The enactment of the Economic Crime and Corporate Transparency Act 2003 (ECCTA), which received Royal Assent on 26 October 2023, heralds a transformative shift in the governments response to combatting economic crime.
Our previous article set out the new administrative requirements imposed on LPs, introduced to increase transparency, and encourage better corporate governance, and can be found here.
The UK Economic Crime and Corporate Transparency Act – Key Changes
However, what truly sets the legislation apart is the inclusion of a new failure to prevent fraud offence and the expansion of corporate liability for all economic crimes perpetrated by senior executives. Businesses should act now to ensure they have adequate oversight and compliance procedures in place to ensure they do not fall foul of the ECCTA.
Failure to prevent fraud offence
ECCTA introduces new rules to hold companies criminally responsible if an “associated person” commits a specific fraud offence with the intention of benefiting the company, or any person receiving services from the company. The list of fraud offences covered under the act is broad and covers existing common law and statutory fraud.
A ‘failure to prevent fraud’ will be a strict liability offence, meaning liability can be attributed to a company even if the fraud was committed without the knowledge of that company’s senior managers or board members.
That said, the offence will apply only to large organisations meeting two of the three following criteria in the preceding financial year:
- More than 250 employees;
- More than £36 million turnover, or;
- More than £18 million in total assets.
Crucially, a defence for a company is to show that it had reasonable prevention procedures in place at the time the fraud was committed, or that it was reasonable not to have them in place. Companies in breach of ECCTA may be held liable for unlimited fines.
Expansion of corporate liability
The current method of attributing liability for criminal acts of individuals to corporates relies on the involvement of an individual representing the “directing mind and will” of the company (usually a board member for example), being complicit in the offending conduct. Over the years however, as governance structures for companies have become more complicated, this has become more challenging.
However, ECCTA will broaden the so-called ‘identification doctrine’ to include the knowledge and actions of “senior managers” in economic crimes.
What should companies do to prepare?
Companies should take a proactive stance in preparation for these reforms. Businesses which falling within the criteria should review their existing fraud risk assessments and identify individuals that are likely to fall within the category of ‘senior manager’.
Even though a corporate may be subject to another regulatory regime, a fresh assessment is required to see if a senior manager may fall within the ECCTA. Therefore, for example, firms regulated by the FCA should conduct a separate assessment to map individuals who qualify as ‘senior managers’ under ECCTA.
Additionally, enhanced control measures and training will be necessary to monitor senior management conduct on an ongoing basis. That may include not only a review and updating of bribery policies, but also the internal processes and procedures regarding the approval of costs and expenses of the business, as well as how the firm will abide by ECCTA to avoid a criminal offence.
If you require assistance assessing your existing compliance procedures or implementing new ones to ensure your business is compliant with the act, please contact Elborne Mitchell’s corporate and regulatory teams for advice.
Callum Asten, Assistant Solicitor / December 2023
