On 26 October 2023, the Economic Crime and Corporate Transparency Act (“ECCTA”) achieved Royal Assent, concluding a year-long journey through Parliament marked by debates and amendments. This substantial and far-reaching legislation is designed to combat economic crime including fraud, money laundering and the financing of terrorist activities in the United Kingdom (“UK”). Nick Ephgrave, the director of the Serious Fraud Office (“SFO”), stated that the ECCTA is, “the most significant boost to the SFO’s ability to investigate and prosecute serious economic crime in over 10 years”.
What is the ECCTA?
The ECCTA builds on the Economic Crime (Transparency and Enforcement) Act 2022, which was fast-tracked through Parliament as a result of the Russian invasion of Ukraine. The ECCTA continues the theme of addressing perceived weaknesses in the UK’s ability to tackle economic crime.
The ECCTA introduces a number of wide-ranging reforms to tackle economic crime and improve transparency over corporate entities including:
a new strict liability offence of failure to prevent fraud for large corporates; and
an amendment to the identification principle to make it easier to prosecute companies and partnerships for certain economic crime offences.
What is one of the key offences?
Under the ECCTA, a corporate will be criminally liable where a person associated with it commits a fraud intending to benefit the organisation and where the organisation did not have reasonable procedures in place to prevent the fraud. The offence essentially imposes strict liability on the organisation which means that prosecutors do not need to show the mindset of the offender and only need to point to the fact that the act of fraud occurred.
The new offence will only apply to organisations operating in any sector including commercial businesses, charities and public bodies, that satisfy at least two of the following requirements in the financial year preceding the year of the fraud offence:
a turnover of more than £36 million;
total assets of more than £18 million; and/or
an average of more than 250 employees.
If an organisation is found liable, it can face an unlimited fine and significant reputational damage. 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, considering 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.
What test will be conducted?
The ECCTA has replaced the “directing mind and will” test with a new “senior manager” test.
The “directing mind and will” test, established in 1971, dictated that a corporate could only be deemed criminally responsible if the actions leading to an offence could be traced back to a specific individual representing its “directing mind and will” at the time of the offence. In essence, this encompassed a limited pool of individuals and was a difficult threshold to attain, particularly in the context of large corporates with complex management structures.
The assessment is now instead the “senior manager” test which significantly expands the group of individuals through which liability can be attributed to a company, making it easier for prosecutors to pursue corporates.
Under the ECCTA, an organisation will be guilty of an offence if one of its “senior managers” commits a “relevant offence” whilst acting within the actual or apparent scope of their authority or attempted or conspired with or for someone else to do so. A "relevant offence" covers a broad range of offences, including substantive money laundering offences and the ancillary money laundering-related offences of "failing to disclose" and "tipping off", fraud, false accounting, tax evasion, bribery, and breaches of sanctions regulations.
As to who is a “senior manager” for these purposes, the ECCTA focuses on the roles and responsibilities of the relevant senior manager rather than the person’s 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.
Organisations must carefully assess which senior managers might be within the scope and determine whether they require specific training or guidance. The increased exposure of businesses to liability for conduct they may be unaware of, and which provides no benefit to them, is likely to serve as an incentive to ensure such occurrences are prevented.
What other changes should you be aware of?
Companies House
The ECCTA includes legislation to enhance the role of Companies House and to make UK organisations more transparent. This includes:
giving the UK company registrar new and stronger powers to query information and to amend or remove information from the companies register;
activating restrictions on the use of corporate directors; and
introducing identity verification requirements for new and existing directors.
Crypto assets
The ECCTA gives law enforcement powers to seize and recover crypto assets which are the proceeds of crime or associated with illicit activity. It does so by extending existing confiscation and civil recovery powers to crypto assets. This means that crypto asset service providers may be required to follow court orders relating to the crypto assets they hold for customers.
Aria Grace Law CIC
In light of these legislative changes, we recommend that organisations take the following protective measures:
Identify senior managers. Identify individuals designated as "senior managers" whose actions could potentially render the organisation liable for specific economic crimes. Ensure these senior managers are well-versed in identified fraud risks and the corresponding policies and procedures.
Cultivate an anti-fraud culture. Strive to foster an organisational culture and governance structure geared towards addressing fraud risk.
Enhance risk assessments. Review and strengthen existing risk assessments, with a specific focus on pertinent fraud risks.
Reinforce policies, controls and training. This includes a comprehensive review of policies and procedures to mitigate identified fraud risks, training initiatives, third-party contractual documentation, oversight of third parties, ongoing monitoring of fraud risk and internal audit programs.
If you’d like help in this area, please get in touch with our team, by contacting us on info@aria-grace.com.
Article by Puja Modha (Partner) and Sarah Davies (Paralegal) – 19 December 2023
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