A further expansion of the UK corporate crime enforcement toolkit

In a nutshell

Recent amendments to the UK's Economic Crime and Corporate Transparency Bill (the Bill), announced on 15 June, could significantly increase the risk of criminal liability for corporates by widening the ‘directing mind and will’ principle to permit the attribution to them of certain offences committed by senior managers.

This development, following the government’s announcement, in April, of its intention to introduce a new failure to prevent fraud offence (which we have written about elsewhere), represents a further measure aimed at improving the government’s enforcement arsenal in respect of economic crime and seeks to address criticism that the current system fails to account effectively for the way in which modern organisations are structured and operate.

The current law: the identification / ‘directing mind and will’ principle

Other than under specific legislation which creates liability for organisations for ‘failing to prevent’ certain offences, corporate liability is typically based on either (i) vicarious liability for the acts of the company’s employees/agents, or (ii) the so-called ‘identification principle’, which requires prosecutors to identify and establish the directing mind and will of the company and then prove corporate criminal liability through that individual’s (or those individuals’) conduct and state of mind.

Under the current law, the ‘directing mind and will’ test has been interpreted very restrictively to encompass those who exercise the powers of the company under the articles of association (i.e. directors) or under delegated authority from the board – in other words, a very limited class of senior individuals within the company. This has led to enforcement authorities such as the Serious Fraud Office encountering significant challenges in prosecuting large organisations, as illustrated by the ruling of Lord Justice Davis in the Barclays case that senior executives including the CEO and CFO did not represent the ‘directing mind and will’ of Barclays because they did not have full discretion to act independently and were responsible to others for the manner in which they discharged their duties.

The proposed amendments

The amendments to the Bill tabled by Lord Sharpe of Epsom at the committee stage could significantly widen the class of individuals whose knowledge and conduct can be attributed to corporates for the purposes of prosecuting economic crime and thereby considerably increases the risks to larger organisations.

These amendments include the introduction of a new statutory provision titled “Attributing criminal liability for economic crimes to certain bodies”, which provides that an “organisation” (being either a body corporate or a partnership) will be guilty of an offence where a “senior manager … acting within the actual or apparent scope of their authority commits a relevant 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 organisation] are to be managed or organised, or (b) the actual managing or organising of the whole or a substantial part of those activities” and could conceivably include managers with responsibility over particular business areas (such as particular regions or specific departments such as finance, sales and marketing or operations).

The offences to which this provision would apply are set out in a separate schedule and include a wide range of economic crimes, including fraud, false accounting, bribery and tax offences, as well as inchoate offences in connection with them. There is a carve-out where the criminal conduct took place entirely outside the UK, unless the organisation would be guilty of the offence had it performed that conduct in the location where the conduct took place.

Key implications for businesses

The Bill is now at the report stage in the House of Lords and it remains to be seen whether and in what form it will receive Royal Assent.

However, if the Bill is passed in its current form, it will significantly impact how businesses manage risk and markedly increase the threat of criminal prosecution. This is particularly the case for large organisations with complex management structures, in which senior managers may have a great deal of autonomy but would not currently be considered to be part of the corporate’s ‘directing mind and will’. Indeed, one aim of the reforms, as indicated by the Minister for Enterprise, Markets and Small Businesses, Kevin Hollinrake, is to help put small businesses on a “level playing field with corporate giants, whilst holding larger companies to account for committing economic crimes”.

If the proposals are enacted, there will inevitably be complex questions of interpretation and application, including as to how widely the class of “senior managers” should be construed, which will fall to be determined in individual cases. But there can be little doubt that the legislature’s objective – both in widening the identification principle and in introducing the ‘failure to prevent fraud’ offence – is to make it easier for prosecuting authorities to establish corporate criminal liability and hold corporates to account.

Indeed, Lisa Osofsky (the Director of the Serious Fraud Office), has recently welcomed the “range of measures introduced by this bill” which she says will “strengthen [the SFO’s] ability to hold corporate criminals to account”, while Security Minister Tom Tugendhat has said that “these measures demonstrate [the Government’s] commitment to improved transparency” and ensuring that “those responsible for economic crime, whether individuals or companies, can be brought to justice”.

With this in mind, businesses may wish to take steps to assess their compliance programmes to reflect this increased risk, including by ensuring that senior executives and others with management or decision-making functions receive adequate training regarding economic crime risks and are aware of the threat of corporate criminal liability that might flow from their actions.