As we have explored in our earlier blogs, the Economic Crime and Corporate Transparency Act 2023 (the “Act”) has introduced important changes to the identification principle to be applied to certain economic crimes by replacing the “directing mind and will” test with a “senior managers” threshold (see our blog posts here and here). The new identification principle will enter into force within two months of the passing of the Act (i.e. by the end of the year). Combined with the introduction of the failure to prevent fraud offence (“FTPF”), the Government has claimed that “[b]oth changes remove the ability for a large company to hide behind complex management structures to evade scrutiny. This ensures a level playing field for all businesses and will help remove criminal money from the economy”. Given the clear indications from Government and short timescale before the provisions take effect, organisations should be taking immediate steps to prepare for the new measures.
The Government has explained that the aim of the reformed doctrine is providing “certainty that senior managers are in scope of attribution to a corporation”. This is in light of the difficulties in identifying who controls a business as organisations have grown in size and complexity, creating increasingly multifaceted governance and management structures. Prosecutors have argued that, as businesses have expanded, the rules of attribution in criminal law have failed to keep pace with these changes to organisations, in turn, creating difficulties for law enforcement prosecuting companies for economic crimes. The courts have explained that criminal culpability may, depending on the circumstances and context, be capable of attaching to a company by virtue of the conduct of individual(s) representing its “directing mind and will”, or where a company delegates their powers and responsibilities to a committee of individuals, their collective acts. In other words, a very limited class of senior individuals within an organisation. The reforms expand this class of individuals to a broader category intended to reflect modern organisational structures. The definition of senior manager is markedly wider in scope than the directing mind and will test.
Drawing the line
The new provisions define a “senior manager” as someone playing a “significant role” in the:
- making of decisions about how the whole or a substantial part of the activities of the body corporate are to be managed or organised; or
- actual managing or organising of the whole or a substantial part of those activities.
The economic crimes caught by Schedule 12 of the Act are wide-ranging, including fraud, false accounting, bribery, and tax offences. Compared to the directing mind and will test, the provisions extend liability to those with apparent, as well as actual authority and those who have a significant role in a substantial part of an organisation’s activity, even if they are not the ultimate leaders of it.
There will inevitably be complex questions of interpretation and application as to how widely the class of “senior managers” should be interpreted. Drawing the new lines of attribution will fall to be determined in individual cases taking into consideration the relevant organisation and criminal offence(s). Nonetheless, some guidance can be found gleaned from sources that are currently available:
- The application of the provisions will reflect the scale of the organisation and the extent to which the relevant actor committing the offence has a role in the company.
- Senior managers will likely cover both those in the direct chain of management as well as those in, for example, strategic or regulatory compliance roles.
- As well as directors and similar senior management positions, roles likely to be under consideration include regional managers and the managers of different operational divisions. It would not usually capture someone whose role was limited to management of a discrete unit that does not represent a substantial part of the company’s affairs. However, where that operation did represent a substantial part of the company’s activities, it may be captured. The following are some potential illustrations of how the provisions may be interpreted in practice:
- If an organisation’s operations consisted of the two distinct units, each unit could be “a substantial part” of the affairs of the company, and accordingly each unit’s senior management could be caught by the expanded definition.
- A compliance manager of a company, may be considered as having sufficient control if his or her role extended to a substantial part of the organisation, even if this was limited to a strategic or regulatory compliance function.
- On the other hand, a deputy store manager of a branch of a national or international supermarket is generally unlikely to be considered as having sufficient control of a “substantial” part of the company.
- Attribution may apply if a senior manager’s responsibilities involve taking decisions relating to corporate strategy and policy in a particular area – such as health and safety, finance, or legal affairs.
- We expect it would be sufficient to show that the senior manager engaged in, authorised or permitted the conduct – it should not be necessary to show that they were “acting within the scope of their authority” in doing so, with apparent authority sufficing for liability to attach.
The above factors are based on the observations in the Law Commission Options Paper into the reform of Economic Crime and statutes that use a similar definition to that applied in the Act, most relevantly the definition of “senior manager” in the Corporate Manslaughter and Homicide Act 2007. We also expect the Explanatory Memorandum into the Act will provide further clarification, which should be published before the end of the year.
Preparing for the measures
Given the wording of the reformed provisions clearly aim to attribute criminal liability for economic crimes to certain bodies, businesses should be mindful of senior managers’ actions and identify personnel:
- that play a significant role in:
- making the decisions about the whole or substantial part of the activities of the business; or
- the actual managing of the whole or a substantial part of those activities.
- that exert a high level of managerial or strategic influence; or
- that act as country / regional leads and business line heads.
In addition, it is worth assessing the equivalent level of seniority of people within subsidiary companies, who may now also represent a wider pool of people who can create liability for that entity, if not the wider group.
Looking ahead at increased investigation risk
The Government Impact Assessment into the extended attribution doctrine envisages that “additional court cases are expected to be low” but we do expect an increase in investigations by prosecuting authorities. This is clear from public statements that signal a clear intention to use the new powers in the Act proactively. Combined with the introduction of the new FTPF offence, the Government claims the “[m]ajor reforms to corporate criminal liability” will “provide prosecutors with game changing powers to hold companies criminally liable for malpractice”, warning that “[b]oth changes remove the ability for a large company to hide behind complex management structures to evade scrutiny. This ensures a level playing field for all businesses and will help remove criminal money from the economy”. Chief Crown Prosecutor for the Crown Prosecution Service, Andrew Penhale, likewise said: “[t]he introduction of a failure to prevent fraud offence and reform of the identification doctrine will better enable prosecutors to hold large companies to account for offences committed under their watch. It should result in greater care to prevent fraud before it happens”.
It is therefore clear that the dual reforms will significantly impact how organisations manage risk and will markedly increase the threat of criminal investigations and may, in some of those cases, lead to prosecutions. The difficulties are particularly stark 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”.
If a corporation is successfully prosecuted, it faces criminal conviction and a significant fine. Any prosecution would clearly also be highly damaging commercially for the business, as well as harming relations with investors, employees and customers. The Government envisages that “it is likely that corporate prosecutions arising from the extended identification doctrine will be dealt with by Deferred Prosecution Agreement”. In cases of corporate crime, an organisation may also face civil claims, including potentially class actions, depending on the particular offence involved.
Preparing for developments
Given the additional challenges arising from recent reform, we recommend businesses take steps to assess their compliance programmes to address the increased likelihood of investigation; including by ensuring that senior executives and others with management or decision-making functions receive adequate training on the changing economic crime landscape and are aware of the threat of corporate criminal liability that might flow from their actions.
Our tax team has also been exploring the practical implications of these changes from a tax perspective (see here).