The Law Commission Consultation paper: rethinking the identification principle?

On 9 June 2021, the Law Commission launched a consultation "seeking views on whether and how the law relating to corporate criminal liability can be improved" (the "Consultation").¹  The Consultation seeks to determine whether the law surrounding the criminal liability of legal persons (such as companies and LLPs) should be reformed to more effectively punish corporate entities for economic crime.  This alert briefly discusses the salient points of the Consultation and some key considerations for companies going forwards.

Introduction

The Consultation provides a good overview of the UK's current approach to corporate crime, as well as providing historical context as to how this approach was reached. In crafting its analysis the Consultation draws comparison to the wider approach (in most cases) to corporate crime followed in other common law and non-common law jurisdictions. At its end, the Consultation poses 13 questions for discussion; arguably the most interesting of these surround the identification principle (described below) and whether it is satisfactory in attributing criminal responsibility to companies as opposed to individuals.

The Law Commission previously reviewed the law in this area in 2010 and found that there was "no pressing need for reform of the identification doctrine"; however given the development of case law since that previous review, the Commission now considers that the assumptions on which that conclusion was made are no longer true.² 

The identification principle

In brief, the identification principle states that where a mental state is a required element of the offence, only the mental state of a senior person representing the "directing mind and will" of an organisation can be attributed to a corporate. That directing mind and will is typically limited to directors and executive officers; individuals who are rarely involved in the day-to-day decisions in which financial crime-related offences have their origin.  This can mean that it is easier for prosecutors to convict a small company, whose executives are more likely to be involved in everyday business decisions, than a large one.

The basis of this principle rests with the decision of the House of Lords in Tesco v Nattrass.³ Tesco was prosecuted under the Trade Descriptions Act 1968 for displaying a notice indicating that goods were being offered at a price less than that at which they actually were. This occurred because the manager of one of their branches had negligently failed to notice that he had run out of the low-price packets. The case escalated to the House of Lords, which decided that the branch manager could not be held to embody the company as a whole (and which made available to Tesco a due diligence defence under s24 of the Trade Descriptions Act 1968).

Whilst in 2010 the Law Commission had been of the view that there was no pressing need for reform of the identification doctrine due to the trend of case law following Tesco v Nattrass, it no longer holds that view primarily due to the High Court’s decision in 2018 in SFO v Barclays Bank plc.⁴ That decision reaffirmed the identification doctrine as the primary rule of attributing the actions of an individual to a corporate.

Indeed the Law Commission is of the view in the Consultation that SFO v Barclays arguably makes the law harder to apply to a large corporation than Tesco v Nattrass envisaged. In Tesco v Nattrass most of the judgments given by the members of the House of Lords envisaged that a managing director normally would have the status or authority to make a company criminally liable, whereas SFO v Barclays suggest it is necessary to show the board collectively possessed the necessary mental element, or that identified directors had sufficient authority to engage in the relevant conduct on behalf of the board of directors.⁵

Criticisms of the current law

In reviewing the current law on corporate criminal liability, the Consultation identifies four criticisms with the identification principle:⁶

• The identification principle makes it difficult in practice, to prosecute companies, as an organisation that allows a degree of autonomy to a subordinate employee will not be liable (according to the rule in Tesco v Nattrass). The identification principle also creates evidential difficulties in tracing actions to the "directing mind and will" of the company, as the email/paper trails reduce the higher the chain of hierarchy is climbed.⁷
• The identification principle does not always bring clarity and certainty. It is clear that directors and senior managers can constitute a "directing mind and will" of a company, but it is not always clear when they will do so.
• The identification principle does not reflect real distribution of decision-making and corporate knowledge. For example, the ethos of a company (which is often unwritten and may influence ongoing decision making and conduct) may have been created by previous members of the company who are no longer involved in day-to day business. A company should therefore be liable in its own right and not by derivation from its "directing mind and will".
• The identification principle puts legislators in a difficult position regarding corporate criminal liability. At present legislators are caught between the present policy, where an offence cannot be effectively enforced against large companies; or an overly punitive policy, where an offence of strict liability is created and corporations may be convicted despite blame actually lying with individuals over whom they have little control.⁸

Potential changes

The Consultation suggests different methods for improving on the criticisms identified above, including the potential re-application of the legal tests established in other legislation (e.g. the Corporate Manslaughter and Corporate Homicide Act 2007, the Specialist Printing Equipment and Materials (Offences) Act 2015 etc.). However, the focus is on whether to introduce further failure to prevent offences, building on the introductions of the failure to prevent bribery⁹ and failure to prevent tax evasion¹⁰ offences in 2010 and 2017 respectively.

"Failure to prevent" offences

The Consultation has revisited the potential extension of "failure to prevent" offences as a means of reforming corporate criminal liability (either in addition to, or in place of, amending the identification principle).  Though the offences of failure to prevent bribery and failure to prevent facilitation of tax evasion currently exist, the consultation discusses extending this to cover other offences - such as 'failure to prevent economic crime'.  Attempts were previously made in Parliament to create such an offence within the Financial Services Act 2021. The government, however, opposed the amendment on the basis that the topic was best dealt with within a broader context, rather than through sector-specific legislation (the Financial Services act 2021 only applied to the regulated sector). 

In the alternative, the SFO has suggested that failure to prevent offences could provide a model for a new principle for the attribution of corporate liability to replace the identification doctrine. Under this model, where a substantive offence was committed by an associated person (to obtain or retain business or a business advantage for a company or otherwise to benefit the company financially) the conduct would be attributed to the company and the company would be guilty of the substantive offence. ¹¹

Comment

It is understandable that board and senior management level employees are, as a rule, not in possession of the granular information required to be deemed culpable for the potentially criminal transactions of a company's individuals.  However, it cannot be denied that the current position in the UK on corporate criminal liability makes it very difficult to convict companies for serious economic and financial crime. 

Whether this fact alone is enough to provoke significant legislative change in this area remains to be seen. One solution may be not to reform the current law but to change approaches to its enforcement – for example, through increased SFO powers and deferred prosecution agreements. As Lisa Osofsky, Director of the Serious Fraud Office (herself a large advocate for a change in the identification principle) recently commented:

"This is our environment. To complain about it would be like a captain complaining about the sea. So we have to adapt."

Whatever the case, the corporate world is unlikely to be happy about the potential additional regulation, scrutiny and liability brought on by the results of the Consultation (as this will ultimately lead to more room for liability and the implementation of internal measures to avoid that liability).  Companies can prepare themselves for the potential changes to UK corporate crime proposed by the consultation by:

• ensuring that sufficient financial and economic crime prevention policies and procedures are in place and up to date;
• ensuring top level commitment to combating corporate crime from directors/senior managers;
• providing sufficient training to staff at all levels of the business; and/or
• reviewing and revising corporate culture where necessary.

The above is of course a non-exhaustive list and there will undoubtedly be additional steps for companies to take as the future legislative framework becomes more clear.  The Law Commission is currently holding several events on the Consultation, and is due to publish a further paper on this topic later in the year.