The Economic Crime and Corporate Transparency Act 2023 ('ECCTA') introduced a number of changes to company law in March 2024 to combat economic crime. More changes are now coming.
Here is what you and your company need to know and steps you can be taking now to keep pace with these changes.
The identification doctrine
The 'identification doctrine', established in 1971, is the principle under which criminal liability is attributed to a company or partnership through the behaviour of senior individuals within that organisation, who are part of its 'directing mind and will'. Prior to ECCTA's reform, the 'directing mind and will' test was interpreted narrowly by the courts: the terms of the organisation's constitutional documents would have been considered, as would the extent to which responsibility for the actions constituting the offence had been delegated by the directors to some other person.
In larger organisations with multiple layers of management and de-centralised decision-makers, it was not easy to link the relevant decision-makers with the doing of a criminal act. This did not incentivise good governance and clear lines of accountability. Smaller companies had the opposite problem.
The ECCTA has put the identification doctrine on a statutory footing for economic crimes, making it clear that senior managers, acting within the actual or apparent scope of their authority, can be part of the 'directing mind and will' of an organisation when considering whether that organisation is criminally liable for an offence. It is no longer possible for people committing crimes at work to hide behind a lower-ranking job title.
Senior Managers
So what, or who, is a 'senior manager'? The ECCTA adopts the definition from the Corporate Manslaughter and Corporate Homicide Act 2007, which considers the senior manager's roles and responsibilities within the organisation - the level of managerial influence they might exert in practice - rather than just their job title. A senior manager will play 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.
It is widely understood that anyone with significant strategic and operational responsibilities would fall within this definition. The Law Commission considers that someone whose responsibilities include taking decisions relating to strategy and policy in areas like finance, legal and health & safety should be a senior manager. The number of 'senior managers' a business might have will vary depending on the size and scale of that business. According to the Ministry of Justice1 , 'apart from directors and similar senior management positions, roles likely to be under consideration include regional managers in national organisations and the managers of different operational divisions'. To date, there is no case law in respect of the definition in the Corporate Manslaughter and Corporate Homicide Act 2007, and the Serious Fraud Office (SFO) has said that it expects to have to litigate the meaning of 'senior manager'. It is not difficult to imagine arguments about the meaning of 'substantial part', or about whether and to what extent the senior manager was acting within the scope of their authority (actual or apparent) in committing the offence. In any event, the upshot is that the pool of employees whose criminal conduct could be attributed to their employer is now much larger.
Specified economic crimes
So what sort of crimes are we talking about? At the moment, these reforms apply only to certain specified economic crimes set out in Schedule 12 to the ECCTA. The list is long, and includes crimes such as theft, false accounting and concealing criminal property, other money laundering and proceeds of crime offences, bribery offences, tax offences, fraud offences, some FSMA offences, market manipulation offences, terrorism offences, and sanctions offences, as well as any attempt or conspiracy to commit any of these offences.
The Government has made clear that it intends to repeal the reference to 'economic' crime and 'introduce reform of the identification principle to all criminal offences in due course'. This would make the list of crimes for which an organisation could be liable as a result of the conduct of its senior managers considerably longer and importantly, would bring non-economic offences, such as sexual offences, within the net. It remains to be seen if these proposals survive any change of Government after the election on 4 July 2024.
Consequences for organisations
If a senior manager commits an offence, at work and acting within the actual or apparent scope of their authority, which is on the list of 'specified crimes', the employing organisation will be on the hook for that offence. If found guilty, the organisation would face criminal conviction and a fine – this would be in addition to any sentences imposed on the offending employees. The maximum fine will depend on the particular offence charged, but for most serious crimes an unlimited fine will be available. There would also be reputational issues to consider.
How to protect your organisation against liability
We recommend that organisations take a pro-active approach to the new legislation – get ahead of it, and don't wait until there is an issue to put processes in place and talk to staff. We suggest doing the following:
- Familiarise / remind yourself of the management structure of the organisation – map it out (if it is not already mapped out). Consider existing formal, and informal, reporting lines and check whether any delegated authorities are in place. Consider who does what in practice. Are there written guidelines setting out the scope of the authority of these individuals?
- Identify your 'senior managers'2 . Take a broad view – the definition is wide. Who could be considered to be 'managing or organising of the whole or a substantial part of [the organisation's] activities' in a particular area? Ignore job titles – look at the management responsibility an individual actually has.
- Create a stand-alone list of senior managers, mark them on the management structure map and flag their roles in the HR system as senior manager roles. Discuss the status of any individuals who are 'borderline' senior managers with others in your organisation to form a view. If in doubt, include them on the list.
- A risk assessment should be carried out in respect of the senior managers on the list. This should include identifying those whose roles or functions within the business may pose a greater risk for the commission of economic crimes – for example senior finance roles, payroll, expenses management or procurement. For the higher risk roles or functions, a review of the employee records of the relevant role holders should be undertaken to identify any historic issues with their conduct which may be red flags for any specified offences. If any red flags are identified, they should be investigated further.
- Appoint an individual who will be responsible for monitoring and auditing the senior managers list, and put a process in place for maintaining that list. Ensure that systems are in place to trigger an update to the list if the management structure changes or if a senior manager is replaced. Consider quarterly monitoring and annual auditing of this maintenance process.
- Review and update compliance policies and roll out targeted training to the senior managers on the list to raise awareness of economic crime offences, including fraud risk, and highlight the procedure for reporting any suspicious or concerning activity. Make sure senior managers are aware of the potential consequences of their actions for the organisation. Records of training should be kept, and the content of the sessions should be kept under review and updated as necessary to reflect any further changes.
The UK government are clear that, through the ECCTA, they are 'strengthening the UK's reputation as a place where legitimate business can thrive, whilst driving dirty money out of the UK'. Discouraging corporate crime and increasing the accountability of organisations follows the general global trend towards transparency and legitimacy in business, and is a positive step.
Footnotes
1 Referring to the definition of 'senior managers' in the Corporate Manslaughter and Corporate Homicide Act 2007.
2 Note that, if the organisation is regulated, 'senior managers' for the purposes of ECCTA are unlikely to be the same subset of individuals that may be deemed to be a senior manager under the FCA's Senior Managers and Certification Regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.