As the hotly awaited Economic Crime and Corporate Transparency Bill (the “Bill”) makes its way towards the final stage of its reading in the House of Lords, the Government has tabled a new amendment that may significantly expand the scope of corporate criminal liability. An understanding of the changes – if they become law – will be critical for corporates to ensure they have the appropriate systems and procedures in place to protect against the risk of criminal liability.
27 June 2023
Expanding Corporate Criminal Liability: Will Companies Be Liable for Senior Managers’ Actions?
Proposed Expansion of the Identification Doctrine
On 15 June 2023, the Government tabled a new amendment expanding the so-called “identification doctrine”.
The Law As It Stands
- Under the current law, save for certain exceptions such as failure to prevent bribery, companies in England can only be criminally liable where the individuals representing the company’s “controlling mind and will” have the necessary mental state required for a conviction. This principle has been applied narrowly by the Courts, and prosecutors have lost some high-profile cases on this basis, such as the Serious Fraud Office’s (“SFO”) dismissed attempts to prosecute Barclays in 2020.
- The Government is now proposing new legislation that will make companies criminally liable if “senior managers” commit fraud, money laundering or other economic crimes.
- The amendment proposes that if a “senior manager of a body corporate or partnership (the ‘organisation’) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force the organisation is also guilty of the offence. ” A “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 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.” (This definition is drawn from the Corporate Manslaughter and Corporate Homicide Act 2007.)
- This amendment is intended to address the problem that complex management structures, in particular in larger companies, can conceal who key decision makers are. The government has also proposed guidance as to how this will work in 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.”
- The proposed change follows the Law Commission’s Corporate Criminal Liability Options Paper published last June, which included as an option expansion of the identification doctrine to allow conduct to be attributed to a corporation “if a member of senior management engaged in, consented to, or connived in the offence”.
- If the amendment is passed as is, we can expect a good deal of thought to be given – in government, corporate boardrooms, and ultimately the courts – as to the meaning of “significant role” in the context of a senior manager, the scope of decisions relating to a “substantial part” of an organisation’s activities, and when actual or apparent authority can be established.
“The Government is now proposing new legislation that will make companies criminally liable if “senior managers” commit fraud, money laundering or other economic crimes”
“Failure To Prevent Fraud”
This follows the Government’s earlier amendment on 11 April 2023 to introduce a new “failure to prevent fraud” offence. This was another option in the Law Commission’s paper.
- As it stands, the proposed “failure to prevent fraud” offence would make an organisation liable where a specific fraud offence is committed by an employee or agent for the organisation’s benefit, and the organisation does not have reasonable fraud prevention procedures in place.
- The offence will apply to all sectors, but only large organisations are in scope – defined as organisations meeting two out of three of the following criteria: more than 250 employees, more than £36 million turnover and more than £18 million in total assets.
- Offences in the following list are currently in scope:
– fraud by false representation
– fraud by failing to disclose information
– fraud by abuse of position
– obtaining services dishonestly
– participation in a fraudulent business
– false statements by company directors
– false accounting
– fraudulent trading
– cheating the public revenue
- Organisations based overseas can be prosecuted if an employee commits fraud under UK law or targets UK victims.
- Guidance on “reasonable fraud prevention procedures” is expected to be published prior to the new offence coming into force. There may also be circumstances where it is reasonable to have no fraud prevention procedures in place (for example, organisations where the risk is extremely low).
“As it stands, the proposed “failure to prevent fraud” offence would make an organisation liable where a specific fraud offence is committed by an employee or agent for the organisation’s benefit, and the organisation does not have reasonable fraud prevention procedures in place”
Conclusion (for now)
The UK government is trying to put its money where its mouth is by tackling fraud through an overhaul of the legislative framework. It hopes the new law will assist in levelling the playing field for companies, driving cultural change and incentivising stronger prevention procedures and corporate accountability. All while boosting conviction tools at the SFO’s disposal.
If the legislation continues on its current trajectory, new major compliance burdens will be imposed on companies. Understanding the new legislation and getting internal systems and procedures right will be critical to ensuring corporates prioritise fraud risk, protecting themselves and their employees from criminal liability. Keep watching this space.
“It hopes the new law will assist in levelling the playing field for companies, driving cultural change and incentivising stronger prevention procedures and corporate accountability”
Alessia de Quincey