Some unanticipated consequences of the new senior managers offence and what law firms should be doing about them

There has been much commentary about how the Economic Crime and Corporate Transparency Act 2023 (ECCTA) should change the landscape for corporate criminal liability in the UK for economic crime offences. However, the focus has mainly been on changes introduced by the new corporate offence of failure to prevent fraud, with less consideration on the impact of the new ‘senior manager’ offence. The unanticipated consequences of the senior managers offence should not be overlooked as they are significant, and include a potential impact for law firms.

What is the new offence?

The ECCTA provides that an organisation will be guilty of an offence if a ‘senior manager’ acting within the actual or apparent scope of their authority commits one of a number of economic crimes listed, which includes various money laundering offences. A ‘senior manager’ is defined as an individual who plays a significant role in the making of decisions about how the whole or a substantial part of the activities of the organisation are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities. An organisation includes a partnership.

This new statutory offence extends the longstanding common law identification principle, which requires that for an organisation to be found to have relevant criminal mens rea it is necessary for the prosecution to prove that an individual with the ‘directing mind and will’ of the company also had the required mens rea for this to be attributed to the organisation. This has proven to be a challenging burden for prosecutors to overcome.

The new offence has been in force since 26 December 2023 and applies to conduct that took place after that date.

So, what does this mean for law firms?

Aspects of legal business activity are subject to the Money Laundering Regulations (et. al) 2017 (as amended) (MLRs) and such firms are required to have in place extensive and onerous obligations and measures to combat money laundering and terrorist financing. A breach of the MLRs can be a strict liability corporate criminal offence.

The new ‘senior manager’ offence widens the scope of criminal liability for an organisation to include circumstances where a senior manager commits an offence of money laundering. The money laundering offences include well-known primary money laundering offences, but also extend to specific offences relevant to the regulated sector such as the ‘failure to disclose’ and ‘tipping off’ offences. It is important to be aware of these provisions as they extend potential corporate criminal liability to include offences that were previously targeted at an individual person. The new senior manager offence means that it is no longer necessary to evidence an individual offender as also being the ‘directing mind and will’ of the organisation in order to attribute liability to it; the definition of senior manager is much wider and encompasses more individuals, so dramatically extends the potential for an organisation to be convicted.

In practice, organisations carrying out ‘regulated’ business (including, law firms) will need to consider whether partners and other senior individuals fall within the definition of a ‘senior manager’. For example, if a partner was found to have failed to disclose to their Money Laundering Reporting Officer suspicions of money laundering arising in the course of regulated activity, not only would the partner have potential criminal liability, but the law firm could also have much clearer criminal liability for the individual’s failure to report. This is in addition to the wider offences the law firm may have liability for under the MLRs for failings in relation to the anti-money laundering procedures.

For other legal sectors, even those not carrying out ‘regulated’ business, if an individual who is a ‘senior manager’ commits one of the primary money laundering offences under the Proceeds of Crime Act 2002, it will be easier under this new senior manager offence to prove that the partnership has criminal liability for the money laundering than under the pre-existing common law ‘directing mind and will’ test.

What should organisations be doing?

It is anticipated that there will be significant litigation in the criminal courts to establish the definition of a ‘senior manager’, as the prosecuting authorities are expected to take a wide approach to this when bringing cases against corporates. It follows that firms should be carefully considering who may be a senior manager and deciding whether any additional procedures are required in regard to their compliance frameworks to mitigate the risks of criminal liability for their actions or inactions. This is in addition to the extensive requirements set out in the MLRs.

In addition, the ‘senior manager’ offence should be an additional factor to consider when conducting internal investigations into activity that may include alleged economic crime. Firms should be considering if the individual concerned is a senior manager and whether they acted within the actual or apparent scope of their authority as a starting point, in order to establish the potential for corporate liability under the new offence.