Economic Crime & Corporate Transparency Act 2023

This new law applies to any large body corporate or partnership (referred to for these purposes as a “Relevant Body”) if certain criteria are made out. It essentially means that, if you operate a large business (defined below) and a fraud is committed by a person associated with it, and with an intention to benefit it, then your business will be liable unless it can prove it had reasonable procedures in place to prevent it from happening. A business does not need to have intended or ordered that the criminality happen; it just needs to have failed to stop it from happening.”

We look at the two examples below:

Example 1

• an associate (employee, agent, subsidiary or service provider) of the Relevant Body
• commits a “fraud offence”
• intending to benefit (whether directly or indirectly) the Relevant Body or
• intends to benefit any person to whom the associate provides services on behalf of the Relevant Body including their subsidiaries. In reality this is likely to be the Relevant Body’s customers and clients
• the Relevant Body is a large organisation (see below for the definition).

Example 2

• an employee of the Relevant Body
• commits a fraud offence
• intending to benefit (whether directly or indirectly) the Relevant Body or
• intends to benefit any person to whom the employee provides services on behalf of the Relevant Body including their subsidiaries.
• the Relevant Body is the subsidiary of a large undertaking (see below), even if it does not meet the criteria itself.

The factsheet issued by the Government describes the behaviours it is trying to prevent as “dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets”.

An employee may commit a fraud for their own benefit but if it inadvertently benefits the Relevant Body, the Relevant Body will be guilty of an offence unless it has reasonable procedures in place (see more on this below).

The fraud offences listed in the Act are:

• fraud by false representation (section 2, Fraud Act 2006)
• fraud by failing to disclose information (section 3, Fraud Act 2006)
• fraud by abuse of position (section 4, Fraud Act 2006)
• obtaining services dishonestly (section 11, Fraud Act 2006)
• participation in a fraudulent business by a sole trader (section 9, Fraud Act 2006)
• false statements by company directors (Section 19, Theft Act 1968)
• false accounting (section 17, Theft Act 1968)
• fraudulent trading (section 993, Companies Act 2006)
• cheating the public revenue (common law).

A ‘large undertaking’ for the purposes of the Failure to Prevent Fraud offence means an organisation that meets two of these three criteria:

1. it has more than 250 employees;
2. it has more than GBP 36 million turnover; and / or
3. it has assets of more than GBP 18 million

The Failure to Prevent Fraud offence therefore does not, currently, apply to Small and Medium-sized Enterprises (“SMEs”), except in circumstances where the SME’s parent organisation meets the above criteria.

No, for two reasons.

First, if someone within your organisation commits a fraud offence while providing services to a Relevant Body, the Relevant Body could be liable for that fraud offence unless it has reasonable procedures in place.

It is therefore extremely likely that before a Relevant Body agrees or continues to do business with you, they will ensure that your organisation has procedures in place to prevent fraud. So, we are advising those in that position to start thinking about this now.

Second, it is expected that the Failure to Prevent Fraud offence will be expanded to capture Small and Medium-sized Enterprises in time. This has been a subject of much debate, but the prevailing thought is that it would be unfair to implement this only against larger organisations and not smaller ones.

If the fraud (or part of it) contravenes UK law, targets UK victims or leads to a gain in the UK, the Relevant Body could be prosecuted even if the Relevant Body (and the associate) are not based or even incorporated in the UK.

Yes. Though it requires proactive steps beforehand.

The Relevant Body will have a defence to Failure To Prevent Fraud if it can show that, at the time the offence was committed, it had ‘reasonable procedures’ in place or that it was not reasonable to require them to have any prevention procedures in place. We expect the latter to be difficult to rely upon.

As a result, it will not be necessary to prove that a Relevant Body’s management knew about or ordered the fraud but simply that they did not have the proper procedures in place.

It is also important to note that a Relevant Body will not be guilty of an offence if it is in fact purely the victim of the fraud, or if the associated person acted was solely for personal gain and it was not their intention that the Relevant Body gain from it.

Law enforcement won’t prosecute managers in their personal capacity for Failure to Prevent Fraud. In the event a manager knew what was happening and encouraged the behaviour, there are other offences that they could be prosecuted for but Failure To Prevent Fraud will remain a corporate offence.

The penalty for Failure To Prevent Fraud is an unlimited fine. A prosecution for this offence has other potential consequences such as affecting your chances of obtaining business insurance, or of winning contracts, particularly public sector contracts.

Deferred Prosecution Agreements are available for this offence. This is an opportunity for a Relevant Body to avoid prosecution by entering into an agreement with law enforcement. However, these are difficult to secure and require significant work and negotiation with law enforcement, resulting in them being a costly way to avoid prosecution.

We anticipate that there will be an increase in private prosecutions (where non law enforcement individuals or entities bring prosecutions for criminal offences) as this offence makes it far easier to establish corporate liability than the pre-existing law.

Use this checklist:

• Have you conducted an audit to identify all associates that may place your business at risk?
• Have you identified the ways in which your business may be at risk of a fraud offence being committed?
• Do you have reasonable procedures in place to prevent fraud?
• Have you provided training to all members of staff?