Corporate criminal liability: A step closer to reform?

On what basis should criminal liability attach to a corporation? This question has long been a vexed one. The statute book features several bespoke offences created for corporations, including corporate manslaughter and failure to prevent bribery and the facilitation of tax evasion. For other non-regulatory and strict liability offences, the primary rule for attributing criminal liability to corporations is through the often-criticised identification doctrine.

The identification doctrine, developed by the House of Lords in 1915 and reaffirmed in 1971 in Tesco v Nattrass [1972] AC 153, provides that only those acts and the mental state of a corporate’s ‘directing mind and will’ can be attributed to the corporate itself. The quest is accordingly for those human agents who form the very ego and centre of a corporation. The culpability of a corporate is then parasitic on the prior fault of those human agents comprising the directing mind and will.

While the identification doctrine remains the judicially preferred test for attributing criminal liability to corporations, the Privy Council in Meridian v Securities Commission [1995] 2 AC 500 confirmed that the courts may fashion a special rule of attribution for criminal statutes with mens rea. This path can only be pursued, however, where insistence on the primary rule would defeat the purpose of the statute.

Outlining the issues with the identification doctrine

The criticisms levelled against the identification doctrine are well known at this point. It is highly unfair, so the argument goes, that the complex management structures of large companies effectively insulate the directing mind and will from allegations of knowledge or complicity in offending. The structure of Barclays Plc is a recent case in point: a coterie, including Barclay’s CEO and Group Finance Director, were found by the High Court in SFO v Barclays [2018] EWHC 3055 (QB) not to constitute the corporation’s directing mind and will for the purpose of performing the particular function in question. While authority was delegated to various committees, it was the Board of Barclays Plc which retained authority to “do the deal”.

The identification doctrine therefore leads to difficulty – both legally and evidentially – holding large corporations criminally liable. E-mail trails are said to have a strange habit of drying up at middle management level, never inculpating the senior management. Small businesses, on the other hand, are much easier to prosecute. To take an example, the SFO’s successful prosecution of Smith & Ouzman Ltd was in part because it was a small family-owned printing company. Yet it will be larger corporations that are able to wreak greater havoc.

In sum, the identification doctrine is said to lack clarity and certainty. The anthropomorphic construct of a directing mind and will does not reflect modern corporate decision-making, which centres around procedural policy rather than individual decisions. Thus, the law ought to be reformed by expanding the current bases of corporate criminal liability. It was, after all, perceived inadequacy of the identification doctrine in the context of manslaughter that led to the introduction of the Corporate Manslaughter and Corporate Homicide Act 2007.

Recent developments

The Ministry of Justice published a Call for Evidence on Corporate Liability for Economic Crime in 2017. The evidence received was considered inconclusive by Government: there was no clear consensus on whether the identification doctrine ought to be repealed and, if so, what legal framework it should be replaced with. Concern was also raised with the introduction of further criminal sanctions in the already heavily regulated financial services sector.

In November 2020, the Government tasked the Law Commission with examining the issue and publishing a paper assessing different options for reform. On 9 June 2021, a discussion paper was published, inviting views on whether, and how, the law relating to corporate criminal liability can be improved. Thirteen questions are posed, the answers to which will in turn inform the Law Commission’s final options paper.

The remainder of this blog will consider three specific schools of thought that are likely to surface in discussions on reform.

Should corporations be capable of sustaining criminal liability?

Some reform sceptics have posed the rather existential question of whether criminal liability should ever attach to a corporate entity. In short, it is said that the criminal law should not superintend corporations when they are in fact mere aberrations whose guilt can only ever be parasitic to the guilt of an identified natural person. Neither punishment nor deterrence can therefore be properly achieved.

As regards punishment, the invariable sentence imposed on a corporation will be a fine. The same result can be achieved through regulatory and civil action, which at present waits patiently in the wings for criminal proceedings to conclude. While prosecutions for historic conduct may raise little issue for personal liability, in the context of corporate liability, it will be the shareholders, employees, and customers of today who bear the brunt of a financial penalty. Yet these individuals may not have been complicit in any offending, and in fact may have since purged the corrupt directing minds.

What then about deterrence? It is arguably personal liability that is the biggest driver for effecting behavioural and cultural change within corporations. Regulatory schemes such as the Senior Managers Regime also have a greater impact on compliance and accountability than the risk of the imputation of corporate criminal liability.

Should a failure to prevent model be adopted?

There is a strong appetite amongst proponents of reform to extend the failure to prevent model to economic crime more generally. The offence is, after all, already established in our laws and has received high praise for raising corporate standards. Speaking in general terms, the House of Lords in 2019 described the Bribery Act 2010 as “exemplary” and encouraged Government to consider extending the failure to prevent model to other economic crimes.

There are several matters that will require fine-tuning should a failure to prevent economic crime offence be introduced. For one, Parliament will have to decide whether to adopt the model found in section 7 of the Bribery Act 2010 (failure to prevent bribery), the model in sections 45 and 46 of the Criminal Finances Act 2017 (failure to prevent the facilitation of tax evasion), or a new model altogether.

Care would also have to be taken on the level of accompanying guidance: should it be overly granular then it may impose undue burdens on small businesses. Should guidance be overly generic then it risks having little impact.

Should the law be left alone?

Another prominent school of thought likely to surface is that the law ought to remain untouched. It may be questioned whether the identification doctrine really does hinder the effective administration of justice. Davis LJ observed in his ruling in Barclays that the doctrine gives rise to a degree of certainty that is required in criminal law. Further, the devolution of responsibility in corporate settings is a practical necessity; a board of a large international corporation cannot be expected to know or concern itself with its quotidian operations.

The law may also develop yet still. Although each case will turn on its facts, a close analysis of both Jay J and Davis LJ’s judgments in Barclays reveals circumstances in which it may be argued that a corporate should be fixed with criminal liability:

• first, the guilty mind of a single director may contaminate the entire decision-making board so as to fix the corporate with the director’s knowledge where that director speaks for the board;
• second, the guilty mind of a director may represent the collective will of the decision-makers where the director’s knowledge is communicated to the board, rather than suppressed;
• third, once a majority or sufficient number of board members have the requisite knowledge, then that knowledge may represent the collective will of the decision-makers;
• fourth, liability may be fixed where the decision-making entity is no more than a rubber-stamping mechanism which performs an act with “blind-eye” knowledge; and
• fifth, liability may flow where general corporate governance structures are inadequate, deficient, or designed to avoid corporate criminal responsibility.

That being said, those who support retaining the current law should be under no illusion that judicial activism will occur. The Privy Council decision in Meridian was lauded for promoting latitude when interpreting the basis on which an offence imposes corporate criminal liability. Subsequent case law indicates, however, that the courts remain hesitant to venture outside of the primary rule of attribution to fashion a special rule for criminal statutes with mens rea. The identification doctrine is unlikely to develop much further judicially.

Concluding thoughts

There have long been vocal proponents for reforming the law governing corporate criminal liability. A new failure to prevent economic crime is likely to be the bookies’ favourite. However, reform should not be treated as a foregone conclusion. While some question the utility of prosecuting corporations, corporate criminal liability is too deeply entrenched in our law to be uprooted now. The question is whether the identification doctrine provides a satisfactory basis for attributing criminal liability to corporations and, if not, whether there ought to be a new basis for sustaining corporate criminal liability. With the publication of the Law Commission’s discussion paper, we move ever closer to potential reform.

Alex Davidson is a current pupil at 2BR and former lawyer at the Law Commission.