UK corporate criminal liability: reform of the identification principle

On 15 June 2023, a new amendment was included in the Economic Crime and Corporate Transparency Bill
(the "Bill")¹ which, if passed, would change UK law on the attribution of criminal liability to corporate entities and partnerships for certain economic crimes. The amendment would make it possible for such organisations to be criminally liable for specified economic crimes if a "senior manager" within the organisation commits a relevant offence while acting within the actual or apparent scope of their authority.

This update discusses the current law; the proposed amendment; and key considerations for companies going forward.

The current law

The current framework for corporate criminal liability applies the identification principle. This states that, where a mental state is a required element of an offence, only the mental state of a person representing the "directing mind and will" of a corporate can be attributed to that corporate.²

Establishing this has proved challenging for the SFO to make out in its prosecutions. The most prominent example was the SFO's prosecution of Barclays Bank for fraud which the SFO alleged was committed by senior Barclays executives during the 2008 financial crisis.³ The court found that the senior executives, including the CEO and CFO, did not represent the "directing mind and will" of Barclays. Instead, authority to commit Barclays to a capital raising or agree a commission was vested in the board, the board finance committee or group credit committee.

In 2023, the Law Commission published a consultation which criticised the identification principle for corporate criminal liability. We discussed this in more detail in this previous client alert. The key criticisms were that the identification principle:

• makes it difficult in practice to prosecute corporates;
• is not always clear when directors and senior managers constitute a "directing mind and will" of a corporate; and
• does not reflect real distribution of decision-making and corporate knowledge, particularly in large organisations.

There has also been support for reform of the identification principle from prosecutors, particularly past and present Directors of the Serious Fraud Office ("SFO"). They had called for the introduction of a new strict liability corporate offence of "failure to prevent economic crime" – building on the existing offences of failure to prevent bribery and failure to prevent tax evasion. The former SFO Director Lisa Osofsky stated in a 2020 speech that such an offence was on the top of her wish list, as the "narrow application of the 'controlling mind' test, [makes] it very difficult to hold companies with complex governance structures to account for their fraudulent conduct." ⁴

The UK Government has sought to deal with these difficulties by introducing new principles regarding the attribution of corporate criminal liability through this amendment to the Bill. Whilst the proposed amendment does not go so far as introducing the new "failure to prevent" offence requested by prosecutors, it is one of the options recommended by the Law Commission's 2022 options paper for reforming corporate criminal liability,⁵ and would make it more straightforward to prosecute larger corporates.

So what does the new amendment say?

The proposed amendment

At the date of this publication, the House of Commons is considering the House of Lords’ amendments to the bill, including the one considered in this alert⁶, before seeking Royal Assent. In summary:

• Corporate liability: The proposed amendment would make a body corporate or partnership (the "organisation") guilty of a "relevant offence" (discussed further below) if that offence is committed by a "senior manager" of the organisation acting within the actual or apparent scope of their authority.
• Definition of "senior manager": "Senior manager"is defined as an individual who plays a significant role in (a) the making of decisions about how the whole or a substantial part of the activities of the organisationare to be managed or organised, or (b) the actual managing or organising of the whole or a substantial part of those activities.
• Definition of "relevant offence": A "relevant offence" is one of the offences listed at a new schedule to the Bill. This list includes bribery, tax,  fraud and false accounting offences. A "relevant offence" also includes attempt, conspiracy, encouraging or assisting, aiding, abetting, counselling or procuring the commission of am offence listed in the schedule.
• Geographic scope: Where no act or omission forming part of the relevant offence takes place in the UK, an organisation will not be guilty of an offence unless it would be guilty of the relevant offence in the country where it was committed.

Comment

The key issue for companies is the definition of "senior manager":

• Critically, the wording in the amendment looks at the substance of an individual's role within the organisation – where they are "acting within the actual or apparent scope of their authority" – not their title.
• The definition of "senior manager" originates from s1(4)(c) of the Corporate Manslaughter and Corporate Homicide Act 2007 ("CMCHA"). Whilst the CMCHA came into force in 2008, there is no case law to date interpreting the definition of "senior manager" in that act which could help corporates prepare for the proposed new offence.
• However, the Ministry of Justice's Guidance for the CMCHA states 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" .
• The amendment does not appear to link to existing legislation and regulation that refers to senior managers – for example, the Senior Manager and Certification Regime ("SM & CR") for entities regulated by the Financial Conduct Authority. Whether prosecutors look to that regime as a guide, if the amendment is passed, should be kept under review.
• However, if a regulated entity has stated that an individual is a senior manager (e.g. by assigning them a statement of responsibilities under the SM & CR), the details of what they are stated to be responsible for could be used as evidence towards corporate liability under this amendment, should that individual commit one of the listed offences.

While there are further stages remaining in the legislative process, we anticipate the substantive provisions in the amendment to remain in the final act. This amendment was introduced by the Government, and represents a realisation of its commitment to reform the identification doctrine as set out in its Economic Crime Plan 2, for the period 2023-2026. ⁷

In the meantime, corporates should consider who in their organisation could fall within the definition of "senior manager", given that the acts and omissions of such "senior managers" could result in the corporate being criminally liable for any offence such senior manager commits. Corporates should ensure that appropriate corporate governance processes to prevent economic crime are in place, particularly in relation to individuals who could be considered "senior managers". Appropriate processes include:

• ensuring that potential new employees who could be considered senior managers are adequately screened (including their qualifications and past references);
• providing regular and adequate training to such individuals on the potential offences and how to prevent them;
• conducting risk mapping exercises to identify business units with high-risk of potential economic crime, such as procurement;
• undertaking regular monitoring, and imposing segregation of duties (e.g., it should not be possible for the same person to both request and approve the same payment);
• maintaining an independent internal audit function which has sufficient authority and knowledge of the business; and
• implementing robust whistleblowing policies offering clear, accessible and anonymous channels to raise concerns about suspected economic crime.