Law commission

Law Commission Consultation Paper: Rethinking the Principle of Identification?

On June 9, 2021, the Law Commission launched a consultation “requesting views on whether and how corporate criminal liability law can be improved” (there “Consultation“).1 The consultation aims to determine whether the law surrounding the criminal liability of legal persons (such as corporations and LLPs) should be reformed in order to more effectively punish legal persons for economic crime. This alert briefly discusses the highlights of the consultation and some key considerations for businesses going forward.

Introduction

The consultation provides a good overview of the UK’s current approach to corporate crime, as well as some historical background on how this approach was taken. In developing its analysis, the Consultation draws a comparison with the broader approach (in most cases) to corporate crime followed in other common law and non-common law jurisdictions. At its end, the Consultation poses 13 questions for discussion; arguably the most interesting of these concerns the principle of identification (described below) and whether it is satisfactory for attributing criminal liability to corporations as opposed to individuals.

The Law Commission already reviewed the law in this area in 2010 and found that there was “no urgency to reform the doctrine of identification”; however, given the evolution of the case law since this previous review, the Commission now considers that the assumptions on which this conclusion was based are no longer true.2

The principle of identification

In short, the principle of identification states that where a mental state is a required element of the offence, only the mental state of an older person representing the “to direct the mind and the will” of an organization can be attributed to a company. This guiding spirit and will is generally limited to directors and members of senior management; people who are rarely involved in the day-to-day decisions behind financial crime offences. This may mean that it is easier for prosecutors to convict a small company, whose executives are more likely to be involved in day-to-day business decisions, than a large one.

The basis of this principle rests on the decision of the House of Lords in Tesco versus Nattrass.3 Tesco was prosecuted under the Trade Descriptions Act 1968 for posting a notice that the goods were being offered at a lower price than they actually were. This happened because the manager of one of their branches negligently failed to notice that he had run out of cheap packages. The case went to the House of Lords, which ruled that the branch manager could not be held to embody the business as a whole (and which made available to Tesco a due diligence defense under section 24 of the Trade Descriptions Act 1968).

While in 2010 the Law Commission found that there was no urgent need to reform the doctrine of identification due to the tendency of case law to follow Tesco versus Nattrasshe no longer shares this view mainly due to the High Court ruling in 2018 in SFO v Barclays Bank plc.4 This decision reaffirmed the doctrine of identification as the main rule for attributing an individual’s shares to a company.

Indeed, the Law Commission is of the opinion in the Consultation that SFO v Barclays arguably makes the law more difficult to apply to a large company than Tesco versus Nattrass considered. In Tesco v Nattrass, most judgments by members of the House of Lords provided that a chief executive would normally have the status or authority to hold a company criminally liable, whereas SFO v Barclays suggest that it is necessary to demonstrate that the board collectively possessed the necessary mental element, or that the identified directors had sufficient authority to engage in the relevant conduct on behalf of the board.5

Criticisms of the current law

Reviewing current corporate criminal liability law, the Consultation identifies four criticisms of the principle of identification:6

  • the principle of identification makes it difficult, in practice, to prosecute companiesbecause an organization that grants a certain autonomy to a subordinate employee will not be responsible (according to the rule in Tesco Nattras). The principle of identification also creates evidential difficulties in tracing actions back to “to direct the mind and the will” of the business, as email/paper trails decrease as the hierarchy chain is climbed.7
  • the principle of identification does not always bring clarity and certainty. Clearly, directors and senior executives can be a “to direct the mind and the will” of a company, but it’s not always clear when they will.
  • the the principle of identification does not reflect the actual distribution of decision-making and knowledge of the company. For example, a company’s philosophy (which is often unwritten and can influence ongoing decision-making and conduct) may have been created by former members of the company who are no longer involved in day-to-day business. . A company should therefore be liable in its own name and not because of its “to direct the mind and the will”.
  • the The principle of identification puts legislators in a difficult position when it comes to corporate criminal liability. Currently, lawmakers are caught between current politics, where an offense cannot be effectively enforced against large corporations; or an overly punitive policy, where a strict liability offense is created and corporations can be condemned when the blame actually lies with individuals over whom they have little control.8

Potential changes

The consultation suggests various methods of improving the criticisms identified above, including the potential re-application of legal tests established in other legislation (e.g. the Manslaughter and Workplace Homicide Act 2007, the Specialized Printing Equipment and Materials (Offences) etc Act 2015). However, the focus is on whether to introduce new offense prevention flaws, building on the introductions of the corruption prevention flaw9 and failure to prevent tax evasionten offenses in 2010 and 2017 respectively.

“Failure to prevent” offenses

The Consultation reconsidered the potential extension of “failure to prevent” offenses as a means of reforming corporate criminal liability (either in addition to or instead of changing the principle of identification). Although the offenses of failing to prevent corruption and failing to prevent the facilitation of tax evasion currently exist, the consultation envisages extending them to other offences, such as “failure to comply with the prevention of economic crime”. Attempts have already been made in Parliament to create such an offense in the Financial Services Act 2021. The government, however, opposed the amendment on the grounds that the subject was better dealt with in a broader context, rather than by sectoral legislation (the Financial Services Act 2021 only applied to the regulated sector) .

Alternatively, the SFO has suggested that failure to prevent offenses might provide a model for a new principle of corporate liability attribution to replace the identification doctrine. Under this model, where a material offense has been committed by an associated person (to obtain or retain business or business advantage for a business or to otherwise financially benefit the business), the conduct would be attributed to the business and the business would be guilty of the material breach.11

Comment

It is understandable that board and senior management employees generally do not have the granular information necessary to be found guilty of the potentially criminal dealings of a company’s individuals. However, it cannot be denied that the current position in the UK on corporate criminal liability makes it very difficult to convict companies of serious economic and financial crimes.

It remains to be seen whether this fact alone is enough to bring about a significant legislative change in this area. One solution may be not to reform the current law but to change approaches to its application – for example, through increased powers for the OFS and deferred prosecution agreements. As Lisa Osofsky, director of the Serious Fraud Office (herself a big proponent of changing the identification principle) recently commented:

“It’s our environment. Complaining about it would be like a captain complaining about the sea. So we have to adapt.”

In any event, the business world is unlikely to welcome the potential additional regulation, scrutiny and liability brought about by the results of the consultation (because it will ultimately lead to greater margin of responsibility and the implementation of internal measures to avoid this responsibility). Businesses can prepare for the potential changes to business crime in the UK proposed by the consultation by:

  • ensure that sufficient financial and economic crime prevention policies and procedures are in place and up to date;
  • ensure commitment at the highest level from directors/senior management in the fight against corporate crime;
  • provide sufficient training to staff at all levels of the company; and or
  • review and revise corporate culture as necessary.

The above list is of course not exhaustive and businesses will no doubt need to take additional steps as the future legislative framework becomes clearer. The Law Commission is currently organizing several events on the consultation and is expected to publish another document on this topic later this year.