UK fraud law increases corporate criminal liability

UK directors and senior managers are now subject to higher liability if they fail to prevent fraud under a new law that came into effect last month, legal experts told Commercial Risk Europe. Essentially, the changes will make it easier for corporations to be held criminally liable for fraud committed by individual staff members. Companies face unlimited fines and could be barred from public contracts if prosecution is successful under the new rules. For the first time, the Economic Crime and Corporate Transparency Act brings senior managers into the scope of a legal test for fraud prosecutions against a corporate. The law updates an established legal test, known as ‘identification doctrine’, for prosecuting a corporate entity for economic crime. The new law, which received Royal Assent on 26 October, puts senior managers on a similar footing as directors if their actions, or “directing of mind and will”, amount to corporate liability for fraud within the organisation. Charlotte Hill, committee member of the London Solicitors Litigation Association, told Commercial Risk that the measures affect the liability of company directors and senior managers in the UK. “It does not need to be demonstrated that the ‘directing mind and will’ of a company was involved in the fraud,” Hill said. The UK government explained that the reform replicates the definition of senior manager in the Corporate Manslaughter and Corporate Homicide Act. “This model will look at what the senior manager’s roles and responsibilities are within the organisation – the level of managerial influence they might exert – rather than their job title. It covers instances where the senior manager is a person who plays a significant role in the making of decisions about the whole or a substantial part of the activities of the body corporate,” it said. It added that reform was necessary to signify the growing importance of senior managers in corporate structures. “This will have the advantage of providing greater clarity on the parameters of the legal test and will also bring the law up to date to reflect modern company structures where directing minds are spread across different functions of business. It will enable prosecutions to progress in more cases where senior level employees who do exert decision-making power are found to be involved in the offending,” the government said. James Ford, senior associate in the litigation and dispute resolution practice at Mayer Brown, said the previous legal test for establishing wider corporate liability for fraud has thwarted prosecutions brought by the UK’s Serious Fraud Office (SFO) in the past. “Practically speaking, the reform of the ‘identification doctrine’ could make it more straightforward for the SFO to successfully prosecute corporates for economic crimes going forwards,” Ford said. He explained: “Previously, where a mens rea is a required element of an offence, only the mental state of a person representing the ‘directing mind and will’ of a corporate could be attributed to that corporate. This principle has presented a significant obstacle for the SFO to successfully prosecute companies in the past in connection with fraud and other economic crime offences. Under the Act, this doctrine is changed significantly.” “The actions of a ‘senior manager’ acting within the actual or apparent scope of their authority can be sufficient to attract criminal liability for a corporate,” he added. “Should a senior manager be involved in or fail to appropriately identify, assess or mitigate risks in these areas, this could expose a corporate to risk under the Act,” Ford warned. Hill said the new corporate criminal offence for failing to prevent fraud applies to large companies, partnerships or parent companies that do not have adequate procedures in place to prevent fraud by their employees, agents or subsidiaries. This is similar to the existing offences of failing to prevent bribery and tax evasion. Vincent Billings, partner in SA Law’s corporate and commercial team, said the new law seeks to discourage organisations from turning a blind eye to fraud. “While technically, individuals (including directors) cannot be prosecuted under the new law, it is still a source of anxiety for company directors because ultimately, the responsibility to prevent fraud from happening within their organisation lies in their hands,” Billings said. Billings said directors need to ensure “reasonable procedures” and corporate governance processes are in place to prevent fraud. Ford added that companies need to keep staff, in particular senior managers, informed about the changes in law and tighten their risk management and governance. “This may include training such individuals, conducting risk mapping and risk assessment, reviewing relevant policies and procedures and reinforcing whistleblowing programmes. This will serve to manage the risk both for individuals and corporates alike, and will likely form the foundation of the company’s ‘reasonable prevention procedures’,” Ford said.

UK fraud law increases corporate criminal liability

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