration of the existing common law principles on attribution, as the proposed new rule is not intended to replace these but rather add a new additional route.
Some businesses are already planning a review of their compliance policies and training, in preparation for the expected new ‘failure to prevent fraud’ offence. Some may wish to build in some consideration, at the same time, of who their ‘senior managers’ are, and whether they might need economic crime awareness training.
For prosecutors, in addition to the failure to prevent offences, the new rule will give them another tool in their enforcement toolbox to hold large companies to account. While it is certainly a significant change in the foundations of corporate criminal liability, the government’s Impact Assessment suggests that it is not expected to give rise to a significant number of additional court cases - between 0-3 cases per year. And indeed in Canada, where a similar rule has been in place since 2003, there have been few prosecutions. It is unclear whether the Impact Assessment factors in court cases approving Deferred Prosecution Agreements (DPAs). The Impact Assessment may in part be based on an expectation that most companies will choose the DPA route, where this is offered by the SFO or CPS. This is consistent with what we see in other jurisdictions with more aggressive standards of corporate criminal liability (such as the US).
It is yet to be seen how prosecutors will choose which tool to use, particularly for offences where there is also a ‘failure to prevent’ option – bribery, tax evasion, and, soon, fraud. The fact that the failure to prevent offences do not require any senior individual to be involved could make cases more straightforward for prosecutors; but, on the flipside, there is a ‘reasonable procedures’ defence for the company. The new rule would still require the prosecution to show that a senior person has been involved (albeit not so senior as before), and although there is no ‘reasonable procedures’ defence, the presence of a good compliance programme would be one of the factors taken into account by prosecutors in deciding whether it was in the public interest to pursue a case.
These are also calculations that private prosecutors will be making, as these reforms will also provide an expanded basis for private prosecutions to be brought.
The proposed reform was agreed by MPs on 4 September.
The Government’s recently published Economic Crime Plan suggests that it aims to ‘implement’ the Bill by Q3 2023. The Impact Assessment states that the measures are expected to be implemented two months after Royal Assent.
...a test will be applied to consider the decision-making power of the senior manager who has committed an economic crime, rather than just their job title. The corporation may then be liable in its own right
Rt Hon Tom Tugendhat, Home Office, 15 June 2023