Liability for the acts of senior management for economic crimes

The Economic Crime and Corporate Transparency Act 2023 (“ECCTA”) reforms the law in which corporates can be found criminally liable for the acts of others.

Before 26 December 2023, the test applied in determining whether a corporate body was criminally liable for the actions of a natural person required such person to be the “directing mind and will” of the corporate at the time the offence was committed. This test is known as the identification doctrine.

Prior to its reform, the identification doctrine was criticised by commentators for being inadequate and unfair because it often limited criminal exposure to crimes committed directly by only the highest-ranking executives. The application of the test in practice often made it difficult to successfully pursue corporates, especially large businesses.

The reformed identification doctrine

The new test extends the pool of individuals whose actions can result in corporate criminal liability for organisations in respect of relevant offences.

The identification doctrine now provides that, 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 (section 196(1) ECCTA).

Acting within the actual or apparent scope of one’s authority is likely to be interpreted broadly. The Statutory Annotations to section 196 of ECCTA provide that it would be sufficient if the act in question was of a type that the senior manger was authorised to undertake, or which would ordinarily be undertaken by a person in that position.

Unlike the failure to prevent fraud offence, organisations (including companies, limited liability partnerships and limited partnerships) are subject to the identification doctrine regardless of their size and any internal preventative fraud procedures they may have in place.

Who is a ‘senior manager’?

Based on the same term within the Corporate Manslaughter and Corporate Homicide Act 2007, a ‘senior manager’ is broadly defined as a person who plays a significant role in:

• the making of decisions about how the whole or a substantial part of the activities of the organisation are to be managed or organised; or
• the actual managing or organising of the whole or a substantial part of those activities.

(section 196(4) ECCTA).

This definition focuses on an individual’s actual or apparent scope of authority within an organisation irrespective of their official role or job title, qualifications, employment status or pay package. It is not only intended to capture people who are in the direct chain of management, but also those in, for example, strategic or regulatory compliance roles. Therefore, senior managers are not just limited to members of an organisation’s board of directors or to individuals who perform an executive function within it (such as chief financial and operating officers). They could also include (for instance) human resources managers. Therefore, it is necessary to look to the function of the organisation’s people in determining whether they qualify as senior managers for the purposes of the new identification doctrine.

What amounts to a substantial part of an organisation’s activities is yet to be tested by the courts.

What is a 'relevant offence'?

At the date of publication, the economic crimes in scope comprise those referred to in section 196(2) of ECCTA; including the economic crimes listed in Schedule 12 of ECCTA (each a “listed offence”) and an offence under Part 2 of the Serious Crime Act 2007 in relation to a listed offence. The listed offences are broad and include the following offences (including any attempt or conspiracy to commit them):

• cheating the public revenue
• conspiracy to defraud
• theft
• false accounting
• false statements by company directors
• fraudulent trading and various other fraud and tax offences
• offences under the Financial Services and Markets Act 2000
• offences under the Financial Services Act 2012
• certain offences under the Bribery Act 2010
• money laundering offences under the Proceeds of Crime Act 2002
• terrorist financing offences under the Terrorism Act 2000
• aiding, abetting, counselling or procuring the commission of any of the listed offences in Schedule 12 of ECCTA

The Secretary of State has the power to amend the list of offences through secondary legislation. The Government’s Factsheet  provides that the Government is committed to introducing reform of the identification doctrine to apply to all criminal offences. Indeed, the Criminal Justice Bill seeks to expand such reform to all criminal offences and not just the specific economic crime offences referred to above.

Does it matter if the location of the act or omission forming part of the relevant offence took place outside the UK?

Potentially, yes. As organisation will not be guilty of a relevant offence if such act or omission occurred outside the UK, unless such conduct was also an offence in the location where it was carried out (section 196(3) of ECCTA).

Penalty

An organisation convicted of a relevant offence will be subject to an unlimited fine and disbarment from public contracts under the Procurement Act 2023.

This could also cause significant reputational damage, which could potentially jeopardize any pre-existing commercial contracts and adversely affect potential commercial opportunities.

What can organisations do?

Whilst there is no ‘reasonable procedures’ defence available to organisations pursued under the revised identification doctrine, the existence of a comprehensive compliance regime could be taken into account by prosecutors in determining whether it is in the public interest to purse an action. Therefore, organisations may wish to undertake actions referred to below.

• Brief their board of directors and members of management on the revised identification doctrine and what it means
• Identify which employees exercise management responsibilities and hence are senior enough to have their conduct attributed to the organisation as a senior manager
• Provide and implement regular economic crime awareness training to senior managers, compliance departments, in-house legal teams and those working in human resources, finance, risk and audit teams
• Update existing policies (including conflicts of interest, ethics, whistleblowing, fraud, compliance, anti-bribery, money-laundering and audit policies), internal codes of practice and policy processes for senior managers
• Update recruitment information (such as recruitment packs and induction packs) provided to senior managers, review recruitment processes and adapt them to include (for instance) fraud and ethics queries for candidates applying for management positions to assess the potential risks such persons may present
• Review senior manager employment contracts and templates to see whether such documents include specific provisions on ethics, anti-bribery, anti-money laundering, anti-facilitation of tax evasion and fraud
• Implement checks and balance measures such as logs to monitor the dates fraud and ethics screening are carried out in relation to recruitment exercises for senior managers and set up central reminders notifying compliance personnel when there is a change of a person in senior manager position.