Home Office outlines plans to reform The Identification Doctrine

Under the proposals, which have been added to the Economic Crime and Corporate Transparency Bill, senior managers will be brought within scope of those who can be considered the ‘directing mind and will’ of a business. If they commit an economic crime, the company can also be held criminally liable and fined for the offence.

Security Minister Tom Tugendhat noted: “Alongside our new ‘failure to prevent fraud’ offence, these measures demonstrate our commitment to improved transparency. We will ensure that, whether individuals or companies, those responsible for economic crime can be brought to justice.”

The Identification Doctrine is a principle used to hold companies criminally accountable for the actions of their ‘directing mind and will’. This has generally been interpreted to be a member of the Board, such as the CEO, but complex management structures can conceal the identity of key decision-makers.

For example, a recent multi-billion-pound fraud trial determined that a banking group’s CEO and chief financial officer could not be viewed as the company’s ‘directing mind’. This has left prosecutors with a very high bar to prove who fits the criteria.

Senior executives often possess a huge amount of influence and autonomy, but cannot currently be considered a part of the ‘directing mind’.

Kevin Hollinrake, the Minister for Enterprise, Markets and Small Business, stated: “This reform will help small business owners play on a level playing field with corporate giants, while also holding larger companies to account for committing economic crimes. We stand firm in striking the right balance between the need to tackle economic crime and keep burdens for the law-abiding majority as low as possible.”

Robust plan

This move is another tool that can be used in the Government’s robust plan to fight fraud. That plan includes the recent publication of the Fraud Strategy, which sets out how the Government will work with law enforcement – and the private sector – to block scams at source, bring offenders to justice, shut down fraudulent infrastructures and ensure the public has the support it needs.

It also builds on recommendations made by The Law Commission and feedback received from prosecutors and business groups. The consensus from these engagements is that the current regime does not effectively cover the way in which modern businesses are structured.

In practice, a test will be applied to consider the decision-making power of the senior manager who has committed an economic crime, rather than just their job title. The corporation may then be liable in its own right.

This will reduce the ability for corporations to use complex management structures to conceal decision-makers and, therefore, level the playing field for businesses of all sizes.

Scale of fraud

Andrew Penhale, Chief Crown Prosecutor for the Crown Prosecution Service, observed: “The scale of fraud in the UK – which now comprises over 40% of all criminal activity – is so widespread that extra measures to help prevent it and protect people and organisations from falling victim to this form of crime is a welcome step in tackling such offending.”

Penhale added: “The reform of The Identification Doctrine for economic crime is another important measure designed to drive better corporate behaviours and further enhances the tools available to prosecutors. We recognise and support the Government’s commitment to legislate for identification doctrine reform across all crime types in the future.”

Lisa Osofsky, director of the Serious Fraud Office, affirmed: “We have a mission to investigate and prosecute those responsible for fraud, bribery and corruption, but currently face a perverse situation wherein some companies have no liability for misconduct and no incentive to prevent it.”

Further, Osofsky said: “We welcome the range of measures introduced by the Economic Crime and Corporate Transparency Bill, including the expansion of our pre-investigation powers and the ‘failure to prevent fraud’ offence which, together with a review of the disclosure regime, would strengthen our ability to hold corporate criminals to account.”

House of Lords ruling

An influential piece of legislation currently used to determine a ‘directing mind’ emanates from a House of Lords ruling in 1971. That case concluded a supermarket group was not liable for the actions of an individual store manager, who was selling washing powder for one shilling more than the advertised price. The store manager was not a part of the corporation’s ‘directing mind’ and the corporation was therefore not guilty.

Senior executives are, consequently, generally viewed within the same light as the store manager. The Government’s reform will reset the balance and ensure greater accountability.

The Identification Doctrine reform, which applies to economic crime only, is another major development in the Government’s drive to reform corporate criminal liability. Another reform – the aforementioned creation of the ‘failure to prevent fraud’ offence – was tabled in April.

The latter states that a large business must have measures in place to prevent fraud. If an employee commits fraud for the company’s benefit, the organisation could receive an unlimited fine unless it’s able to prove it had adopted reasonable safeguards.

A list of these measures will be published by the Government in due course.