The Situation: After a year of debate, the Economic Crime and Corporate Transparency Act (the "Act") was passed into law on 26 October 2023.
The Result: Amongst a number of other developments, the Act introduces a new offence of failure to prevent fraud, under which larger corporates may be held liable for frauds perpetrated by employees and certain other individuals for the benefit of the company. The Act also brings long-awaited changes to the "identification principle" by which corporates are found liable for offences committed by individuals.
Looking Ahead: The Act, combined with the commencement of Nick Ephgrave's tenure as Serious Fraud Office director, may herald a new era of corporate investigations and prosecutions. Changes to the identification principle mean corporates will need to ensure they have sufficient internal systems in place to mitigate the risk and potential liability arising from both the new offence and those already on the statute books.
On 26 October 2023, almost exactly a year after then-Government Minister Robert Buckland told an audience in London that the United Kingdom was looking to change the rules governing corporate criminal liability, the government passed the Act, doing just that.
The Identification Principle
Perhaps the biggest shift in the legal landscape introduced by the Act, and the one which should make it far easier for prosecutors to advance claims against corporates (and achieve financial resolutions), is a revised test for attributing criminal liability for economic crimes to corporates.
Previously, prosecutors relied upon the so-called "identification principle", under which it was necessary to establish that accused individuals constituted the "directing will and mind" of the company. Prosecutors and commentators alike have long complained that the old law was out of step with modern corporate realities, leading to near impossibility in attributing criminal liability to large corporates with complex management and organizational structures, as evidenced by the historical difficulties faced by the Serious Fraud Office in securing corporate convictions.
Under the Act, corporate criminal liability instead rests on the actions of "senior managers", a term which is defined broadly to include any individual who plays a significant role in "the making of decisions about how the whole or a substantial part of the activities of the body corporate ... are to be managed or organized ... or the actual managing or organizing of the whole or a substantial part of those activities".
The definition of "economic crimes", as set out at Schedule 12 of the Act, is broad and encompasses a wide range of common law and statutory offences, including those under the Theft Act 1968, Fraud Act 2006 and Bribery Act 2010.
With this new development, prosecutors may feel empowered to bring proceedings against corporates alleged to have committed economic crimes in circumstances where, under the previous law, they would not have done so.
Failure to Prevent Fraud
The Act was passed after the Lords abandoned their opposition to the small-medium enterprise, or SME, exemption to the new failure to prevent fraud offence, which means the new offence applies only to "large organisations", being those with (i) more than 250 employees, (ii) more than £36 million in turnover or (iii) £18 million in assets.
The new offence is presented in much the same form as existing failure to prevent offences introduced under the Bribery Act 2010 and the Criminal Finances Act 2017, and will enable prosecutors to find companies liable for fraud offences perpetrated by employees and other associated individuals for the company's benefit. Corporates won't find themselves in prosecutors' crosshairs where the corporate itself was the actual, or intended, victim of the relevant fraud offence. As with other failure to prevent offences, companies will be able to rely on the existence of reasonable prevention procedures as a defence to the new offence.
The offence will come into force following publication of guidance by the secretary of state in relation to the implementation of reasonable fraud prevention procedures.
The Act will also bolster Companies House, the UK's corporate register, to enhance its role in combatting fraud and other economic crime. This includes new measures to verify the identities of company directors and people with significant control, as well as increased investigative and enforcement powers.
Three Key Takeaways
- The new legislation will make it easier for UK prosecutors to prosecute corporations for economic offences committed by employees and other associated individuals for the company's benefit.
- Companies can mitigate the risk of criminal liability by ensuring they implement and maintain reasonable fraud prevention procedures, including through appropriate training of employees. The government will publish guidance on this ahead of the new offence entering into force, though it is likely that reference can be taken from existing guidance with respect to other failure to prevent offences.
- Companies House reforms will enhance the corporate register's ability to combat fraud and economic crime by increasing corporate transparency and increasing the register's investigative and enforcement powers.
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