The Government has announced plans to make it easier to convict corporate bodies of certain offences committed by their senior managers.

What is the current position?

Currently, under UK law, it is possible in some limited cases to bring criminal proceedings against a corporate body if someone “associated with” the corporate commits an offence.

These so-called failure-to-prevent (FTP) offences currently apply only to bribery and the facilitation of tax evasion, although, in its Economic Crime and Corporate Transparency Bill (the Bill), the Government is proposing to expand the list of offences to which the FTP approach applies to various fraud-related offences.

However, outside the FTP framework, a company or other corporate body can normally be convicted of a criminal offence only if the offence can be attributed to someone who, at the time, was the “directing mind and will” of the corporate body. This is known as the identification doctrine.

The difficulty for prosecutors with the identification doctrine is that it can be difficult to demonstrate that an individual was in fact the “directing mind and will” of a corporate body. This is because most corporate bodies act through a board or other managing body comprising several individuals, and to ascertain the collective will of that managing body can be problematic.

There is also a lack of clarity in case law about what the “directing mind and will” of a company is. In some cases, the courts have said that the intention of a single manager with delegated authority may suffice, that there is not always an “omniscient directing mind and will” and the meaning of the phrase depends on how the offence in question is structured.

This in turn leads to a lack of clarity as to exactly when the doctrine might apply.

What is the Government proposing?

However, Government-sponsored amendments to the Bill, which is currently making its way through Parliament, would introduce a reformed identification doctrine to make it easier to attribute certain offences to corporate bodies.

Under the amendments, it would no longer be necessary to show that one or more people were the “directing mind and will” of the corporate body.

Instead, the corporate would be guilty of an offence if one of its senior managers commits the offence while acting within the actual or apparent scope of their authority. Whilst, in many cases, prosecutors may still need to demonstrate some element of intention or recklessness by the senior manager in question, there would no longer be any need to attribute intention to the corporate body.

This would dramatically lower the bar for convicting the corporate body itself.

The change would also apply to unincorporated partnerships.

The amendments define a senior manager as someone who plays a significant role in making management decisions about all or a substantial part of the organisation’s activities, or in actually managing or organising those activities.

This concept will undoubtedly capture directors of companies, but it could also cover executive managers in the C-level directly below the board.

For private equity investors, the principal risk is that a fund structured as a limited partnership (which is an established model) could find itself liable for offences committed by the general partner or manager of the fund, as it is they who will, in practice, take decisions relating to the fund’s business.

Which offences would this apply to?

The reformed identification doctrine would apply only to specific listed offences. However, the Government would have the power to add and remove offences to and from that list, and the proposed amendments contain no specific restrictions or parameters around which offences could be added to the list.

At the time of writing, the proposed list includes principally economic offences, including theft, false accounting, fraud, fraudulent trading, bribery, money laundering, terrorist financing and certain tax evasion offences.

However, it also includes certain technical offences connected with corporate transactions, including the following.

• Section 85, Financial Services and Markets Act 2000 (FSMA). This makes it an offence to offer certain securities to the public, or to apply to admit securities to a regulated market (such as the London Stock Exchange Main Market), without publishing an approved securities prospectus.
• Section 25, FSMA. This makes it an offence to communicate a financial promotion (such as an invitation to acquire securities or, in due course, cryptoassets) unless the communication is made or approved by an FCA-authorised person or falls within an exemption.
• Section 23, FSMA. This makes it an offence to carry on an FCA-regulated activity without authorisation from the Financial Conduct Authority (FCA).
• Sections 89 and 90, Financial Services Act 2012. These make it an offence to make misleading statements, or to give misleading impressions as to the market or value of investments, and, by doing so, induce some to engage in investment activity, such as dealing in securities.

What does this mean for corporates?

The inclusion of these offences within a reformed identification doctrine would significantly increase the risk for companies seeking a listing, raising equity finance or looking to market a business for sale.

It is already standard practice to take various precautions to guard against liability under these offences. These include:

• verification, a detailed procedure by which the contents of a prospectus, information memorandum or other marketing document are scrutinised line by line and justified by reference to external evidence; and
• disclaimers, which can be effective in qualifying information within a document and ensuring clarifying that only certain persons may rely on the document (in the expectation that this will allow a communication to fall within particular exemptions).

However, should the proposed amendments become law, companies and their advisers will need to review their procedures to ensure they remain robust enough to address potential liability for the company itself.

We will continue to follow developments in this area and provide further updates in due course.