What is this about?
The Economic Crime and Corporate Transparency Act 2023 (“the Act”) has now been passed by the UK Parliament, some provisions of which are now in force (as at the date of this article) whilst others will come into force later (some sooner than others). This article looks at some select highlights of the Act with a focus on the new offence of failure to prevent fraud.
In a nutshell, what’s the Act about?
In brief, the Act seeks to strengthen the UK’s fight against economic crime reform and covers the following:
- Provisions to: strengthen anti-money laundering powers, enabling better information sharing on suspected money laundering, fraud and other economic crimes; expand the powers of the Serious Fraud Office; expand corporate criminal liability to specific economic crimes; and, create a corporate offence of failure to prevent fraud;
- Enhancing the role of Companies House (the UK government agency that maintains the register of companies, employs the company registrars and is responsible for incorporating all forms of companies in the UK) and increases the transparency of UK corporate entities;
- Overhauling in a major way the regulatory framework that applies to limited partnerships;
- Changing the register of overseas entities, such as amending the criminal offences for providing certain false statements to be consistent with other offences; and,
- Providing additional powers to law enforcement so that they are able to more quickly and easily seize and recover cryptoassets which are the proceeds of crime or associated with illicit activity such as money laundering, fraud and ransomware attacks.
What’s new with regard to anti-money laundering?
A number of amendments have been introduced aimed at removing burdens on banks as well as reducing the burden on the National Crime Agency (NCA) in dealing with a large number of so-called “DAML” requests (a regulated firm can ask the NCA for consent or a defence against money laundering to deal with property which would otherwise be an offence under one of the principal money laundering offences). One provision now in force under the Act is as follows: an exemption from the principal money laundering offences where the transfer of money or other property owing or belonging to a customer is for the purposes of terminating that customer relationship, provided the value does not exceed £1,000 and the required customer due diligence has been done. Other provisions relating to money laundering offences are not yet in force, such as the following: enabling regulated firms to share information in the form of a direct disclosure regarding an existing or former customer for the purposes of preventing, detecting and investigating economic crime.
So-called “Information Orders” compel regulated businesses such as banks, accountancy, and legal sectors, who have submitted a statutory disclosure known as a “Suspicious Activity Report” (SAR) to provide further specific information about a client. New powers to assist the NCA with their investigations into money laundering offences have been introduced including empowering NCA officers to proactively use information orders to investigate suspected money laundering offences without the need to wait for a Suspicious Activity Report (SAR) to have been made.
What’s new concerning the Serious Fraud Office (SFO)’s powers?
SFO officers have the ability compel persons to answer questions and provide information and documents. These powers can however only be used once the SFO has formally opened an investigation, for which the Director of the SFO must have reasonable grounds to suspect an offence involving serious or complex fraud, bribery or corruption. Some time ago SFO officers were granted the possibility of using their above-mentioned powers at the pre-investigation phase of international bribery and corruption cases. What the Act does is extend the use of these powers to all cases during the pre-investigation phase. This provision is however not yet in force.
What’s new with regard to sanctions?
In order to prevent sanctioned persons (so-called “designated persons”) under the UK sanctions regime from being able to lead companies, amendments have been made under the Act to UK sanctions rules to allow director disqualification orders to be made on persons “designated” under a UK sanctions regime, and an amendment has been made under the Act to the UK company directors disqualification rules to make it an offence for a person subject to disqualification sanctions to act as a company director. However, these provisions are not yet in force.
What about the expansion of corporate criminal liability for economic offences?
The Act expands criminal liability on organisations for economic offences (the latter are set out in the Act). Specifically, under Section 196(1)&(3) of the Act (“Attributing criminal liability for economic crimes to certain bodies”):
“(1) If a senior manager of a body corporate or partnership (“the organisation”) acting within the actual or apparent scope of their authority commits a relevant offence after this section comes into force, the organisation is also guilty of the offence. This is subject to subsection (3).
(3) Where no act or omission forming part of the relevant offence took place in the United Kingdom, the organisation is not guilty of an offence under subsection (1) unless it would be guilty of the relevant offence had it carried out the acts that constituted that offence (in the location where the acts took place).”
This provision is however not yet in force.
What about failure to prevent fraud?
The Act has created a new corporate offence of failure to prevent fraud and is one of the more significant new features introduced by the Act.
Under Section 199(1)&(2) of the Act (“Failure to prevent fraud”), an organisation (within scope – see below) will be guilty of this new offence where:
(1) “A relevant body which is a large organisation [see definition later below] is guilty of an offence if, in a financial year of the body (“the year of the fraud offence”), a person who is associated with the body (“the associate”) commits a fraud offence intending to benefit (whether directly or indirectly)—
(a) the relevant body, or
(b) any person to whom, or to whose subsidiary undertaking, the associate provides services on behalf of the relevant body.
(2) A relevant body is also guilty of an offence under subsection (1) if—
(a) an employee of the relevant body commits a fraud offence intending to benefit (whether directly or indirectly) the relevant body,
(b) the fraud offence is committed in a financial year of a parent undertaking of which the relevant body is a subsidiary undertaking (“the year of the fraud offence”), and
(c) the parent undertaking is a relevant body which is a large organisation.”
However, under Section 199(4) of the Act:
“It is a defence for the relevant body to prove that, at the time the fraud offence was committed—
(a) the body had in place such prevention procedures as it was reasonable in all the circumstances to expect the body to have in place, or
(b) it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place.”
The definition of an “associate” is fairly wide – under Section 199(7),(8)&(9) of the Act:
“(7) For the purposes of this section a person is associated with a relevant body if—
(a) the person is an employee, agent or subsidiary undertaking of the relevant body, or
(b) the person otherwise performs services for or on behalf of the body.
(8) For the purposes of this section a person is also associated with a relevant body if the person is an employee of a subsidiary undertaking of the relevant body; but for the purpose of determining whether an offence is committed by virtue of this subsection, subsection (1) has effect with the omission of paragraph (b) (and the “or” preceding it).
(9) Whether or not a particular person performs services for or on behalf of a relevant body is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the body.”
A large organisation is defined under Section 201(1) as follows:
“For the purposes of section 199(1) and (2) a relevant body is a “large organisation” only if the body satisfied two or more of the following conditions in the financial year of the body (“year P”) that precedes the year of the fraud offence—
Turnover More than £36 million
Balance sheet total More than £18 million
Number of employees More than 250.”
The offence in question includes all types of fraud and false accounting offences relevant to corporations, including the following:
- Fraud by false representation, under Section 2 of the (UK) Fraud Act 2006;
- Fraud by failing to disclose information, under Section 3 of the (UK) Fraud Act 2006;
- Fraud by abuse of position, under Section 4 of the (UK) Fraud Act 2006;
- Obtaining services dishonestly, under Section 11 of the (UK) Fraud Act 2006;
- Participation in a fraudulent business, under Section 9 of the (UK) Fraud Act 2006;
- False statements by company directors, under Section 19 of the (UK) Theft Act 1968;
- False accounting, under Section 17 of the (UK) Theft Act 1968;
- Fraudulent trading, under Section 993 of the (UK) Companies Act CA 2006.
It should be noted that the failure to prevent fraud offence is a strict liability offence, which can only be committed by corporations, i.e. not by an individual director or senior manager.
Organisations convicted of failure to prevent fraud will be liable on conviction to unlimited fines.
Guidance on this part of the Act will eventually be issued. Under Section 204(1),(2)&(3) of the Act:
“(1) The (UK) “Secretary of State must issue guidance about procedures that relevant bodies can put in place to prevent persons associated with them from committing fraud offences as mentioned in section 199(1)”
(2) The Secretary of State may from time to time revise the whole or any part of the guidance issued under this section.
(3) The Secretary of State must publish—
(a) any guidance issued under this section;
(b) any revision of that guidance.”
The failure to prevent fraud offence is however not yet in force. Under Section 219(1)&(8) (“Commencement”) of the Act:
“(1) Except as provided by subsections (2) to (5), this Act comes into force on such day as the Secretary of State or the Lord Chancellor may by regulations made by statutory instrument appoint.
(8) No regulations may be made under subsection (1) bringing into force section 199 unless the Secretary of State has published guidance under section 204(3).”
With regard to the offence of failure to prevent fraud, to avoid possible prosecution, organisations (within scope) should consider starting to prepare to eventually:
- Have in place reasonable fraud prevention policies and procedures;
- Undertake training on them; and,
- Brief the Board.
We report about anti-bribery and corruption issues here https://www.corderycompliance.com/category/bribery-corruption/.
For our other news please see here https://www.corderycompliance.com/news/.
The UK Economic Crime and Corporate Transparency Act 2022 can be found here: https://www.legislation.gov.uk/ukpga/2023/56/contents/enacted.
For more information please contact Jonathan Armstrong or André Bywater who are lawyers with Cordery in London where their focus is on compliance issues.
|Jonathan Armstrong, Cordery, Lexis House, 30 Farringdon Street, London, EC4A 4HH||André Bywater, Cordery, Lexis House, 30 Farringdon Street, London, EC4A 4HH|
|Office: +44 (0)207 075 1784||Office: +44 (0)207 347 2365|
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