Economic Crime and Corporate Transparency Act 2023

The Economic Crime and Corporate Transparency Act (the “Act”) received Royal Assent on 26 October 2023 following various amendments in the houses of Parliament. The Act includes provisions allowing Companies House to play a more active role in tackling economic crime and promoting corporate transparency. Amongst those provisions, is the introduction of the new failure to prevent fraud offence contained in sections 199-206, which was subject to continuous debate and multiple amendments during the Act’s progression through Parliament.

Failure to Prevent Fraud

The new failure to prevent fraud offence extends liability to an organisation when an associated person commits a specified offense for the organisation’s benefit, unless the organisation can show it had in place reasonable fraud prevention procedures. This is a strict liability offense, and the potential penalty is an unlimited fine.

The offences which businesses will be criminalised for failing to prevent are:

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

Despite debate as to its scope, the new offence only applies to “relevant bodies” which have been defined as “large organisations”. These large organisations include any entity that satisfies at least two of the following requirements in the financial year preceding the year of the fraud:

1. a turnover exceeding GBP36 million;
2. an annual balance sheet exceeding GBP18 million; and
3. over 250 staff.

If a business currently meets two of the three criteria in the Act, the new offence now applies. Small and medium sized enterprises are therefore outside the scope of the Act. However, these businesses should continue to assess their ability to comply with the Act, as a power has been reserved for these requirements to be updated or even removed.

While the offence is considered to be a strict liability offence the act allows for two defences. In particular, that an organisation had in place such prevention procedures as it was reasonable in all the circumstances to expect the body to have in place. The Act also provides as a defence that it was not reasonable, in the circumstances, to expect the organisation to have any prevention procedures in place. However, as a practical matter, it is unclear in what context this defence would be available.

Corporate Criminal Liability

In addition to the new offence, which only regulates the 0.5% of business in the UK which meet the definition of “large organisations”, the Act alters the level at which employees of all business can have their criminal actions attributed to the business. Under section 196 of the Act, “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.” Whereas previously, criminal liability could only be attributed to a business for the actions of that business’ “directing mind and will”, this amendment significantly lowers that standard such that prosecutors will have a wider remit to be able to prosecute businesses for the actions of their employees outside of the board room.

What to do now

While the offence of failing to prevent fraud will not come into effect until the Government has published guidance on the offence and what reasonable prevention procedures might look like, it is important for businesses to start looking at their operations and how associated persons may commit fraud for its benefit. Furthermore, given the broader scope for employees to bring criminal liability onto employers for their own criminal activities, it is imperative for businesses of all sizes to consider their compliance procedures and take advice on how best to limit their risk of criminal prosecution from employee misconduct.