Economic Crime and Corporate Transparency Act 2023: Royal Assent for failure to prevent fraud and reform to Corporate Criminal Liability

The Economic Crime and Corporate Transparency Act 2023 (“ECCTA”) received Royal Assent on 27 October 2023. 400 days after the introduction of the Bill, and some 52 years after the case of Tesco v Nattrass set narrow limits on common-law corporate criminal liability, ECCTA has now triggered an enormous expansion in the risk of criminal prosecution for companies. The second in a planned trilogy of Economic Crime Acts, following the introduction of the Economic Crime (Transparency and Enforcement) Act 2022, it is the first in the series to implement long debated, serious changes to corporate criminal law in the UK.

Described as a “game changer for law enforcement” by the previous head of the UK’s Serious Fraud Office (“SFO”), the new reforms mean that “large companies” can be found guilty for the fraudulent conduct of employees, subsidiaries and “agents”. Companies of all sizes can, from 27 December 2023, be prosecuted for the fraudulent actions of their “senior managers”, whether or not directors were aware, regardless of who was the victim.

We outline the key reforms below:

Failure to Prevent Fraud

1. The offence

• A "relevant body" will face criminal liability when an associated person (e.g., employees, agents or subsidiaries);
• Commits one or more specified offences;
• With the intent to benefit the organization.
• Conviction may result in an unlimited fine
• Applies to:
  • "large organisations," meeting two of the following criteria:
  • Turnover exceeding £36 million
  • Total assets exceeding £18 million
  • Over 250 employees on average
  • Individuals within the “large organisation” who “consent or connive” in the commission of the fraud.
• In scope:
  • all sectors and “bodies corporate”, including charities;
  • certain acts done abroad;
  • companies wherever incorporated in the world;
  • parent companies where the fraud is committed by the employee of a subsidiary;
  • where resources held across a parent company and its subsidiaries cumulatively meet the size threshold, that group of companies will be in scope of the failure to prevent fraud offence.

2. Defence of Reasonable Procedures; Exemptions 

• It will be a defence to have in place “such prevention measures as it was reasonable in all the circumstances to have in place”, being “procedures designed to prevent persons associated with the body from committing fraud offences”.
• Companies will be exempt from prosecution if the organization is the actual or intended victim of the fraud.
• Companies which fall below the “large organisation” threshold are exempt.
• Guidance will be published before the new offences comes into force which as to what would be considered reasonable fraud prevention procedures, with the stated aim of “clarifying the expectations on business.”

3. Relevant “Failure to Prevent Fraud” Offences:

• ECCTA brings into the scope of the Failure to Prevent Fraud offence nine separate fraud-type offences;
• Failing to prevent the aiding, abetting, counselling or procuring the commission of any one of the offences can be prosecuted;
• The list of in-scope offences may be expanded by secondary legislation. It could, in future, include money laundering offences, dishonesty offences and offences that are “similar in character” to those already listed.

4. Expansion of SFO pre-investigation powers

• Under ECCTA, the SFO will obtain significant new pre-investigatory powers.
• Wide ranging powers to compel companies to produce information before a formal SFO investigation has commenced, previously limited to bribery investigations, will now extend to the nine offences to which the new failure to prevent fraud offence applies.

Senior Managers and the Attribution of Criminal Liability to Companies

5. The reforms

• ECCTA displaces the common law of the past 52 years in respect of listed fraud offences, making companies criminally liable if a "senior manager" commits an offense within their authority or encourages it.
• The scope is not limited to large organizations and applies to specified economic crimes.
• The “reasonable procedures” defence will not apply.
• The exemption for companies which are the actual or intended victim of the crime will not apply.
• It is the stated aim of the government to extend this policy to all criminal offenses in the future.

6. Who is a "Senior Manager"?

• ECCTA defines a senior manager as an individual who:
  • Organises, manages or decides about how the “whole or a substantial part” of the business is “to be managed or organised”;
  • Is not restricted by job title, nor by the definition of “senior manager” in other regulatory schemes;
  • Will be determined case by case, on the basis of their role and responsibilities in decision-making or organizational management;
  • Does the relevant criminal act in the “actual or apparent” course of their duties.

7. Enforcement and Resource Challenges:

• Effective enforcement of these reforms is crucial, with significant pressure on enforcement authorities.
• Fraud constitutes a substantial portion of all UK crime.
• Enhanced action necessitates increased funding, a challenge given the constraints on agencies' resources.

8. Prospects for Future Legislation:

• Discussions during the Commons debate hinted at a potential third economic crime bill to address unresolved aspects, including trusts, corporate service providers, whistleblower regimes, and asset seizure reforms.
• ECCTA had strong cross-party support: further legislation can be expected from future governments from across the political divide.

What next?

9. When is it in force?

• The “Senior Manager” regime will come into force on 27 December 2023.
• The majority of ECCTA’s substantive provisions will be enacted by Statutory Instruments, warranting close monitoring of progress.

10. Mitigation and Prevention

• The impact and necessity of new policies and procedures should be considered by business organisations, and close attention paid to reforming and enhancing existing policies and procedures in line with the new law.
• Notwithstanding the size limitation of the failure to prevent fraud offence, SMEs should assess the implications of the “Senior Manager” route to criminal liability, with a particular focus on the identification and training of those who would be deemed “senior managers”.

11. Other reforms

• Introduced for the purpose of forming “a key part of the wider government approach to ensure that law enforcement and the private sector have the tools needed to help tackle economic crime, including fraud and money-laundering”, the Act is a showcase piece. It includes reforms of Companies House and the administration of limited partnerships, additional powers to seize cryptoassets, new intelligence gathering powers for law enforcement and additional powers to tackle money laundering and economic crime.
• These new powers will resonate across sectors and international borders.
• Critical amongst those reforms will be amendments to Parts 2, 3, 4, 5, and 8 of the Proceeds of Crime Act which will mean that criminal, civil, and supplementary investigative powers will apply to cryptoassets in the same way they currently do to cash and listed assets. Law enforcement will be able to:
  • seize, store, sell or destroy cryptoassets as part of investigations at speed, whereas previously assets might have remained in the possession of suspects, vulnerable to dissipation;
  • impose criminal and civil seizure and recovery orders on platforms suspected of moving or storing cryptoassets related to criminal activity.
• Amongst the additional reforms are: more stringent regulation of company administration; heightened powers of criminal law enforcement for Companies House.

For more information, contact your Relationship Partner and follow CMS Law Now for updates on the implications of ECCTA for corporate transactions, real estate, crypto assets, and an in-depth discussion of the reforms in our specialist Law Now of 21 April 2023