Reform of UK identification principle to expand corporate criminal liability

The proposed reform, to be introduced as part of the Economic Crime and Corporate Transparency Bill, significantly widens the range of employees whose criminal conduct could be attributed to a corporate body, from directors to a much broader cohort of senior management. Under the reformed regime, if a member of a company’s senior management engaged in, consented to, or connived in an economic crime offence, such as fraud, then the company could be held liable for the manager’s actions.

The identification doctrine is the legal test for determining whether the dishonest actions of individuals can be attributed to a corporate, which is a separate legal personality. Under the current law, it has proven to be difficult to establish evidentially proof of intentional wrongdoing or dishonesty – fault – in serious offences. The law requires that a ‘natural person’ of sufficient seniority to be considered the ‘directing mind and will’ (DMW) of the organisation be at fault. If that person, acting in the capacity of the DMW, commits a criminal offence that offence, including the guilty mind needed to commit it, may be considered that of the organisation, enabling it to be prosecuted.

In practice, this need to identify fault in the “directing mind and will” has proved difficult to establish in all but the simplest of corporate structures.

The proposed reform would place the identification doctrine on a statutory footing for economic crimes and provide certainty that senior managers, not only directors, will fall within the scope of those whose criminal liability can be attributed to a corporate. According to a government policy paper, this will better reflect modern corporate structures where directing minds are spread across different functions of the business, and adapt to sophisticated criminality.

The proposal follows an 18-month consultation by the Law Commission on reforming corporate criminal liability. It is proposed that a member of an organisation’s senior management would be any person who plays a “significant role” in the making of decisions about how the entity’s relevant activities are to be managed or organised, or in the actual managing or organising of those activities. The organisation’s CEO and CFO would always be considered members of its senior management under this definition.

Legal experts at Pinsent Masons said that reform of the identification doctrine has been on the cards for some time, and the proposal is the latest addition to a growing number of different models of corporate criminal attribution the government has introduced over the years. These include strict liability offences under health and safety legislation; the ‘senior management’ test under the 2007 Corporate Manslaughter and Corporate Homicide Act; and the ‘failure to prevent’ bribery and tax evasion facilitation offences under the 2010 Bribery Act and 2017 Criminal Finances Act. A further amendment to the Bill, introduced in April, proposes a new corporate failure to prevent fraud offence.

Fiona Cameron of Pinsent Masons said: “The driving force behind these formulations has been a desire to facilitate corporate prosecutions where there is wrongdoing, by imposing liability for the actions of a broader cohort of senior managers than the existing ‘directing mind and will’, or by reversing the burden of proof and requiring companies to demonstrate they had adequate procedures to prevent their associated persons’ breaches”.

Financial crime investigations expert Andrew Sackey, also of Pinsent Masons, predicted that the revised identification doctrine is likely to be reserved for more egregious cases of corporate misconduct and is unlikely to lead to more court cases.

“The requirement to prove that the senior manager in question played a ‘significant role’ in relevant decision-making will likely become a hotly contested battleground; particularly in the context of large organisations with delegated management responsibilities and complex chains of command. This is precisely the problem that has beset prosecutions under the existing identification doctrine’s rules,” he said.

“The failure to prevent fraud, bribery and tax evasion facilitation offences are, in principle at least, more attractive tools for prosecutors, placing the onus on the company to exculpate itself once the breach is demonstrated,” he said. “It is perhaps then unsurprising that the government’s impact assessment on the proposal states that, through consultation with the Crown Prosecution Service and Serious Fraud Office, ‘additional court cases are expected to be low’. This in my view reflects the likelihood that the new offence will be reserved for more egregious cases of corporate misconduct, with direct criminal attribution carrying greater opprobrium than ‘failures to prevent’ criminality.”

The Economic Crime and Corporate Transparency Bill is currently progressing through the House of Lords.