One Step Closer To The Future (Part II) – Statutory Reform to the Identification Principle

Earlier this summer, the Law Commission published its long awaited proposals on reforming corporate criminal liability in England and Wales (the "Options Paper"), following the launch of its discussion paper in June 2021. Whilst the Options Paper rejects the much discussed "failure to prevent economic crime" offence, it outlines ten "options" for strengthening corporate liability, which notably includes the expansion of the failure to prevent model to fraud, and of the identification principle to cover a wider set of senior individuals whose mental acts and states might result in a corporate entity becoming criminally liable. Other proposals include the introduction of failure to prevent offences in relation to a small number of non-economic crimes, making publicity orders available in all cases where a non-natural person is convicted of an offence, introducing a regime of administratively imposed monetary penalties, introducing civil actions in the High Court based on Serious Crime Prevention Orders, and introducing a requirement for public interest entities to report on anti-fraud procedures, or introducing a requirement akin to Modern Slavery Act statements for large corporations to report on their anti-fraud procedures.

In this article of our series examining the Options Paper and the future of corporate criminal liability in England and Wales, we examine the Law Commission's proposed extension of the identification principle to include the conduct of senior managers, and its implications.

Corporate criminal liability in England and Wales

The main way that criminal liability is attributed to corporates in England and Wales, with limited exceptions for some strict liability and regulatory offences, is through the "identification principle". This holds that a corporation can only be held criminally liable if the commission of an offence can be attributed to a person who has the "directing mind and will" of the corporation at the time the offence was committed.¹

This is a very high threshold to attain. In practice, depending on a corporation's organisational structure, only a very narrow class of senior individuals will be considered to have such a "directing mind and will". For example, an individual director may not necessarily be considered to be the "directing mind and will" of a large company. In order for them to meet this threshold and for their conduct to be attributed to the company, they must have both the requisite status and the authority in relation to the conduct in question.

The principle has long been criticised by prosecutors as being too narrow, not reflecting the reality of decision-making in complex organisations, being unfair to smaller corporations where decision making is not as diffuse, and making it too difficult to convict companies for offences committed for their benefit.

The Law Commission has itself described the identification principle as an "obstacle" to holding large companies criminally responsible for offences committed in their interests by their employees. It therefore assessed a number of alternative models of attribution and options for reform to address the gaps in enforcement caused by the identification principle as it currently stands.

Alternative Ways of Attributing Criminal Liability to Corporates

The Law Commission considered a number of alternative ways in which criminal liability could be attributed to corporates, and how the identification principle could potentially be reformed, including:

(i) the doctrine of respondeat superior ("let the master answer") adopted in the United States, under which the criminal acts of any employee can be attributed to the corporation where they were committed in the course of their employment and with an intention to benefit the corporation;

(ii) models which would enable a corporate to be convicted on the basis that its "corporate culture" or systems either encouraged or permitted the wrongdoing. Australian Commonwealth Law, for example, allows for some fault elements such as intent to be attributed to a corporation on the basis that its corporate culture or policies and procedures encouraged or permitted commission of the offence by employees; or

(iii) a statutory expansion of the identification principle, along the lines of certain legislation in Canada or Australia, which allow the mental acts and mental states of "senior managers" or "high managerial agents" (as opposed to the narrow group of persons who constitute the "directing mind and will") to be attributed to a corporation.

The Law Commission rejected respondeat superior noting the lack of stakeholder support the model received and criticisms about its use in the United States, and also rejected the corporate culture approach (ii, above) due to concerns in Australia around the lack of clarity and effectiveness of this model.²

Interestingly, the Law Commission reported that the majority of respondents to the discussion paper thought that there was no merit in either the Australian or Canadian identification principles which attribute corporate criminal liability where a member of the senior management has the requisite fault.³ However, the Law Commission nevertheless stated that there is a case for statutory reform to widen the scope of the identification principle to cover situations where the conduct was done by or at the behest of a member of senior management. Such a move would, in large part, address the current criticisms and weaknesses of the identification principle, tackling the current disparity between attributing criminal liability to large and small companies, potentially making it easier to convict larger organisations for offences committed for their benefit, while also incentivising better corporate governance measures. It would also more accurately reflect corporate decision making, given that in practical terms senior management are perhaps more likely to be making key operational decisions which could attract criminal liability.

Proposal for Reform

The Law Commission therefore suggested that one option would be to reform the identification principle along the lines of the Canadian model to include "senior officers" as part of the "directing mind" of the company,⁴ but using terms and definitions from the existing criminal law of England and Wales (in particular that of "senior management" from the Corporate Manslaughter and Corporate Homicide Act 2007).

This amended principle would allow conduct to be attributed to a corporation if a member of the corporation's "senior management" engaged in, consented to or connived in the offence. A member of "senior management" would be any person who plays a significant role in: the making of decisions about how the whole or a substantial part of the organisation's activities are to be managed or organised; or, the actual managing or organising of the whole or a substantial part of those activities.

The Law Commission specified that the definition would include directors. For senior managers outside the board, this option would therefore extend the law by making clear that their individual conduct could fix the company with criminal liability, without having to show that there had been a total delegation of authority by the board. With regards to directors, this would effectively reverse the narrowing of the interpretation of the identification principle which has occurred in recent years, and restore its original interpretation whereby the conduct of a single director would generally be sufficient to fix an organisation with criminality.

The Law Commission further proposed that the CEO and CFO automatically fall within scope and are always to be considered senior managers. Its decision to prefer the definition of "senior management" used in current criminal legislation from England and Wales appears to have been grounded primarily in the preference for consistency across criminal legislation, but it did acknowledge that, for the purposes of clarity, there could be some merit in mirroring the Canadian approach of expressly providing that the CEO and CFO are automatically within scope, provided that is drafted as an inclusive list.

This proposed expansion of the identification principle would therefore extend its application to not only those who decide on broad strategy, but also those who take operational decisions covering the whole of the corporation or a substantial part of it, including, for example, those whose responsibilities involve taking decisions relating to corporate strategy and policy in a particular area, such as health and safety, finance or legal affairs. It seems it would not, however, ordinarily capture someone whose role was limited to the management of a discrete unit (such as an individual store) which does not represent a "substantial part" of the company's affairs. In practical terms, it is unclear what the exact test would be to ascertain whether or not a person does in fact meet this standard and what constitutes a "substantial part" of the business, and it may be difficult for the prosecution to establish that this threshold has been met.
 
However, such an expansion would likely assist prosecutors in attributing criminal liability to larger corporations, and help bolster corporate conviction rates which remain low. Enforcement agencies will still require adequate resources to properly investigate allegations of corporate wrongdoing, and an amendment to the identification principle may, on its own, be insufficient. Consequently, companies may not alter their approach to compliance or their governance structures for some time, as they wait for its impact to come to light.

A Thorn in the Side of Corporate Criminal Liability

The Options put forward by the Law Commission will provide fresh impetus for Government to introduce new legislation to tackle corporate criminality and economic crime more generally. However, no deadline has been set for Government to consider these Options.

The identification principle has long been criticised by prosecutorial agencies such as the Serious Fraud Office and Crown Prosecution Service as one of the biggest hurdles in successfully prosecuting large corporate entities with complex governance structures. However, the debate surrounding reforms to corporate criminal liability has in large part been dominated by the potential introduction of further "failure to prevent" offences to supplement this principle, as opposed to amending the principle itself. The Law Commission has made clear its view that a rule of attribution is necessary in order for fault elements in offences to be applied to corporates, and the significance of the identification principle should therefore not be underestimated.

The Law Commission has stated that if the identification principle is to remain unchanged, the case for additional measures to tackle corporate crime such as further "failure to prevent" offences (previously discussed here) would become even more compelling. However, it noted that even the introduction of such offences would not wholly address the gaps in enforcement caused by the identification principle, suggesting that the inadequacies of the principle remain a key weakness in the armoury against corporate crime. Whether the Government agrees that it should be amended and/or supplemented by further "failure to prevent" offences remains to be seen.

_{1 Tesco Supermarkets Ltd v Nattrass [1972] AC 153
2 The Law Commission noted that, in the 20 years that the provision has been in force, the Australian courts have considered it on only one occasion, which resulted in acquittal. The Law Commission also notes that, as a result, the Australian Law Commission has recommended the amendment or removal of the corporate culture mode of attribution (see paragraphs 6.9 and 7.3 of the Options Paper).
3 This was due to a number of factors, including the fact that such an amendment would still fail to capture criminality by lower ranking employees and agents, and because companies could still organise themselves to avoid liability for senior management. Perhaps unsurprisingly, this latter concern was voiced by both the CPS and SFO, with the SFO noting "For example, in the LIBOR and EURIBOR investigations, many of the individuals involved – in practices condoned, encouraged or tolerated by their employers – were middle-ranking. It is also possible that, by setting a bar below which liability cannot be attributed to the company, a company could arrange its operations to distance individuals at or above that level. This again highlights the need for any reform of the identification principle to sit alongside a wider range of failure to prevent offences that encourage good corporate behaviour."
4 In 2003, the Criminal Code of Canada was amended to extend the common law concept of a directing mind to "senior officers". See paragraph 4.13 of the Law Commission Options Paper for the full text of the relevant provision (Section 22) of the Criminal Code of Canada. The Australian model of "high managerial agents" was rejected for a number of reasons including because of the limited number of prosecutions (10 between 2009 and 2019) from which to determine the success of this model and the recommendation by the Australian Law Reform Commission that this model should be replaced with respondeat superior.}

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