Following the Economic Crime (Transparency and Enforcement) Act 2022, the new Act further reforms and broadens the scope for corporate criminal liability. It will do this by:
- tackling abuse of corporate structures
- introducing a new corporate fraud offence
- strengthening the powers of law enforcement agencies, and
- making it easier to prosecute corporates for certain financial crimes
The new Act also aims to enhance the UK’s defences against economic crime and contributes to a more robust and accountable financial system by increasing corporate responsibility and transparency in financial transactions.
Purpose
The new Act received royal assent on 26 October 2023 and means:
- The UK’s response to financial crime in deterring criminals from using UK entities to harm the economy is fortified through a new failure to prevent fraud offence, meaning large organisations risk criminal liability, if they do not have reasonable procedures in place and fail to prevent fraud by their employees and agents.
- It will now be easier to prosecute an organisation for many financial crimes, as prosecutors need only focus on the role(s) of a senior manager, rather than the directing mind and will of a company, which was previously the case.
How does this affect you?
If an agent or employee of a large company or corporate body commits a fraud contrary to UK law, or targets UK victims for the organisation’s benefit, it could be prosecuted, even if it is based overseas (or the agent or employee is).
To be a large organisation, a company must meet two of the following three criteria:
- an annual turnover of more than £36 million
- a balance sheet total of more than £18 million
- more than 250 employees
However, secondary legislation could change the threshold at which businesses are excluded, which the government has recognised, meaning smaller businesses are likely to be included in the future. It should also be realised that the senior manager test applies to organisations of any size and not just the corporate failure to prevent fraud offence.
If a company is criminally convicted, it will receive a fine. The maximum fine will be contingent on the particular offence and is unlimited for the most serious crimes. Individuals who are also found guilty of related offences will also have a sentence imposed on them. Businesses will want to take advantage of the ‘reasonable procedures’ defence, so it is important that organisations consider taking the necessary next steps, as the offence may come into force soon after the government’s publication of the guidance.
Further key changes
Companies House – Now has further powers to challenge, question, alter and remove information it holds on the register, thereby improving the accuracy and transparency of the data it administers. This data will be accessible to and shared with other government bodies.
Limited Partnerships – The way the UK administers the registration of limited partnerships with Companies House is changing to add transparency, and introduce a de-registration process as well as sanctions for non-compliance. This is a direct response to address these entities being exploited for fraudulent purposes.
Real Estate Ownership – To better reflect the true ownership of land, the information required on the register of overseas entities and disclosed to Companies House, has increased to include a wider scope of registrable beneficial owners (where trusts and overseas nominees are in ownership structures).
Crypto Assets – The new Act extends civil recovery and confiscation powers so that law enforcement agencies now have the power to seize and recover, or even destroy crypto assets which are the proceeds of crime. The National Crime Agency will have greater powers to compel businesses to produce information regarding money laundering.
Serious Fraud Office (SFO) – As well as taking the lead on the new corporate fraud offence, the SFO can now also compel businesses to produce pre-investigation information about all potential cases it might take on, in addition to suspected overseas bribery.
Next steps
Management should demonstrate top-down commitment by conducting risk assessments for relevant fraud offences such as false representation, failure to disclose information, abuse of position, false accounting, and fraudulent trading.
Internal controls, prevention policies and training programmes should be proportionately developed to demonstrate reasonable prevention procedures exist to combat fraud and accommodate implications of the new offence.
It would be prudent for businesses to take obvious steps such as:
- Bolstering oversight of third-party representatives and related contracts.
- Ensuring appropriate channels and whistleblowing policies are in place for reporting suspicions of fraud,
- along with maintaining comprehensive records of the relevant training provided and to whom.
Those likely to be defined as senior managers (under the modified identification principle) should also be recognised, including those who may not be senior managers under the FCA’s Senior Managers and Certification Regime for example. Consideration should be given to their training requirements in particular, to ensure these managers are fully aware of their increased responsibilities.
Companies should monitor and regularly review the effectiveness of their training and policies to ensure that necessary and proportionate improvements are made when required. Use of data analytics is a valuable tool in addressing this.
Businesses should expect more scrutiny from Companies House and will need to ensure their registered office meets new criteria. Companies will be required to appoint appropriate individuals to file documents and be aware of directors who require identity verification for example. Acting without verification will be considered a criminal offence.
Our Business Crime and Investigations Team is here to assist you with these changes, to ensure their smooth implementation into your business and to minimise any future risks of non-compliance.
