Biggest Reform Of The Identification Doctrine In More Than 50 Years

The Economic Crime and Corporate Transparency Act (the Act) introduced reforms to corporate criminal liability for the first time in more than 50 years.
UK Criminal Law
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The Economic Crime and Corporate Transparency Act (the Act) introduced reforms to corporate criminal liability for the first time in more than 50 years. These reforms make it easier to prosecute companies for economic crime offences committed by their senior managers.

The Act, which received Royal Assent on 26 October 2023, replaces the common law "directing mind and will" test for corporate criminal liability with a statutory "senior manager" test. This change came into force on 26 December 2023 and means that a corporate entity will be found criminally liable where a senior manager who was "acting within the actual or apparent scope of their authority" commits one or more of a long list of specified economic crime offences. Notably, these offences are broad and include fraud, bribery, money laundering, sanctions, tax evasion, terrorism, accounting and FSMA offences, amongst others.

The previous position

Previously, corporate criminal liability was generally determined according to the common law identification doctrine, which attributed the actions of an organisation's "directing mind and will" to the organisation itself. Courts had historically interpreted the concept of the "directing mind and will" narrowly by having regard to the company's memorandum, articles of association, and whether responsibility and authority for the particular actions which constituted the offence had been entirely delegated to an individual by the company's directors. In the modern corporate world, where large companies have numerous layers of management and business decisions are often decentralised, this meant it was often impossible to link a company's principal decision-makers with the criminal act. Conversely, smaller companies often have simpler management structures making it much easier to evidence a link between the decision maker and the criminal act, and so easier to prosecute them.

The reformed position under the Act

Under the changes brought in by the Act, an organisation will be criminally liable when part or all of a specified economic crime is committed in the UK by a senior manager of that company or partnership.

The test to determine who is a "senior manager" is the same test found in the Corporate Manslaughter and Corporate Homicide Act 2007. This means that, rather than look at an employee's job title, it will be necessary to consider the roles and responsibilities of the employee within the organisation and the level of managerial influence they exert. Notably, the new law covers instances where the senior manager is a person who plays a significant role in the making of decisions about the whole or a substantial part of the activities of the organisation.

Prior to the passing of the Act, the Home Office noted that they considered this senior management test struck a proportionate balance in capturing those who have genuine decision-making authority over a large section of business, with prosecuting for the actions of low-level employees. The latter may of course be caught by failure to prevent offences such as the UK Bribery Act and the failure to prevent fraud offence, which was also introduced by the Act and is expected to come into force later this year or early in 2025 - for more information see our article here.

The specified economic crime offences are wide-ranging and numerous. They include false accounting, money laundering, the three bribery offences that can be committed by individuals, tax offences, fraud offences, some FSMA offences (Sections 23, 25 and 85 contraventions and the Section 398 offence of misleading the regulator), market manipulation offences, terrorism offences, and sanctions offences, amongst others.

The Government has also committed in the Second Economic Crime Plan, the Fraud Strategy and in committee debates to introduce full reform by repealing the reference to economic crime as soon as it has the Parliamentary opportunity to do so: this is currently proposed through the Criminal Justice Bill which is making its way through Parliament. The proposal is to expand the identification doctrine further so that organisations are not only liable for economic crime offences committed by senior managers, but all criminal offences (including non-economic crime offences such as sexual offences).

What impact will this have for businesses?

This change supplements the new offence of failing to prevent fraud and the existing offences of failing to prevent bribery and tax evasion, expanding the potential liability of corporate entities. In addition to making it much more likely that organisations will be successfully prosecuted and fined for relevant criminal offences, there is also an increased likelihood of companies being automatically debarred. A conviction under Section 1 of the Bribery Act 2010, for example, results in automatic debarment. Companies will need to look much more closely at their compliance programmes to prevent relevant offences occurring, and should ensure that senior managers receive enhanced training.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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