Identification Doctrine and Economic Crime

As well as the many administrative and procedural changes that the Economic Crime and Corporate Transparency Act 2023 (ECCTA) is introducing, there are also significant changes being made to expand the exposure of corporates to criminal liability. A new offence of failing to prevent fraud is being introduced and provisions that expand the scope of the “identification” doctrine in corporate criminal liability.

The offence of failure to prevent fraud only applies to large organisations and therefore will not be relevant to SME companies and outside the scope of the businesses that we cater for.

However, the expanded scope of the “identification” doctrine within corporate criminal liability applies to all organisations regardless of size. Whilst it may be more relevant for large organisations, whose corporate structures are more complex, SME businesses also need to be aware of this expanded liability which broadens the “directing mind and will” or “identification” principle by attributing criminal liability to a body corporate or partnership for the acts of their senior managers. The intention is to make it easier to prosecute companies and partnerships for certain economic crimes than it has been.

If a “senior manager” of a company (or LLP, limited partnership, or partnership) acting within the scope of their actual or apparent authority commits an offence, the relevant organisation can also be guilty of the offence. A senior manager can be anyone who plays a significant role in the decisions or the management of the organisation. The economic crimes to which the ECCTA applies are wide ranging and include fraud, false accounting, money laundering, sanctions evasion, bribery, and tax evasion. 

Up until the introduction of this offence, an organisation could only be criminally liable for misconduct committed by a more limited category of persons who were viewed as its directing mind and will. As companies grew in size and complexity, decisions are usually diffused across a large number of managers within a business. Therefore, the Government has been of the view that it was too difficult to identify and prove wrongdoing by the previously established directing mind and will test to the standard required to establish criminal liability. The ECCTA reforms aim to catch a much wider group of senior managers (beyond board level) and make corporations criminally liable for their acts.

This increased risk means SME businesses should start to identify who in their business could potentially fall within the category of being a senior manager and consider whether these people should be provided with targeted training on economic crime offences. Companies should also consider what enhanced control measures may be required to monitor senior management on an ongoing basis, proportionate to the relative risk that the company faces. This will require an assessment of individual roles, responsibilities, and levels of influence within an organisation rather than just job titles.

The expansion to the identification doctrine is in force as of 26th December 2023.