The Corporate Criminal Liability Options Paper

The identification doctrine

In general, corporates and other legal persons can be liable for all criminal offences. But since a company can only act through natural persons, it is always necessary to consider the circumstances in which the actions of a natural person can be attributed to a corporate.

There are many strict liability offences (e.g. environmental and regulatory breaches) where the liability of a corporate, if the conduct that constitutes the offence is proved, tends to follow automatically and without issue.

However for most criminal offences (including fraud and substantive money laundering offences), the acts of a natural person can only be attributed to a corporate when that person can be “identified” with the company. This is known as the identification doctrine, which provides that only acts of a senior person representing the company’s “controlling mind and will” can be attributed to the corporate.

This is a very high bar and has long been criticised for creating major difficulties for establishing criminal liability against a large and complex company, and resulting in very few successful prosecutions for serious economic crime offences by a large company. A notable exception is the failure to prevent bribery offence under the UK Bribery Act 2010, which avoids the identification doctrine by making the company itself liable for failing to prevent bribery. The UK Criminal Finances Act 2017 took a similar approach in relation to the facilitation of tax evasion.

The current approach in the UK is also different from the approach in other jurisdictions, such as the United States.

The Law Commission has been considering whether the identification principle should be reformed and/or whether any other approaches should be adopted.

The Options Paper proposes three options for reforming the identification doctrine:

• Option 1 - Retention of the existing identification doctrine.
• Option 2A - Allowing conduct to be attributed to a corporation if a member of senior management engaged in, consented to, or connived in the offence. A member of senior management would be any person who plays a significant role in decision making about a substantial part or corporate’s activities or manages a substantial part of the activities themselves.
• Option 2B - Option 2A, but that senior management always includes the CEO and CFO.

The Options Paper also takes the view that it should be possible to attribute negligence to a corporation, even if there is no individual who is personally negligent.

“Failure to prevent” offences

The Law Commission has also declined to introduce a general “failure to prevent economic crime” offence. 

A general “failure to prevent economic crime” offence has been much talked about in recent years but the Law Commission rejected it as overlapping with existing failure to prevent offences. Instead it proposes minor amendments to the identification principle as possible options (automatically including senior management) as well as a number of specific failure to prevent offences. 

Of these, the failure to prevent fraud appears to resemble the failure to prevent bribery offence, with a company’s liability extending to third parties such as agents but with a defence of reasonable adequate procedures.

Civil options

The Law Commission has also put forward a number of options for civil remedies:

• Introduction of a regime of administratively imposed monetary penalties.
• Enabling the High Court to impose penalties upon companies found to have conducted themselves in a way likely to facilitate fraud might have the advantage of avoiding the need to place issues of corporate compliance in front of a jury.
• A reporting requirement based on section 414CB of the Companies Act 2006 for public interest entities, requiring affected entities to report on anti-fraud procedures.
• A reporting requirement based on section 54 of the Modern Slavery Act 2015, requiring large corporations to report on their anti-fraud procedures.

Conclusion

The Law Commission has clearly been mindful of the risk of placing overly onerous requirements on UK business while at the same time addressing concerns that criminal liability was not a level playing field for companies, with larger companies less likely to face liability due to a complex management structure. Although failure to prevent offences inevitably impose additional compliance requirements and costs on companies, the larger the company the larger the cost and international organisations may face additional difficulties in monitoring compliance.

The Law Commission has presented the government with a number of options rather than a firm recommendation. This reflects the point that any change in the law is heavily political, with a host of competing objectives.

The next step will be for the government to consider the proposed options. The implications of the options could mean that the law is more easily able to hold corporates to account for criminal acts, as there is currently often difficulty in pinpointing responsibility within organisations. There is currently no proposed timeline for the government’s response.