Reform of the UK identification doctrine - significant expansion of corporate criminal liability for economic crimes

The old identification doctrine

Where a criminal offence requires proof of a specific mental state, or ‘mens rea’ (such as intent, recklessness or dishonesty), previously a company could only be found guilty if an individual who represented the company’s ‘directing mind and will’ possessed the requisite state of mind. That proved a high bar for prosecutors to satisfy.

Supporters of reform said that the rule was not adequate to deal with misconduct in larger companies with complex decision-making structures where ultimate responsibility is diffuse across multiple individuals or committees.  

To sidestep this well-known difficulty, the government relied on introducing ‘failure to prevent’ corporate criminal offences.  These offences cover bribery and tax evasion.  A new failure to prevent fraud offence has also been added under the Act.  ‘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 s196 of the Act, a company or partnership commits an economic crime offence where the offence is committed with the involvement of a “senior manager”. This  broadens the category of individuals who can trigger liability for the business. This makes charging decisions for prosecutors, and subsequent prosecution of companies, and partnerships more straightforward.

The reform amends and expands 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. 

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, and indeed a senior prosecutor from the SFO has already said that the SFO expects to have to litigate the meaning of 'senior manager'.¹  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 reform.

So whilst the reform certainly broadens 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 only applies to a defined (and long) list of “economic crime” offences listed in Schedule 12 of the Act, plus an attempt or conspiracy to commit those offences.  The list can be amended by regulation.  Interestingly, the list includes some bribery, tax,  fraud and false accounting offences notwithstanding the failure to prevent offences in those areas.

The listed offences which are not 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.

Impact

This reform means 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 means 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 be required 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 reviewing their compliance policies and training, in preparation for the 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 rule gives them another tool in their enforcement toolbox to hold large companies to account.  While it is certainly a significant  shift in the foundations of corporate criminal liability, the government’s own 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).

How prosecutors will choose which tool to use, particularly for offences where there is also a ‘failure to prevent’ option  (bribery, tax evasion and 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.

Timing

The reforms to the identification principle come into force on 26 December. 

Footnote:

1. Elizabeth Collery, 5 September 2023, Cambridge International Symposium on Economic Crime