Be prepared for the new corporate liability rules

A less high-profile aspect of the Act already in effect is reform of the corporate liability rule, known as the ‘attribution principle’ or ‘identification doctrine’, making businesses and organisations strictly liable for so-called economic crimes committed by senior managers.

While the new failure to prevent fraud offence is reserved for larger organisations, the corporate liability rule applies to all companies, including SMEs – the vast majority of Scottish businesses.

Unlike the failure to prevent fraud offence, a crime can be committed under the new corporate liability rules regardless of whether or not it benefits the company. It also covers a broader range of economic crimes, including money laundering, fraudulent evasion of VAT and customs duty, bribery, and breach of sanctions.

Under the terms of the new corporate liability law, an employer could be prosecuted on a strict liability basis if a senior manager commits an offence. Previously, the company or organisation in question might have faced a failure to prevent bribery charge; now it could now be prosecuted under the new rules, meaning it is deprived of an adequate procedures defence.

These changes to corporate criminal liability, including the extension of the Scottish ‘self-report’ scheme, have major implications for all companies. Economic crimes committed by their senior managers could now potentially land them in the dock, although the new rules do offer a route to avoid prosecution by confessing all at the earliest opportunity and paying a civil penalty.

Senior managers, adopting the same definition as in the 2007 Corporate Manslaughter and Corporate Homicide Act, include anyone who plays a significant role in making decisions about the running or organising of the whole or a substantial part of a company or organisation’s business. This includes individuals in the direct chain of management and those in more strategic or regulatory compliance roles, irrespective of title, remuneration, qualifications or employment status. It is not limited to those who perform an executive function or serve as board members.

The new corporate liability law and its potentially far-reaching impact across employers of all sizes should be a key focus for company directors. A proactive strategy is essential in mitigating potentially disastrous consequences of criminal actions carried out by senior employees. This could include widening out compliance training across a management team with a strong focus on the new legislative reality that corporate liability is not an alternative to individual liability.

It’s also important to make senior managers fully aware of the implications of breaching the new corporate liability law with the prospect of dismissal, fines, imprisonment and director disqualifications – and future employability in jeopardy.

The introduction of a broader compliance programme has never been more important for SMEs. The UK Government offers ‘failure to prevent’ guidance, a good starting-point in reducing the prospect of risk.

The implications of the Economic Crime and Corporate Transparency Act represent a real threat to SMEs amid wider plans extend corporate liability to all crimes committed by senior managers.

While it might be impossible to prevent rogue individuals from carrying out criminal acts, it is vital companies take pre-emptive actions to best manage these risks. This is especially important as we face an evolving regime and an increasing burden on companies and organisations in terms of corporate criminal liability.

Sally Clark is an Of Counsel and dispute resolution specialist, CMS