Policy paper

Economic Crime and Corporate Transparency Act: identification principle for economic crime offences

Updated 1 March 2024

Key reform

This Economic Crime and Corporate Transparency Bill (‘the bill’) is designed to reform corporate criminal liability laws for economic crimes to hold corporations liable in their own right for economic crime.

The measures will strengthen the ability to apply corporate liability to the makeup of modern corporations, particularly large complex structures, and deter instances where senior managers use their authority granted under the corporation to commit economic crimes.

Background

The identification doctrine is the legal test for deciding whether the actions and mind of a natural person can be regarded as those of a legal person. The current law (common law) requires that an offence must be committed by the “directing mind and will” of a corporation to trigger attribution to the corporate itself. If the person(s) identified as the “directing mind and will” of the corporate commits a criminal offence in that capacity, that offence, including the guilty mind to commit the offence, is considered that of the corporation. This legal test was established in 1971.

The past few decades have seen companies grow tenfold. In doing so, their governance and management becomes more complex with new teams and subsidiaries that control different aspects of business. As companies expand, it is difficult to determine who really pulls the strings and directs the whole business functions. Often - particularly in large organisations - decision making is dispersed across multiple directing minds who have significant control across different area of business. By effect, senior people in a corporation who have decision making over substantial areas of business are not considered sufficiently controlling enough to hold the corporate liable, despite having the authority in the corporate to commit large-scale harms. This does not incentivise good governance and clear lines of accountability. Meanwhile, the directing mind is much easier to identify in smaller corporations who may only have one or two directors leading the entire business functions.

What will the amendments to the bill do to help?

The reform proposed is to place the identification doctrine on a statutory footing for economic crimes, providing certainty that senior managers are in scope of attribution to a corporation. A test is introduced that replicates the definition of “senior manager” in the Corporate Manslaughter and Corporate Homicide Act 2007 (CM&CHA 2007). This model will look at what the senior manager’s roles and responsibilities are within the organisation - the level of managerial influence they might exert - rather than their job title. It 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.

This will have the advantage of providing greater clarity on the parameters of the legal test and will also bring the law up to date to reflect modern company structures where directing minds are spread across different functions of business. It will enable prosecutions to progress in more cases where senior level employees who do exert decision making power are found to be involved in the offending.

The Security Minister, the Rt Hon Tom Tugendhat, said:

This reform is a major reset that is urgently needed.

Economic crime is not something you can always see in the light of day, but the shadow it casts impacts all our lives. The National Crime Agency assesses it is a realistic possibility that over £100 billion pounds is laundered every year through the UK or through UK corporate structures.

Our current system for holding corporations liable for conducting crime is based on legislation that has become antiquated. We must adapt to the challenges posed by modern practices and sophisticated criminality. With the tabling of this reform, we are doing just that.

Questions

Why is the reform applying to economic crime offences only?

Economic crimes, including fraud, currently makeup over 40% of crime in the UK and are deeply harmful and system threats to our society.

Although some economic crimes are committed by lone actors, there is clear evidence that corporate structures are being used by criminals to conduct economic crimes such as bribery, fraud and money laundering. Following a Serious Fraud Office (SFO) investigation, in November 2022, Glencore Energy (UK) Ltd. was handed down the largest corporate sentence in a criminal conviction for bribery offences including a £182.9 million penalty and a £93.5 million confiscation order.

It is important that we take action against corporate bodies in their own right where they are committing economic harms. This - alongside the new failure to prevent fraud offence - will ensure that all those who have played a part economic crime, including both individuals and corporates, can be brought to justice.

Does the government plan to introduce the identification doctrine reform for all criminal offences?

Although this will address corporate liability laws in a significant number of potential cases, wider reform is required for the whole of criminal law.

The government has committed in the Economic Crime Plan 2 and the Fraud Strategy to introduce reform of the identification doctrine to apply to all criminal offences. This is outside the scope of the ECCT Bill and will take place when a suitable legislative vehicle arises.

What is the penalty for the corporation?

The company will be criminally convicted and receive a fine, in addition to any sentences imposed for individuals who are also found guilty of the same offence(s).

The maximum fine will depend on the particular offence charged, but for most serious crimes an unlimited fine will be available.

Are the measures fair and proportionate to small and medium sized businesses?

Currently, small and micro companies were at a disadvantage as they are more likely to have one or two directors with oversight of the whole company operations and who are more easily identifiable. On this basis it was easier to convict small companies than large companies, which is an unfairness in the operation of the law.

It is important that the playing field is levelled, and small and medium sized businesses are not unfairly penalised. Reform of the identification doctrine to extend it to senior management intends to mitigate the unfairness by better reflecting the make-up of large companies with diffuse decision making structures.