The Economic Crime and Corporate Transparency Act receives Royal Assent – now the hard work begins

The Economic Crime and Corporate Transparency Act (the ECCTA) received Royal Assent on 26 October 2023, following over a year of debate and amendment as it progressed through Parliament. It is a broad and comprehensive piece of legislation which aims to tackle the use of the UK’s corporate, real estate and business sectors by criminals for nefarious purposes and address the reputation London sometimes has as a place where money laundering and fraud are commonplace. 

The ECCTA’s supporters say it will be a game-changer in the fight against economic crime in the UK but while increased enforcement activity is likely, that outcome is only half the story. Another main aim of the Act is to drive change in corporate culture, effectively outsourcing the role of preventing fraud to the business sector before it happens. 

Below we recap briefly on the reforms most closely aligned with business crime. An overview of the other main reforms being introduced by the ECCTA is available on our UK Economic Crime and Corporate Transparency Hub (linklaters.com).  

Failing to prevent fraud

A relevant body will be criminally liable where a person associated with it (such as employees, agents, subsidiaries and other persons that perform services for or on its behalf) commits a fraud intending to benefit the organisation and the organisation did not have reasonable procedures in place to prevent the fraud. The offence is effectively one of strict liability for the organisation; prosecutors will not need to show that the organisation’s leaders authorised or had knowledge of the fraud. If convicted, the organisation is liable to an unlimited fine. However, an organisation will not be guilty if it was itself the intended victim of the fraud.

The new offence will only apply to “relevant bodies”, defined as “large organisations” operating in any sector, including commercial businesses, charities, NGOs and public bodies, that satisfy at least two of the following requirements in the financial year preceding the year of the fraud offence:

• turnover of more than £36 million
• total assets of more than £18 million
• an average of more than 250 employees

Small and medium sized businesses are therefore exempt from the legislation, although the legislation includes a power for these requirements to be modified or removed. 

A schedule to the ECCTA lists the in-scope fraud offences. These currently comprise a set of core common law and statutory fraud offences but the Secretary of State may amend the list at any time. 

It will be a defence for the organisation to show that, at the time of the fraud, it had “reasonable procedures” in place to prevent fraud or that it was not reasonable in the circumstances to expect such procedures to be in place. The government will be obliged to publish guidance on what “reasonable procedures” in the context of preventing fraud may be and it is likely that they will follow those already published for the existing failure to prevent offences. 

For more information on how the offence will operate, please see our earlier blog post here: Revealed at last: The government publishes its proposals for a new failure to prevent fraud offence (linklaters.com)

Corporate Criminal Liability

The ECCTA introduces a new test for corporate liability which amends the “identification principle”, the legal construction under which responsibility for wrongdoing and other acts by individuals can be attributed a company. The principle, which required the identification of the “directing mind or will” of a company, had been criticised as being unrepresentative of how corporate entities are structured and operate nowadays and prosecutors such as the Serious Fraud Office had long been calling for a change in the law to enable them to prosecute corporate wrongdoing more easily.

Under the ECCTA, a company or unincorporated partnership will be guilty of an offence if one of its “senior managers” commits the offence whilst acting within the actual or apparent scope of their authority, or attempted or conspired (or encouraged or assisted someone else) to do so. Unlike the new failure to prevent fraud offence, the changes to corporate criminal liability are not limited to large organisations. It will not be necessary to show that anyone who was the “directing mind and will” of the company was involved. For the present, the provisions will only apply to specified economic crimes, including bribery, money laundering, fraud, false accounting, fraudulent trading and other related offences, along with various Financial Services and Markets Act 2000 and Financial Services Act 2012 offences, offences under the Terrorism Act 2000 and so on. However, the government has already committed to extending the policy to all criminal offences when a suitable bill arises.

As to who is a “senior manager” for these purposes, the ECCTA focusses on the roles and responsibilities of the relevant senior manager, rather than their job title. It is someone who plays a “significant role” in making management decisions about all or a substantial part of the organisation’s activities, or in actually managing or organising those activities. However, it is likely that there will be considerable debate over what exactly this means. 

The changes are intended to make it easier to prosecute a company for criminal misconduct by focussing on the role and responsibilities of the senior manager who has committed the relevant crime, rather than just their job title. And while it is possible that we may see more corporate prosecutions for wrongdoing as a result, the government also hopes that the changes will increase certainty as to what the law is, act as a deterrent for organisations and that, as a result, crime will decrease.

For more information on how the new approach to corporate criminal liability will operate, please see our earlier blog post here: The proposed reform of the identification principle from the Bill that keeps on giving (linklaters.com)

Comment

Both these reforms are aimed at reducing fraud and other forms of economic crime by placing an increased onus on businesses to tackle misconduct at its source. Exactly how they will play out remains to be seen but business organisations will have to consider their impact and whether they will need to implement new policies and procedures as a result. SMEs may be exempt from the new failure to prevent fraud offence – they of course remain subject to existing laws on fraud and economic crime generally – but they will still need to consider how the reframing of the corporate criminal liability principle will affect them. Will additional training be required for senior managers, for example?

During the Bill’s passage through the House of Lords, Lord Coaker noted that while it was an important step forward, “the enforcement of it is everything”. There is likely to be considerable pressure on enforcement authorities to demonstrate more effective implementation of the new offences, particularly given that fraud accounts for 41% of all crime in the UK. However, agencies’ resources are already stretched and increased action will require a commensurate increase in funding.

Lastly, there was mention during the Commons debate of a third economic crime bill, picking up on some of the other aspects of economic crime which have not yet been dealt with in full, such as trusts, authorised corporate services providers, the introduction of a whistleblower regime and reforms to asset seizure. Whether such a bill is likely in the near future given the impending election must now be debateable.

Some of the new provisions came into effect immediately, and others, including the new corporate criminal liability regime will come into effect “at the end of the period of 2 months beginning with the day on which the Act is passed' (i.e., on 26 December 2023); however most of the substantive provisions in the ECCTA will be brought into force by Statutory Instrument. This includes the failure to prevent fraud offence. We will be monitoring progress closely.