Companies and partnerships are increasingly being used to commit crime. However, applying the criminal law to companies is difficult to do, because they are only able to act through people that work in or for them, including directors, managers, employees or agents. To date, it has been very hard to successfully prosecute companies for criminal offences, because most criminal offences depend on establishing the intention to commit the crime, and companies (being artificial persons) do not possess a mind.
There is therefore difficulty in attributing the mental element required for most of the offences to the organisation itself – the identification principle. This will change from 26 December 2023, when section 196 of the Economic Crime and Corporate Transparency Act 2023 (the act) comes into force, which will make it easier to prosecute organisations for economic crimes, including fraud, bribery, and money laundering. It will change further when the Criminal Justice Bill which is currently going through Parliament is enacted, which will make it easier to prosecute organisations for all crimes.
Attributing the wrongdoer’s intention or knowledge of the offence to the organisation
Most crimes require both the physical elements of the crime and a mental element, meaning that the wrongdoer intended or had knowledge of the crime (some crimes are strict liability offences which require no mental element). Organisations can be used by wrongdoers to commit crimes, but as they do not have a mind of their own, the common law has developed such that the courts have said that the mental state of the wrongdoer can be attributed to that of the organisation so that the organisation itself can be prosecuted, if the wrongdoer was the “directing mind and will of the corporation”.
This identification principle is a difficult test to apply in practice, however, particularly with large companies with complex management structures. Normally a board member is required to be involved and have the required mental state in order to commit the offence, but larger organisations will have many senior people who are not board members. Also even being a board member may not be sufficient - in The Serious Fraud Office v Barclays PLC & Anr [2018] EWHC 3055 (QB), the wrongdoers were the chief executive and the chief finance officer, but the court held that their mental states could not be attributed to Barclays, because the “directing mind and will” of Barclays was held to be the full Board and certain committees, and they had not delegated their authority for the relevant transactions to those individuals.
The new "senior manager" test
Section 196 of the act introduces a “senior manager” test for the identification principle, which already appears in the Corporate Manslaughter and Corporate Homicide Act 2007. Under this test, if a senior manager of an organisation acting within the actual or apparent scope of their authority commits a relevant offence, the organisation is also guilty of the offence.
Both the act and the bill define a senior manager as someone who “plays a significant role” in deciding, managing or organising the “whole or a substantial part of the activities of the organisation”. This definition means it will not always be clear who may be considered to be a senior manager, and it certainly does not depend on job title. Instead it will depend on the facts in each case. However it is clear that a much broader range of individuals will be caught by this new identification principle, and so it should make it easier to attribute a wrongdoer’s mental state to an organisation.
The economic crime offences
The new identification principle will apply from 26 December 2023 to the economic crimes that are listed in Schedule 12 of the act, including fraud, bribery, money laundering offences, false accounting, tax evasion, offences under the Financial Services and Markets Act 2000 and breaches of sanctions regulations. These Schedule 12 offences should not be confused with those economic crimes that can only be committed by corporates (these are listed in Schedule 11 of the act, or the new "failure to prevent fraud" offence created by the act - see our article: Businesses at risk of unlimited fines if they fail to prevent their employees committing fraud.
Which organisations is this relevant for?
Companies and partnerships of any size. It includes those incorporated overseas, although if the acts or omissions that caused the offence took place outside the UK, then an organisation would only be guilty if the offence would also be an offence in the location it took place.
Preventative procedures will be no defence
If a wrongdoer uses an organisation to commit an economic crime listed in Schedule 12 of the act, and the "senior manager" test can be used to attribute the wrongdoer’s mental state required for the offence to the organisation, then it will be no defence for the organisation to say that it had preventative procedures in place. This is in contrast to the new failure to prevent fraud offence introduced by act.
All criminal offences
The Criminal Justice Bill is currently going through Parliament. Assuming it is enacted containing the current clause 14 as drafted, the new identification principle will apply to all criminal offences two months after it comes into force.
Clause 14 of the bill provides that where a senior manager of a body corporate or partnership acting within the actual or apparent scope of their authority commits an offence under UK law, the organisation also commits the offence. This is unless all the conduct constituting the offence occurred outside the UK and the organisation would not commit the offence if that conduct were the organisation’s (rather than the senior manager’s).
What can organisations do?
Organisations should identify the employees who could be deemed to be senior managers under the new identification doctrine, train them so that they understand the most likely potential range of offences that could be committed using the organisation, and ensure they have adequate procedures in place to detect and minimise the risk of such crimes being committed.
Kathryn Saunders