Economic Crime & Corporate Transparency Act – a new dawn in the fight against economic crime and fraud?

After much debate, the Economic Crime and Corporate Transparency Act finally received Royal Assent on 26^th October 2023.

On the back of similar legislation which preceded it in recent years, such as the Bribery Act 2010 and Criminal Finances Act 2017, this new act forms part of the governments broader reform of corporate criminal liability in the UK.

Its significance is twofold in that it not only amends the “identification principle” in order to make it easier to prosecute companies and partnerships (organisations) for certain economic criminal offences, but it also introduces a new strict liability offence for the company of “failing to prevent fraud”.

How is it now easier to prosecute organisations?

Firstly, section 196 of the new act has sought to overcome the difficulty of identifying the directing mind and will of a company (the so called “identification principle”) so as to make it easier to hold organisations to account for the criminal acts of its staff. As a result of this change, organisations will now be held liable in the following circumstances:

• An organisation will be guilty of a relevant offence if that offence is committed by a senior manager acting within the actual or apparent scope of their authority.
• Senior manager is defined as an individual who plays a significant role in either making the 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.
• Relevant offences which are set out in schedule 12 of the act and includes bribery, fraud, money laundering, theft, and tax offences amongst others. Also included are attempts and a conspiracy to commit these acts as well as circumstances where there has been aiding, abetting, counselling, or procurement of these offences.
• An organisation cannot be held criminally liable under section 196 if the act or omission which forms part of the relevant offence takes place outside the UK unless it would be guilty of that relevant offence in the location where the act took place.

What is the new offence of “failing to prevent fraud” and who does it apply to?

In a similar vein to the failure to prevent bribery and tax evasion offences which were introduced by the Bribery Act 2010 and Criminal Finances Act 2017 respectively, failure to prevent fraud is also a strict liability offence.As set out in section 199, an organisation will be guilty of this offence if an associated person commits fraud and this is intended to benefit the organisation or any person or subsidiary to whom services are provided on behalf of the organisation.

Associated person is broad in its definition as it includes any employee, agent, or subsidiary of the organisation, as well as any others who perform services on its behalf.

The definition of fraud is also set out in schedule 13 of the act and includes fraud by false representation, fraud by abuse of position, and fraud by false accounting as well as the aiding, abetting, counselling or procuring of these offences.

However, unlike the equivalent bribery and tax evasion offences, this new offence will only apply to larger organisations which meet at least 2 of the following criteria during the financial year which precedes the offence:

• More than 250 employees.
• More than £36 million turnover.
• More than £18 million in aggregate assets on its balance sheet.

Organisations will only have a defence if they can prove that they had reasonable prevention procedures in place to prevent fraud or that it was not reasonable for the organisation to have such prevention procedures in place. In a similar way to what happened when the Bribery Act was introduced, the government are due to publish guidance in the near future to help organisations understand what procedures are to be considered reasonable.

As is the case for similar offences, organisations who are convicted of this offence are liable to receive an unlimited fine.

Conclusion

Given the significant cost of economic crime (and particularly fraud) in the UK every year, the new act clearly has the purpose of ensuring that organisations are more easily held to account for the criminal acts of those who are performing services on their behalf.

Whilst law enforcement bodies such as the Serious Fraud Office (SFO) will be keen to demonstrate that this new Act carries teeth, it remains unclear whether they will have sufficient resources to be able to investigate and secure substantially more convictions against organisations. Notwithstanding the SFO’s mixed success rate in recent years, the further powers granted by this new act in tackling fraud and economic crime will almost certainly ensure that the spotlight remains firmly on its performance.

Whether an increased level of enforcement action materialises or not, this new act should serve as a prompt for all organisations to review their internal procedures to avoid any potential criminal liability.

Assuming that the government guidance for the new failure to prevent fraud offence will mirror the guidance that was issued for bribery in 2011, organisations will probably base a review on the six principles in order to not only minimise the prospect of fraud occurring but also to put themselves in a position where they can avail themselves of the reasonable procedures defence should this materialise.

This traditionally has included securing top level commitment within the organisation, carrying out and recording an anti-fraud risk assessment, implementing safeguards that are proportionate to the level of risk identified, undertaking sufficient due diligence on associated persons, ensuring that internal training is provided and recorded, as well as monitoring and carrying out regular reviews of the safeguards.

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Contact our Compliance & Regulatory Team today should you have any queries regarding the new Economic Crime & Corporate Transparency Act.