Corporate fraud and the “identification doctrine”

Last Thursday (15 June) the government announced that new provisions are to be added to the Economic Crime and Corporate Transparency Bill, already at the Report Stage in the House of Lords, to extend the “identification doctrine” to senior managers of “legal persons” (such as corporations and partnerships) in respect of economic offences.

Established in the early years of the 20th century and confirmed in the 1971 case Tesco Supermarkets Ltd v Nattrass, the “identification principle” is the principle that the criminal conduct of a senior officer of a corporation can be attributed to the corporation itself, where it can be shown that the person in question was acting as a “directing mind” of that corporation.

Whilst straightforward in principle, the concept is difficult to apply in practice and prosecutions are comparatively rare. In the original Tesco v Nattrass case, the House of Lords determined that breaches of the Trade Descriptions Act 1968 by a store manager could not be attributed to the supermarket itself because the manager was insufficiently senior to be considered a “controlling mind” of the corporation, who had exercised “reasonable due diligence” in their supervision of the store. More recent challenges in pursuing prosecutions against corporations for bribery and the facilitation of tax fraud have led to the creation of a new class of “FTP” (Failure To Prevent) offences requiring companies to put in place “adequate procedures” to prevent criminal conduct by “associated persons” or else risk being held responsible for offences committed by junior staff on company time. In fact, the current bill already contains proposals for a new FTP offence covering economic crime, fraud and false accounting.

With fraud a serious growing international threat, and many organised criminals effectively hiding behind complex corporate structures, these new proposals seek to further narrow the gap between “associated persons” targeted by the FTP offences and “directing minds” who have historically been difficult to identify in large corporations. The proposed amendments will extend the identification doctrine to “senior managers” with a significant role in the decision-making process of a corporate body. The approach is lifted directly from the definition of a “senior manager” in the Corporate Manslaughter and Corporate Homicide Act 2007 and subject to parliamentary scrutiny, will in future apply to all economic crime, with plans announced to extend the approach to all criminal offences.

Whilst the new legislation is broadly aimed at deliberate criminal conduct, there are clearly important lessons for all large companies, partnerships and corporate entities. With UK law enforcement increasingly focused on the responsibility of the company for the criminal actions of its staff and employees, your best defence is a robust compliance culture, clear messaging and effective training across the business at all levels. The alternative is to risk criminal prosecution and conviction, unlimited financial penalties and the poor publicity and reputational damage likely to follow such action.