On June 15, 2023, the UK Government announced proposals to introduce the biggest reform of corporate crime legislation in more than 50 years, with the result that, if enacted into law, companies who commit fraud, money laundering and bribery will be subject to greater scrutiny and be at greater risk of being successfully prosecuted.
The Identification Principle
In a previous blog post called “The Elusive “Directing Mind and Will”, we discussed that, save where specific legislation provides for strict liability (such as the offences of bribery and the facilitation of tax evasion under the UKBribery Act 2010 and Criminal Finances Act 2017, respectively), in order to establish corporate criminal liability in the UK, it is necessary to successfully invoke the “identification principle”.
In short, the “identification principle” requires a prosecutor to prove that the individual(s) who are suspected of being involved in the commission of a corporate crime represent the “directing mind and will” of that company – or, in other words, the actions of that individual (or individuals) need to be considered to be those of the company. By way of illustration, in one of the leading cases from 1971, the House of Lords decided that a supermarket group was not liable for the actions of a store manager, who was selling washing powder for more than the advertised price, since the store manager was not a part of the company’s “directing mind.”
As we also discussed in our previous blog post called “The UK (Slowly) Inches Toward Corporate Criminal Liability Reform”, the “identification principle” has long been a thorn in the side of UK prosecutors. Most recently, it was cited as the reason that the Serious Fraud Office’s case against Barclays was dismissed: because senior executives, including the CEO and CFO of the bank, did not constitute the “directing mind and will” of the bank in respect of certain capital raisings in the 2008 global financial crisis. In making their argument for change, UK prosecutors frequently point to the fact that the “identification principle” has its roots in the Victorian era when companies were smaller and it was accordingly easier to identify the directing mind and will. They also point to the difficulties of following email trails that appear to evaporate the further up the management chain one goes.
The Law Commission
In our blog entitled “Criminal Investigations in the UK: What to Watch for the UK and the EU in 2023”, we reported that, in June 2022, the UK Law Commission published an options paper on potential reform of UK corporate liability, concluding that the current law poses “an obstacle to holding large companies criminally responsible for offences committed in their interests by their employees” and incentivizes poor corporate governance, by “reward[ing] companies whose boards do not pay close attention” and penalizing those that do.
The Law Commission set out several options for reform, including a reform of the identification doctrine (to broaden it to cover crimes committed with the consent or connivance of senior managers, and to cover collective negligence) and the introduction of specific failure to prevent offences (particularly in relation to fraud, but maybe also in relation to failure to prevent money laundering).
The Economic Crime and Corporate Transparency Bill
On 15 June 2023, the U.K Home Office announced a proposal to amend the Economic Crime and Corporate Transparency Bill (the “Bill”). The Bill is currently being debated by Parliament. Whilst its stated aim is to “make provision about economic crime and corporate transparency; to make further provision about companies, limited partnerships and other kinds of corporate entity; and to make provision about the registration of overseas entities”, it has also been further amended to, among other things, introduce a corporate “failure to prevent” offences for fraud. See our blog entitled “The UK’s Introduction of a New “Failure to Prevent Fraud” Offence Edges Closer”.
In its June 15 proposal further to amend the Bill, the UK Home Office has proposed that senior managers be brought within scope of who can be considered the “directing mind and will” of a company. The amendment to the Bill proposes that the actions of a “senior manager… acting within the actual or apparent scope of their authority” will be attributable to his or her company, with a “senior manager” being 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 body corporate or (as the case may be) partnership are to be managed or organised, or (b) the actual managing or organising of the whole or a substantial part of those activities.” The Home Office has further stated that “[i]n practice, 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.”
In its announcement, the Home Office noted:
“The identification doctrine…has generally been interpreted to be a member of the board, such as chief executives, but complex management structures can conceal who key decision makers are. For example, a recent multi-billion-pound fraud trial determined a banking group’s chief executive and chief financial officer could not be viewed as the company’s ‘directing mind’. This has left prosecutors with a very high bar to prove who fits the criteria. Senior executives often possess a huge amount of influence and autonomy but cannot currently be considered a part of the ‘directing mind’.”
It is yet to be seen whether the Bill will pass through Parliament without further amendments and, if so, whether further detailed guidance is given: for example, how should “significant role” and “substantial part” in the definition of a “senior manager” be interpreted? It does seem clear, however, that the UK Government is indeed committed to tackle the commission of fraud within the UK and that corporate prosecutions for economic and corporate crimes are intended to become easier.