Discussions regarding the difficulties in prosecuting large corporations under the current English and Welsh law have been taking place for a number of years, with changes to the corporate criminal liability landscape rare. However, last month the Government announced that it is introducing new legislation to reform the identification doctrine for some economic crime offences. This is in addition to the introduction of the new ‘failure to prevent fraud’ offence which was announced earlier in the year. Both substantive changes are being implemented through the Economic Crime and Corporate Transparency Bill[1] that is currently in report stage at the House of Lords.
The current identification doctrine
The identification doctrine is the name given to the general rule of criminal liability that is applied to corporations, to whom the rule of vicarious liability rarely applies in the criminal context. The identification doctrine provides that a corporation will generally only be liable for the conduct of a person who had the status and authority to constitute the company’s “directing mind and will”.[2] The doctrine first began with the 1915 case of Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd in which the House of Lords examined whether a corporate ship owner could be made liable for the loss of his cargo due to the negligent navigation of one of its ships.[3] A subsequent major development in the criminal law came by way of Tesco Supermarkets Ltd v Nattrass in which the House of Lords applied the term “directing mind and will”, first coined in Lennard’s Carrying Co, explaining that this would normally be members of the board of directors of the corporation.[4] Tesco v Nattrass currently remains the leading case on the identification doctrine in the criminal law, despite being over 50 years old.
In recent years, concern regarding the utility of a principle that was devised in the 1970s has grown. A recently published Home Office Impact Assessment[5] sets out six ways in which the current identification doctrine does not adequately deal with misconduct carried out by modern day corporations. These can be summarised as follows:
- The doctrine is too narrow, with only a small number of persons considered the “directing mind and will” of a corporation;
- It doesn’t adequately reflect the reality of the decision-making in complex corporations that is usually dispersed across various areas of the business;
- It makes it too difficult to convict corporations for offences committed for their benefit and where they are gaining financially from criminal conduct;
- It is unfair between small and large companies as it is easier to identify the “directing mind and will” in a smaller company that has a simpler corporate structure;
- The current law does not bring any certainty – it has developed in common law through the courts, without any legislation underpinning it;
- The current doctrine does not incentivise good corporate governance and in fact disincentivises it by encouraging corporates to make their governance artificially complex so that it is difficult to identify the “directing mind and will”.
A recent example of the difficulty in applying the current doctrine to a modern day corporate was seen in the case of Serious Fraud Office v Barclays PLC[6] where the Serious Fraud Office (“SFO”) attempted to prosecute Barclays PLC and its subsidiary Barclays Bank PLC (“Barclays”). The SFO sought to bring a voluntary bill of indictment against the two corporations, the Crown Court judge having dismissed the case against them, arguing that through their Chief Executive, Chief Financial Officer and three others, they had conspired to commit fraud when attempting to raise capital for Barclays at the beginning of the 2008 financial crisis. The High Court refused the application, rejecting the assertion that any of the defendants were the “directing mind and will” in order to attribute liability to Barclays. In handing down the High Court’s decision, Lord Justice Davis determined that the individuals in question did not have full discretion to act independently with regards to the transactions in raising capital but were instead responsible to another person for the manner in which they discharged their duties.
The Barclays case highlighted how the identification doctrine has set too high a threshold for the establishment of corporate criminal liability in complex and global corporate structures. It is difficult to envisage how any large corporate would be liable for criminal conduct, as it is not common practice to have ultimate decision-making power lie with one individual. Rather, corporate governance is normally distributed across various parts of the business. Additionally, from the public’s perspective, if it is not enough to fix the company with criminal liability that a company’s CFO and CEO were involved in alleged criminal conduct, the law must not be fit for purpose.
The proposed change to the identification doctrine
The wording of the statutory reform to the identification doctrine is “a body corporate commits an offence of fraud (including false accounting), money laundering, sanctions evasion, bribery and tax evasion where the offence is committed with the consent, or connivance of a senior manager”.[7] A “senior manager” is then defined as an individual who “plays a significant role in the making of decisions about how the entity’s relevant activities are to be managed or organised ” or “plays a significant role in the managing or organising of the entity’s relevant activities”, or the CEO or CFO.
The test replicates the definition of “senior manager” found in the Corporate Manslaughter and Corporate Homicide Act 2007, bringing the economic crime law in line with other types of corporate criminal liability.[8] This model will focus more on what the senior manager’s roles and responsibilities are within the organisation, rather than their job title, with the intention that this will bring greater clarity and consistency to the application of the identification doctrine.
Analysis
The anticipated impact of this new test for corporate criminal liability cannot be overstated and is a welcome improvement to the law in this area. It will likely lead to a notable change in the types of organisations being charged with economic crime offences and lead to a better cross-section of corporations being brought before the courts, which can only help improve the public’s confidence in the criminal law.
Some may have seen the addition of a ‘failure to prevent fraud’ offence as an adequate solution to improving corporate criminal liability and tackling economic crime. However, without a change to the identification doctrine, holding corporates accountable for substantive offences that reflect the true criminality would have remained difficult. Lax corporates which let fraud or corruption take place in their ranks and which don’t implement adequate procedures indeed should be prosecuted. But change is still needed so that corporates which actively participate in, and commit, criminal acts for their own benefit do not avoid prosecution due to the difficulty in determining who possesses the “directing mind and will” within the particular organisation. Maintaining the current identification doctrine would only have enabled companies increasingly to avoid liability as corporate structures become more complex and multi-national.
The proposed change to the identification doctrine, in removing ambiguity as to whose actions will bind the corporate, is of benefit not only to prosecutors but also to corporates. It will assist corporates in targeting compliance training at those who can bind the company, which will better mitigate risk. Furthermore, clarity in the application of the law regarding corporate criminal liability will encourage further defining of roles and responsibilities within large and complex corporate structures which, in turn, will lead to better transparency and governance.
The proposed reform will be a welcome addition to the prosecutor’s toolkit, including private prosecutors. The new law will give legislative certainty as to the circumstances in which the identification doctrine applies and provide a more consistent success rate in the prosecution of similar cases.
Georgina Diamanti
[1] https://bills.parliament.uk/publications/51671/documents/3612
[2] Tesco v Natrass [1971] UKHL 1 AC 153.
[3] [1915] AC 705
[4] [1971] UKHL 1 AC 153.
[5]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1163432/5_IDD_Impact_Assessment.pdf, para 8
[6] [2018] EWHC 3055 (QB)
[7] Clause 134 of the Economic Crime and Corporate Transparency Bill
[8]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1163432/5_IDD_Impact_Assessment.pdf, para 10
