The Economic Crime and Corporate Transparency Act 2023 (ECCTA) is the next step being taken by the UK government to address economic crime and improve the transparency of corporate entities with Royal Assent received on 26 October 2023.
The new ECCTA introduces a new 'failure to prevent' regime, addressing fraud, including cheating the public revenue alongside other measures. The ECCTA also introduces a new test for 'corporate criminal liability' which amends the 'identification principle' making it easier for corporate entities to be the subject of prosecution.
Failing to prevent fraud
Organisations may be held to account if they profit from fraud committed by an 'associated person'.
An associated person is defined as an employee, agent or subsidiary of the relevant organisation, an employee of a subsidiary, or a person who otherwise performs services for or on behalf of the organisation, so the scope of liability is wide ranging.
An organisation will be criminally liable where such a person commits a fraud intending to benefit the organisation, or any person to whom the associate provides services on behalf of the organisation, and the organisation did not have 'reasonable procedures' in place to prevent the fraud.
Fraud consists of a number of offences and includes cheating the public revenue, false accounting, fraudulent trading, and fraud as defined in the Fraud Act 2006.
ECCTA relies on associated guidance. As this guidance is not yet available under ECCTA, the rules relating to 'failure to prevent fraud' can't yet take effect. The guidance is anticipated to be published during 2024, though no specific date has been given.
The focus of ECCTA is on fraud and larger organisations only. 'Larger organisation' is defined as large bodies corporate and partnerships, and also large not for profit organisations, such as charities and incorporated public bodies, all of which must satisfy at least two of the following requirements in the financial year preceding the year of the fraud offence:
- Turnover of more than £36million
- Total assets of more than £18million
- An average of more than 250 employees
It is anticipated that ECCTA guidance will stipulate that 'reasonable prevention measures' are in place. This will include the need for a specific fraud risk assessment.
It will be a defence, if an organisation can demonstrate 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.
Companies will be exempt from prosecution if the organisation is the actual or intended victim of the fraud.
Corporate criminal liability
The ECCTA expands the 'identification principle' which applies in attributing liability to corporates for economic crimes. The 'identification principle' is the principle that, under current law, a company can only be criminally liable where the commission of the offence can be attributed to anyone who was the "directing mind and will" of the company.
Establishing who might be the 'directing mind and will' has up until now been difficult, especially for larger entities.
The ECCTA extends the common law definition of 'directing mind and will' to include acts of senior managers, so that a company or partnership can now be convicted if a senior manager acting within the actual or apparent scope of their authority commits an economic crime.
From 26 December 2023 (two months from Royal Assent) companies of all sizes, will be criminally liable if a 'senior manager' commits an offence within their authority or encourages it. It will not be necessary to show that anyone who was the 'directing mind and will' of the company was involved.
Currently, the scope of the reforms will apply to specified economic crimes including bribery, money laundering, fraud, false accounting, fraudulent trading, and other related offences. The Government has committed to extending the policy to cover all criminal offences in future.
In deciding who is a senior manager for these purposes, the ECCTA focuses on the roles and responsibilities of an individual rather than their job title. A senior manager will be 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.
For an organisation to be culpable for the offences committed by a senior manager, the senior manager must commit the relevant criminal act in the 'actual or apparent' course of their duties.
Who is a senior manager within an organisation will be determined on a 'case by case' basis, with regard given to their role and responsibilities in decision making or organisational management.
The changes are intended to make it easier to prosecute a company for criminal misconduct by focussing on the role and responsibility of the individual who has committed the relevant crime, rather than just their job title. As well as making it easier to prosecute, the change is intended to clarify the law with the longer-term objective of reducing crime.
The reasonable procedures defence that applies for failure to prevent fraud will not apply in cases of corporate criminal liability and neither will the exemption for companies which are the actual or intended victim of the crime.
Changes to Companies Act 2006
Alongside these changes, the ECCTA also makes a number of changes to Companies Act 2006, to incorporate a host of new measures, including a requirement for all new and existing company directors to file identity verification documents, restrictions as to who can file documents with Companies House, changes to company record keeping requirements, the use of Corporate Directors and giving Companies House new powers if they suspect that a document has been filed fraudulently.
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