It is amusing to note that one of the fundamental principles of corporate liability in British law is inextricably linked to the price of washing powder. The seminal case Tesco Supermarkets v Nattrass [1971] UKHL 1 concerned a disgruntled Tesco customer who was charged full price for a box of washing powder advertised at a lower price, the discounted stock having sold out earlier and been replaced by full price product without taking down the discount sign. Initially convicted of liability for the false advertising of the store manager, Tesco appealed to the House of Lords and ultimately had the conviction overturned on the basis that the company was not responsible for the acts of any person who was not “the controlling mind and will of the corporation”, a standard not reached by a manager in charge of a local store. This principle is known as the “identification doctrine”.
The identification doctrine remained largely unchanged until the introduction of the Corporate Manslaughter and Corporate Homicide Act 2007. This legislation introduced the exception that organisations could be held responsible for any death caused by a gross breach of duty of care by a senior manager, reflecting the gravity of such negligence. Three years later, concerns about international bribery and corruption led to the creation of a “failure to prevent” offence under the Bribery Act 2010, creating a statutory obligation on commercial organisations to take “adequate” steps to prevent bribery and allowing firms to be convicted of “failure to prevent” bribery in the course of their business if they did not take such steps. However, the fundamental principle that the actions of employees and agents could not normally be attributed to corporations remained largely unchanged.
Significant change in the application of the identification doctrine eventually came in October 2023 when the Economic Crime and Corporate Transparency Act came into force. One of the new offences introduced by ECCTA was a new “failure to prevent fraud” offence under section 199 of the new Act. Based on the Bribery Act offence (and similar legislation relating to facilitation of tax evasion enacted by the Criminal Finances Act 2017), the new offence requires corporations to put procedures in place to prevent economic crime offences by associated persons such as employees or contractors. Concerns about the impact of the new requirement on small and medium-sized companies led to the government limiting the new requirements to “large corporations” meeting two out of three criteria: over 250 employees; more than £36 million turnover; more than £18 million balance sheet assets. Economic crime offences captured by the legislation include offences under the Fraud Act, corporate offences under the Theft Act and “cheating the public revenue” under common law. The new offence reflects growing concerns about the scale of fraud in the UK, in particular online fraud, and the use of corporate structures to hide the identities of criminals and launder the proceeds of economic offences. Interestingly, proposals to include money laundering in the list of economic crimes covered by the legislation were rejected by the House of Commons, perhaps concerned that a continued association between corporate liability and laundry would undermine the gravitas of the legal system.
However, the more fundamental change wrought by ECCTA went largely unnoticed. Section 196 of the 2023 Act states that:
If a senior manager of a body corporate or partnership (“the organisation”) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force, the organisation is also guilty of the offence.
A “relevant offence” for the purposes of section 196 is defined as any one of a wide range of economic crimes. Based on similar principles to the corporate manslaughter legislation, section 196 effectively changes the “identification doctrine” for all economic crime offences and renders all corporations – including small and medium sized companies – liable for economic malfeasance by their senior managers. It also delivers – arguably through the back door – two results explicitly excluded from the section 199 FTP offence: it extends corporate responsibility for the economic offences of managers to small and medium-sized corporations; and it includes the offence of money laundering. The spirit of Tesco v Nattrass and the legendary cleaning power of Radiant washing powder live on.
Given the direction of travel, it is perhaps inevitable that we are due one more significant change. The Crime and Policing Bill is currently at Committee stage in the House of Commons. Section 130 of the Bill proposes one final change to the identification doctrine:
Where a senior manager of a body corporate or partnership (“the organisation”) acting within the actual or apparent scope of their authority commits an offence under the law of England and Wales, Scotland or Northern Ireland, the organisation also commits the offence.
If passed without further amendment, the new legislation will leave all corporations and partnerships in the position where they are responsible for any criminal acts committed by senior managers in the course of their work, whether or not the company, Board or shareholders approved or even knew of those actions.
The implications of these changes are potentially far-reaching. It is not much of a stretch to consider that a firm might bear some responsibility if a senior manager defrauds a customer by overcharging them, but what if that manager goes out for a big night with a client and drunkenly disgraces himself in some way that passes the threshold of criminal responsibility? Whilst the legal requirement to maintain “adequate procedures” to prevent criminality only extends to financial crimes and the specific FTP offences, corporations would be well-advised to take a far broader look at their employment contracts, HR policies, processes and communications to ensure that they are setting the right expectations across the business. Exercising reasonable care through effective management is likely to be a cheaper and less embarrassing option than managing the fallout of the bad behaviour of one bad apple.
The use of corporate entities to facilitate financial crime and wider criminality is likely to mean that legislative and regulatory pressures continue to grow over time. Taking those basic steps to get your compliance processes right should help to reduce risk, satisfy regulators and law enforcement and – to channel the spirit of Radiant washing powder one last time – help your company to maintain a “clean” bill of health.
