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Proposed economic crime changes will affect your business risk

07 August 2023
Whilst the introduction of a failure to prevent fraud offence has attracted most of the attention surrounding the Economic Crime and Corporate Transparency Bill ("the Bill"), the proposed reform of the identification principle is likely to have a greater practical impact on corporates and their economic crime liability.

The Bribery Act 2010 introduced the corporate liability offence of failure to prevent bribery and helped the Bribery Act become the gold-standard in anti-bribery legislation across the world.

However, the introduction of this new offence has not led to as many prosecutions as might have been anticipated at the time. This is, in part, because failure to prevent offences were never intended to be widely prosecuted. Rather they were intended to encourage companies to assist in the prevention of economic crime, inducing a change of culture to reduce the risk of bribery and, subsequently, tax evasion.

The Government now wants to incentivise businesses to contribute to the fight against fraud through the implementation of the failure to prevent fraud offence and the associated requirement for companies to have reasonable fraud prevention procedures in place. As such, this offence is primarily intended to encourage businesses to assist in the prevention of fraud, rather than necessarily prosecute those who fail to do so.

Why is the change to the Identification Principle more significant?

The more significant change to corporate criminal liability is likely to be the proposed reform of the Identification Principle – as this will broaden the cirumstances in which the criminal conduct of employees can be attributed to the company itself.

The general rule of criminal liability currently applied to corporations is the Identification Principle, which provides that a company 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'.

The definitive statement on the Identification Principle is found in the 1971 House of Lords judgment in Tesco v Nattrass, which limited the class of those who can represent the 'directing mind and will' of a company to the Board of Directors, the Managing Director and, in certain circumstances, other superior Officers.

The interpretation of the Identification Principle was narrowed further by the Court of Appeal in the Serious Fraud Office's (SFO) prosecution of Barclays, for fraud arising from the capital raising exercises during the 2008 financial crisis. This case established that for the conduct of a Director to be attributed to the company, they must have the requisite status and the authority in relation to the particular conduct. If either is missing, the company will not be criminally liable.

The judgment in Barclays was considered to have reduced the prospect of an individual's state of mind being attributed to a corporation, and led to a great deal of frustration for enforcement authorities. The outgoing Director of the Serious Fraud Office told politicians that the current law means her agency can prosecute “Main Street but not Wall Street” – meaning that small companies can be prosecuted more easily than complex multinationals, where Directors are often further removed from the conduct in question.

How will the reform of the Identification Principle change things?

Under the recently proposed reform of the Identification Principle added to the Bill, Senior Managers will be brought within scope of those who can be considered the 'directing mind and will' of a company.

The proposed test, not to be confused with the definition of a 'Senior Manager' under the Financial Sevices and Markets Act 2000, replicates the definition of a 'Senior Manager' in the Corporate Manslaughter and Corporate Homicide Act 2007.

This new test will look at what the Senior Manager's roles and responsibilities are within the organisation, i.e. the level of managerial influence they might exert, rather than merely their job title, and covers instances where the Senior Manager is a person who plays a significant role in the making of decisions about the whole or a substantial part of the activities of the body corporate.

Why does this matter for your company?

This proposed amendment to the Identification Principle will provide greater clarity on the parameters of the legal test. It will bring the law up to date to reflect modern company structures where directing minds are spread across different functions of business.

Most significantly, it will enable more prosecutions in cases where senior level employees who exert decision-making power are alleged to be involved in the offending. This will bring with it heightened risks for companies which means that business integrity is more important than ever given that prosecuting authorities, such as the Serious Fraud Office will be better placed to prosecute both Main Street and Wall Street in the future.

If you require further information or guidance on these proposed changes, and how they will affect your company, please contact our authors below.

Further Reading