The fight against economic crime in England is about to get a significant boost with the implementation of the Economic Crime and Corporate Transparency Act 2023 (ECTA). This landmark legislation, which received Royal Assent in October 2023, aims to tackle two key areas: strengthening law enforcement’s tools to combat economic crime and increasing transparency around corporate ownership and structures.
4 key things directors need to know about the new laws
· New Offence of “Failure to Prevent Fraud”: Businesses could face liability if they fail to implement adequate measures to prevent fraud by their employees or associated parties. This will hold companies accountable for creating an environment conducive to wrongdoing.
· Simplified Test for Corporate Criminal Liability: Prosecuting companies for economic crimes will become easier with a clarified test focusing on the “identification, prevention, and detection” of criminal activity within the company.
· Enhanced Powers for Law Enforcement: Authorities such as the Serious Fraud Office gain new powers to investigate suspected economic crime, including obtaining information and freezing assets (including the seizure and recovery of cryptoassets).
· Additional powers for Companies House: Companies House, the UK’s registrar of companies, will have stronger powers to help prevent the creation of fraudulent companies, as well as shutting down sham organisations.
Impact and Significance
The ECTA represents a significant shift in the UK’s approach to economic crime. It is expected to deter criminal activity, improve prosecution rates, and enhance financial transparency.
ECTA extends significantly beyond bribery and the facilitation of tax evasion to a broad range of economic crimes. Parent company liability is also substantially greater than under the Bribery Act 2010. These reforms have resulted, in part, from lobbying by the Serious Fraud Office (SFO). It is likely that corporate criminal enforcement will become a key focus for the SFO.
The failure to prevent an economic crime offence applies to all sectors and UK-incorporated bodies or foreign-incorporated bodies that carry on a business or part of a business in the UK, subject to them meeting two or more of the following thresholds either individually or, with respect to parent companies, where the subsidiaries in aggregate meet the statutory thresholds: a turnover of more than £36m; a balance sheet total of more than £18m; and/or more than 250 employees.
Insofar as the additional powers for Companies House are concerned, Companies House is currently required by law to accept information if it is “properly delivered” and has limited powers to correct or query information where there is a suspicion that something submitted is erroneous or fraudulent. The Government is introducing a new power to enable Companies House to reject and query new filings, as well as to query information already on the register, where information is identified as potentially fraudulent, suspicious, or might otherwise impact on the integrity of the register or wider business environment. The new power allows the Registrar to compel a person to provide information so the registrar can make a determination about the queried filing.
If an entity fails to respond to a query from Companies House, or fails to provide sufficient evidence in its response, the Registrar will be able to take a number of actions, including imposing sanctions. A failure to respond to a notice will be an offence.
As with other broad and significant corporate law changes, such as GDPR, it will take some time to see how the new laws are interpreted and enforced in practice, and in how the law will work when in some situations collaboration with other countries will be needed to combat cross-border financial crime
Defence
It will be a defence to the failure to prevent economic crimes offence if the company can prove that it had reasonable prevention procedures in place, or that it was not reasonable in all the circumstances to expect it to have ha Comd any procedures in place. The offence will come into force when the UK government publishes statutory guidance on the reasonable procedures organisations should consider putting in place.
It is anticipated that the Government’s guidance will follow the “six principles” recommended by existing statutory guidance in relation to legislation concerning anti-bribery and the prevention of tax evasion.
The six principles are:
(i) top-level commitment;
(ii) a documented risk assessment;
(iii) proportionate procedures;
(iv) due diligence;
(v) communication and training; and
(vi) monitoring and review.
As the economic criminal offences under ECTA are fairly extensive in range, the six principles will probably need to be adapted. Organisations which are caught by the ECTA thresholds referred to above should already be considering their reasonable prevention procedures and have a compliance plan in place.
An early risk assessment will be key to informing the executive management team of which reasonable procedures need to be in place.
