Current state of the law
Under the current law, the “identification doctrine” means that a company can only be convicted of a criminal offence if the commission of the offence can be attributed to someone who, at the material time, was the “directing mind and will” of the company or an “embodiment of the company”.
Usually only the actions of senior officers of a company (for example board members and senior executives) will be attributed to make the company itself criminally liable.
Why have people been calling for change?
The Government has acknowledged a need for reform in this area since 2012, when it stated in a public consultation on Deferred Prosecution Agreements that it is difficult to prosecute companies for criminal offences because the identification doctrine threshold is so high. In practice, it requires proof that the people at the most senior level of the organisation committed a criminal offence.
It can be difficult for prosecutors to identify who embodies a company’s “directing mind”, particularly in large companies where business decisions are increasingly decentralised and made on a multi-national level.
The current state of the law is also seen as being unfair, because it may be easier to prosecute smaller companies, where decision-making is limited to several key individuals, than larger companies.
What will happen next?
Parliament is currently debating the Government’s Economic Crime and Corporate Transparency Bill (“the Bill”) (which is focused mainly on reforming Companies House with a view to boosting transparency around UK businesses and corporate entities). During this debate, MP Robert Buckland proposed an amendment which would introduce corporate “failure to prevent” offences for fraud, false accounting and money laundering. In response to this amendment, MP Tom Tugendhat stated that he could assure Robert Buckland “that the Government intend to address the need for a failure to prevent offence” and that he would “welcome further discussion with him about the most effective way in which that can be done”.
What does this mean for companies?
Whilst we don’t yet know precisely how these new “failure to prevent” offences would be drafted, it’s likely that they would follow a similar format to the current offences of failure to prevent bribery and the facilitation of tax evasion, but would operate for a wider number of criminal offences.
Previous amendments to the Bill, which have been withdrawn, have included suggestions that any corporate failure to prevent money laundering offence would apply only to the anti-money laundering regulated sector. It’s anticipated that the Government will propose their amendments in the House of Lords, which we expect will mirror the existing strict liability regimes under the UK Bribery Act and the Criminal Finances Act. It remains to be seen how a failure to prevent money laundering corporate offence will sit alongside the existing regulated sector offence of breaching the Money Laundering Regulations. The only available defence to an allegation of failure to prevent bribery or the facilitation of tax evasion by a corporate is that the company had adequate or reasonable procedures in place to prevent bribery or facilitation of tax evasion occurring.
If the law is expanded to cover further criminal offences in a similar way, companies will be liable if their employees or individuals associated with the company fail to prevent fraud, false accounting or money laundering. In practice, this means dedicating further time and resource to identifying the areas within the operations of a business which expose it to risk, and implementing policies, processes and controls to mitigate those risks. Given the wide range of offences which are likely to be included, this will require careful thought to ensure that risks are not overlooked.
If you’d like to find out more about what this reform could mean for your organisation and how best to approach your assessment of risk, or updates to your existing policies and procedures, please get in contact with our team today.
Authored by Claire Lipworth, Olga Tocewicz, and Elizabeth Horton.