The Economic Crime & Corporate Transparency Act

On October 26, 2023, the Economic Crime and Corporate Transparency Act (ECCTA) was enacted.

The ECCTA will substantially affect doing business in the United Kingdom (UK) and beyond, with an impact that has not been seen since the UK Bribery Act 2010. The law reinforces and enhances the legal arsenal to fight corporate crime.

Failure to prevent fraud offense

For many global organizations, the UK Bribery Act was the most stringent legislation they were exposed to when doing business in the UK. With its extra-territorial reach, the law quickly took a high priority in the compliance world. The UK Bribery Act of 2010 was the first to adopt a “failure to prevent” corporate criminal liability. It does not matter whether the company was aware of the bribery misconduct; it is sufficient to demonstrate that the company failed to prevent the illegal activity to initiate a liability case. The only defense is to have robust and effective compliance procedures and controls in place.

Section 199 of the ECCLA takes the principle beyond the bribery offenses, instituting a more generic “Failure to prevent Fraud” offense. This includes broader acts benefiting the company than Bribery (UK Bribery Act of 2010) or Tax evasion (Criminal Finances Act of 2017). The applicable crimes are listed in Schedule 13, “Failure to prevent fraud: fraud offenses” and include:

• Cheating the public revenue

• False accounting (Section 17 of the Theft Act of 1968)

• False statements by company directors (Section 19 of the Theft Act of 1968)

• Fraudulent trading (section 993 of the Companies Act of 2006)

• Fraud by false representation (Section 1 of the Fraud Act of 2006)

• Fraud by abuse of position (Section 1 of the Fraud Act of 2006)

• Fraud by failing to disclose information (Section 1 of the Fraud Act of 2006)

• Participation in a fraudulent business (Section 9 of the Fraud Act of 2006)

• Obtaining services dishonestly (section 11 of the Fraud Act 2006)

Anyone aiding, abetting, counseling, or procuring the commission of a listed offense is committing an offense. Such areas could also be expected to cover fraud in emerging topics, such as ESG and greenwashing.

The new law recognizes a defense to prove that, when the fraud offense was committed, the entity had such prevention procedures as it was reasonable in all the circumstances to expect to have in place. Per the law, “Prevention procedures” are “procedures designed to prevent persons associated with the body from committing fraud offenses.”

Currently, the “failure to prevent fraud offense” only covers organizations or their parent companies that satisfy two criteria out of three: more than 250 employees, more than GPB 36 million turnover, and more than GBP 18m in total assets. However, it should not be excluded that in the future, the scope could be extended to other organizations of a smaller size.

Nevertheless, smaller companies would still need to seriously consider complying with this law and review their anti-fraud measures and programs, especially if they are agents or subsidiaries of large organizations covered by the law.

Senior Management test

Furthermore, the ECCTA significantly lowers the bar to initiate cases by referring to the concept of senior management amending the old “identification doctrine” principle, which is the legal concept in English law that allows companies to be liable for the acts of their agents. Under the identification doctrine, companies can be found responsible for acts committed by individuals representing the corporation’s “directing mind and will.” The doctrine was significantly challenged when applied to large organizations with complex management structures and diffuse responsibilities.

Section 196 of the ECCTA, refers instead to a“Senior Manager” acting within the actual or apparent scope of authority committing a relevant offense or attempting to or conspire to commit such an offense. As enforcement progresses over the upcoming years, regulators and courts could further clarify the “Senior Management” concept; however, it undeniably includes a larger group of individuals whose acts may make their corporation liable than under the “identification doctrine.”

In all cases, such concept adjustments are expected to make the prosecution of corporate crime more effective in the UK when the law becomes effective (after the implementation of secondary regulations by the end of the year 2024).

Companies that fail to comply with the ECCTA risk unlimited penalties, while managing officers of foreign companies may risk fines and up to five years in prison.

Conclusion:

More than ever, global organizations exposed to the UK laws and regulations must review their Fraud Risk Management (FRM) programs. Large entities must ensure that themselves and the persons performing services for or on their behalf, including those based overseas, have adequate anti-fraud procedures that are reasonably effective to prevent fraud and constitute an acceptable defense.

BAK Global Risk Management help organizations design and implement adequate fraud risk management programs to prevent, detect, and deter fraud. We also provide assurance and fraud investigations services to organizations in the private, public, and non-profit sectors. To know more about our services, visit us at bak-grm.com and book your free consultation now.

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