UK lawmakers are considering sweeping changes to the so-called identification principle, which makes prosecuting corporate crimes notoriously difficult. Economic crime lawyer Lloydette Bai-Marrow explores what the changes would look like in practice — if they make it into law.
The identification principle as established by the 1971 case of Tesco v Nattrass has been a proverbial thorn in the side of prosecutors throughout the United Kingdom. At last, it seems some relief is on the way thanks to changes proposed as part of the Economic Crime and Corporate Transparency bill currently being considered in parliament.
Under the identification principle, a prosecutor must identify and establish a “directing mind and will” of the company, and only the acts of a senior person representing the directing mind and will of the company will attribute liability to the company.
The corporate criminal liability landscape in the UK would be significantly strengthened by bringing senior managers within scope of who can be considered as the directing mind and will of a company. This reform will specifically be for the attribution of economic crime liability to the company, but there are plans for its application to all areas of criminal law.
It is an important development, as the number of people who can currently be identified as “the directing mind and will” is vanishingly small. This is particularly so in large companies with complex operational and decision-making structures. Conversely, the status quo of the identification principle makes it easier to prosecute small companies for corporate misconduct, and therein lies the central issue with the identification principle.
It presents a high bar to surmount when seeking to hold large companies to account, limiting the number of successful prosecutions for corporate misconduct. This situation was exacerbated in 2018 by the decision in SFO v Barclays, in which the court, following Nattrass, ruled that the Barclays CEO and its CFO did not represent “the directing mind and will” of Barclays Bank, only the board of directors, in the circumstances of the case. The ruling appeared to raise the bar for corporate criminal liability to an impossibly high level.
The Law Commission, in a June 2022 paper included retaining the identification principle but allowing “conduct to be attributed to a corporation if a member of its senior management engaged in, consented to, or connived in the offense. This could be drafted so that chief executive officers and chief financial officers are always considered part of an organization’s senior management.”
The government’s decision to modernize the identification principle to reflect the realities of corporate structures has been welcomed by enforcement agencies. It should lead to more prosecutions and convictions for corporate criminality and also bring clarity to the corporate liability landscape post the Barclays ruling.
What does this mean in practice?
The focus will be on the decision-making power and influence of the senior executive who committed the economic crime rather than their job title alone. There will be a practical test applied based on the scope of the decision-making by the senior executive. Whilst the precise details of the test are yet to be published by the UK government, these proposed changes in addition to a new failure to prevent fraud offense, signal an increased willingness to broaden the corporate criminal liability landscape.
The new test would include definition of a “senior manager” taken from the Corporate Manslaughter and Corporate Homicide Act 2007, as someone who:
- Plays a significant role in decisions taken wholly or substantially about the management or organization of the company’s activities or
- Plays a significant role in actually managing or organizing the company’s activities, whether wholly or a substantial part.
In light of these proposed changes, companies should consider the following:
- Who are the key influencers with the company?
- What is their impact on decision-making in relation to the company’s activities?
- Do the influencers also fall within the definition of senior managers?
It will be essential to review governance structures and ensure that there is clarity within those structures and also in the decision-making process itself. Companies need to educate their senior executive teams about the impact of these changes on the organization as well as its executives.
Diffuse decision-making has long been a shield for corporations facing criminal prosecution, and that shield may soon be removed. This increased exposure to liability may require a risk assessment to be undertaken to ensure that the types of issues that may lead to regulatory or enforcement investigations are promptly addressed and risks mitigated.