The proposed reform of the identification principle from the Bill that keeps on giving

Under current UK law, in order to find a company liable for offences requiring proof of a mental element (e.g., intention, knowledge or suspicion) it is necessary to prove that a "directing mind and will" of the organisation was involved in the misconduct. While this “identification principle” has been interpreted in different ways, it is generally held to require that a senior officer or director (the “directing mind and will" of the company) knew about or was involved in the offence. The principle has been repeatedly criticised as being unrepresentative of how corporate entities are structured and operate nowadays. Prosecutors and law enforcers argue that it hinders the effective enforcement of criminal law against large companies in particular, as it is often difficult to show that those at the top of the business had any knowledge or involvement in the wrongdoing at all. 

The new proposals

Under amendments now proposed by the government to the Economic Crime and Corporate Transparency Bill, a company or unincorporated partnership will be guilty of an offence if one of its “senior managers” commits the offence whilst acting within the actual or apparent scope of their authority, or attempted or conspired (or encouraged or assisted someone else) to do so. It will not be necessary to show that anyone who was the “directing mind and will” of the company was involved. For the present, the provisions will only apply to specified economic crimes, although the government has already committed to extending the policy to all criminal offences when a suitable bill arises.

The provisions will apply to all corporate bodies and partnerships established in England, Wales, Scotland and Northern Ireland. They won’t apply to organisations based and operating overseas in respect of conduct carried out wholly overseas, simply because the senior manager concerned is subject to the UK’s jurisdiction (for instance, because that manager is a British citizen). But they will apply to offences which can be prosecuted under UK law wherever they are committed, against individuals or organisations with certain close connections to the UK (including foreign-incorporated bodies). 

This proposal would in effect dramatically lower the bar for convicting the corporate body itself and level up the enforcement playing field between large organisations and smaller businesses (“SMEs”) where historically it has been much easier to identify the controlling mind and will.

Who is a “senior manager” for these purposes? 

The proposal is to adopt the definition of senior manager in the Corporate Manslaughter and Corporate Homicide Act 2007, which looks at what the senior manager’s roles and responsibilities are, rather than their job title. So, it’s someone who plays a significant role in making management decisions about all or a substantial part of the organisation’s activities, or in actually managing or organising those activities. There is of course likely to be considerable debate over what “significant role” means – is it in the company as a whole or just the particular division? And there are also likely to be questions around what “acting in the actual or apparent scope of their authority” covers in practice. Can acting fraudulently ever said to be in the scope of a manager’s authority? What if an employee holds themselves out as having authority when they don’t?

To which offences will the new principle apply?

The reform to the identification principle would initially apply to the economic crime-related offences set out in a schedule to the Bill. These are currently offences of bribery, money laundering, fraud, false accounting, fraudulent trading and other related offences, such as cheating the public revenue, along with various Financial Services and Markets Act 2000 and Financial Services Act 2012 offences, offences under the Terrorism Act 2000 and so on. Other offences that are in scope of economic crime may be added later by regulations. 

What’s not in the proposal?

Also of interest is what the proposals do not contain.

• It is not necessary that the senior manager intended to benefit the company itself. In fact, the company does not need to be aware that the offence was being or had been committed.
• There is no defence that the company had taken reasonable measures to stop such offences being committed.
• There is no limitation of this provision to large organisations, as there is in the proposed failure to prevent fraud offence (“FTP Fraud”). (In this regard it should be noted that the House of Lords voted on 27 June 2023 to extend that proposed offence to all businesses in the face of strong government opposition – the House of Commons will now have to decide that point.) 

What’s the likely effect of the reform?

The Impact Statement accompanying the proposal suggests that the cost of implementing this reform will be quite small. For companies it suggests that costs might only amount to the time it takes company secretaries to read and pass on the new rules. In practice, the costs could be greater; organisations will need to consider which senior managers might be in scope and whether they need any specific extra training or guidance. The increased exposure of businesses to liability for conduct they might not even know is happening and which is of no benefit to them is likely to prove an incentive to ensure it does not occur.

As with the FTP Fraud offence, the Impact Statement suggests that it is not expected that there will be many additional court cases brought as a result of this change. It does anticipate an increase in corporate prosecutions but suggests that these are most likely to be settled by way of a deferred prosecution agreement. 

The government also hopes that the change will increase certainty as to what the law is, act as a deterrent for organisations and that, as a result, crime will decrease. This does rather suggest that the government expects businesses to do something to take account of the change. 

Another potential consequence noted in the Impact Assessment is that the reform “will significantly improve” the UK’s ability to support international partners in high profile cases and enable parallel proceedings to be brought where it has not been possible before. The UK has previously faced unfavourable comparison with other jurisdictions regarding its ability to prosecute large corporates. It clearly hopes this development will bolster its standing in this regard.

What’s next?

The Bill will have its third reading in the Lords on 4 July 2023 and then go back to the Commons for consideration of the latest amendments. These include three specific amendments introduced by the House of Lords on 27 June 2023, all of which had been proposed by the Lords previously but rejected by the government. This time they were put to the vote and passed, so the Commons will have to consider them in full. 

They are:

• To leave out the reference to “a large organisation" in the definition of organisations caught by the FTP Fraud offence, thereby extending the offence to all businesses, including SMEs. The exclusion of 99.5% of businesses from the ambit of the offence has been widely criticised. Lord Garnier suggested it was like saying that only burglars over six foot six tall were liable to prosecution while everyone else got off scot free. The government maintains it would place too much of a financial burden on SMEs. But that argument was not run for the existing offences of failing to prevent bribery or the facilitation of tax evasion, which apply to all enterprises, no matter their size.
• To extend the FTP Fraud offence to include failing to prevent money laundering. Supporters of this argue that money laundering is currently dealt with mostly by regulation and there should be a specific obligation on businesses to prevent criminal money laundering too.
• To extend the cost cap for civil recovery cases to all proceedings brought by an enforcement authority under Part 5 of the Proceeds of Crime Act 2002, where the property in respect of which the proceedings have been brought has been obtained through economic crime. This would mean that public authorities would not have to pay the costs of defendants in these cases unless the authority had acted unreasonably, dishonestly or improperly in bringing or conducting the proceedings or it would not be in the interests of justice.

The FTP Fraud offence proposals are covered in more detail in our previous blog post: Revealed at last: The government publishes its proposals for a new failure to prevent fraud offence (linklaters.com)