Government-drafted amendments to the Economic Crime and Corporate Transparency Bill surprised many in the corporate world by proposing a new basis for holding businesses accountable for economic crime offences, which could become law in months. The amendments aim to expand corporate liability by attributing the actions and mental states of senior managers, who have committed economic crime offences, to the corporates they work for. Under the current common law, the identification doctrine restricts the possibility to do this by limiting attribution to the directing minds of will of organisations (for the purposes of corporate criminal liability). This change will mean the risk profile of many companies needs revisiting. Inhouse lawyers will be asked what can be done to prepare for these changes.
Business taken by surprise - A new way for corporates to be found liable for economic crime offences
The late tabling of Government-drafted amendments to the Economic Crime and Corporate Transparency Bill (the Bill) focusing on holding businesses to account for economic crime offences last week took many in the corporate world by surprise.
Below, Nichola Peters, Michelle de Kluyver, Harriet Territt, and Gilly Bradbury of Addleshaw Goddard LLP's Global Investigations practice set out the background to the provisions, what they mean for business and what happens next. This is the first in series of articles, considering this development in more detail.
The Law Commission's June 2022 report "Corporate Criminal Liability: an options paper" contained a menu of ways businesses could be held to greater account for criminal acts committed in their name or by their staff. Not many of the options were 'new'. One, in particular, had been the subject of litigation in the courts, debate in the media and legal commentary and scrutiny in Parliament.
The identification doctrine
The identification doctrine is the principle by which a corporate may be held accountable in the criminal law for the conduct of its most senior people. It has long been cited as a barrier to corporate prosecutions in the UK for offences requiring knowledge, intention or dishonesty because it requires the conduct to be committed by a "directing mind and will" of the company. Removing this barrier is the rationale for corporate 'failure to prevent' offences, e.g. under the UK Bribery Act, where the directing mind and will of a company is taken out of the equation.
A bold step forward
A way of more easily enforcing against companies for crimes would be to do away with the identification doctrine. Successive Governments have been reluctant to take such a bold step. This latest set of amendments to the Bill takes a significant step forward towards this. The amendments proposed put in place a statutory basis for attribution of senior manager acts to the business itself. Importantly, they do this on the basis that, if the senior manager is guilty, the business will also be guilty. There is no exception for companies who vet, train and encourage their senior managers to act with the highest ethical standards of conduct. This is the most significant extension of attribution for the acts and mental state of senior managers to the corporates who employ them to date.
Reframed corporate criminal liability
The scope of the current provisions is limited to those offences listed in a schedule (forming part of the amendment paper) and are broadly categorised as 'economic crimes'. This includes theft, false accounting, forgery, bribery, money laundering, tax offences, fraud, some Financial Services and Markets Act 2000 offences, market manipulation, anti-money laundering and sanctions offences.
Commercial organisations can currently be held liable for these offences but only if their most senior personnel (representing their directing mind and will) commits them. There is no doubt that it is challenging to hold large organisations to account on this basis due to the way they operate and their corporate structures.
These reforms will lower the bar so that the organisation will be judged by the actions and 'mens rea' of their senior managers, such as, regional heads or relevant directors or heads of departments or divisions, based not on their job title but on their role.
The corporate will be liable where a senior manager of the organisation, acting within the actual or apparent scope of their authority, commits a relevant offence in the UK. As such, the impact is not limited to UK incorporated companies or registered partnerships. In terms of who is considered to be a senior manager, the model adopted in the current draft is based on that found in section 1(4)(c) of the Corporate Manslaughter and Corporate Homicide Act 2007. This looks for the person who plays a significant role in decision making about how a substantial part/the whole of a commercial organisation's activities are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities.
The definition of senior manager thus differs vastly from that which the financial services sector is used to, which is by reference to senior manager functions ("SMF"). If the Government's draft provisions become part of the criminal statute as drawn, the question of whether someone is in fact a senior manager will become a matter of evidence and, possibly, inference.
A late stage in the Parliamentary process
The Bill has been before Parliament since its introduction in September 2022 and has now reached Report (consideration) Stage in the House of Lords. There are now only two Parliamentary Stages left before the Bill can receive Royal Assent and become law. It has already been debated on more than 20 occasions.
This is not the first time that a clause drafted in these precise terms has been considered as part of this Bill. A cross-party group of Members of the House of Lords tabled the same wording during the Committee Stage. In his gentle rebuff on 27 April 2023, Lord Sharpe of Epsom, indicated that the Government would prefer any reform to have a wider remit than economic crime and wanted first to identify and understand any unintended consequences or risks before agreeing to the amendments. It may be that that risk analysis has now been undertaken.
Time remaining to act
The Government's Fraud Strategy, published in May 2023, sets out the anticipated timescales for achieving key milestones in its ambition to cut fraud by 10% before the next General Election. Its intention is to introduce the new corporate offence of failure to prevent fraud (added to the Bill during Committee Stage) by Q3 2023. We take this to mean that the offence will be in force by the end of the year.
The draft commencement provisions included on the amendment anticipate that the senior manager attribution provisions will come into force two months from Royal Assent.
How to prepare
The impact of these provisions coming into force will be reduced for smaller and less complex companies. Complex organisations and multinationals will need to identify who their senior managers are for these purposes and assess economic crime risk falling within the scope of their authority. Consideration can then be given to how best to manage these risks.
In our following articles we will update on Parliamentary progress, consider who is likely to be considered a "senior manager" and discuss further steps businesses can take to mitigate this emerging, critical risk.
Key contacts and authors
To the Point
Subscribe for legal insights, industry updates, events and webinars to your inboxSign up now
Get up to date with our latest news on LinkedInFollow now