What is the identification doctrine under current law?
Under the current law, the “identification doctrine” means that a corporate can only be convicted of a criminal offence that requires mens rea (i.e. a particular mental state such as knowledge, neglect or intent) in respect of the acts of someone who, at the material time, was the “directing mind and will” of the corporate or an “embodiment of the corporate”. Usually only the actions of very senior officers (for example board members and chief executives) will be attributed to make the corporate itself criminally liable.
Why the call 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 was difficult to prosecute corporates for criminal offences because the identification doctrine threshold was so high. In practice, it requires proof that the people at the topmost level of the organisation committed a criminal offence.
It can be particularly difficult for prosecutors to identify who embodies a corporate’s “directing mind” in large corporates where business decisions are increasingly decentralised and made on a multi-national level. This has led to criticism that the doctrine creates unfairness to small businesses whose governance structures mean that the directing mind is often easier to identify than within larger corporates.
Giving a speech in October 2020, Lisa Osofsky, Director of the Serious Fraud Office, said the narrow application of the “directing mind” test made it “very difficult to hold companies with complex governance structures to account for their fraudulent conduct”. This is why, Osofsky stated, a “failure to prevent” offence was at the top of her list for changes to the criminal law.
In June 2022, the Law Commission also considered a possible reform of the identification doctrine in its Options Paper on Corporate Criminal Liability, see our previous Engage Article on this.
What is the proposed reform to the identification doctrine?
Under the Government’s latest proposal (in the form of a factsheet only) – and to be brought into the law through the Economic Crime and Corporate Transparency Bill which is currently at Report Stage in the House of Lords – “senior managers” will be brought within scope of who can be considered to be the “directing mind and will” of a corporate. It is not clear how this will be done as a matter of law but it is likely that at the least the activities and decisions of “senior managers” will be sufficient to impose liability on the corporate.
The proposed reforms could be similar to those that were enacted to establish the offence of corporate manslaughter. Under the Corporate Manslaughter and Corporate Homicide Act 2007, a corporate commits the offence of corporate manslaughter where it is managed or organised by “senior management” so as to cause a person's death and amount to a gross breach of a duty of care owed to the deceased.
Which offences will the extended doctrine apply to?
This reform will only apply to economic crimes, including fraud, bribery and money laundering. This means the identification threshold will remain the same as the current law for all other criminal offences that require proof of requisite mens rea. So as things stand, there is no proposed change to how companies would be liable under the Modern Slavery Act and for human rights breaches despite the Law Commission’s previous consideration of a “failure to prevent” human rights abuses offence.
What impact will the reform have on criminal law?
It is still uncertain exactly what shape the new identification doctrine would take; the Government has yet to release a new draft of the Bill including this proposal. Whilst the fact sheet released on 16 June 2023 talks only of widening the list of individuals who can be considered part of the “directing mind” to include senior managers, a previous draft reform to the identification doctrine proposed in November 2022 was far broader. Under the previous proposal, a corporate would commit a criminal offence when an offence is committed with “the consent, connivance or neglect of a senior manager or senior managers”. If this much broader proposal is reflected in the Economic Crime and Corporate Transparency Bill, the identification doctrine will be significantly widened not only in relation to the individuals whose actions can bind a corporate, but also the actions that create corporate criminal liability.
Whatever form the final drafting takes, corporates must prepare for further change. The widening of the scope of who within a company can bind its criminal exposure will bring with it a greater risk of criminal prosecution. Coupled with the imminent implementation of the Failure to Prevent Fraud offence, the demands on the resources of compliance and business integrity teams will be greater than ever.
The practical impact of the reform on successful convictions remains to be seen. The proposed changes are limited to financial crimes only where there is already an ability to find corporates liable for bribery, corruption, and the facilitation of tax evasion without needing to attribute culpability to individuals. Failure to prevent fraud will soon be added to that roster.
The Serious Fraud Office has already found it very difficult to prosecute individuals associated with large scale corporate wrongdoing. Despite many attempts, and more recently abandoned actions, there has only been one successful prosecution of an individual associated with conduct which formed the subject of a Deferred Prosecution Agreement.
As an indication of success, we can also look to the Corporate Manslaughter Act – upon which this new identification reform is based – which has itself had less than 40 prosecutions and 30 convictions since 2008. However, unlike the failure to prevent offences which already exist in law, a corporate charged with an offence based on the new identification doctrine would not be able to avail itself of the statutory defence of having in place adequate or reasonable procedures to prevent the misconduct. As such, prosecutors may prefer to charge a corporate in relation to the substantive offence, rather than the failure to prevent it, in order to bolster chances of successful conviction.
If you’d like to find out more about what 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.
For more information on the Failure to Prevent Fraud offence reform also proposed under the Economic Crime and Corporate Transparency Bill, please see our Engage article.
Authored by Liam Naidoo, Olga Tocewicz, Kevin O’Connor, and Elizabeth Horton.