New economic crime legislation

by | May 20, 2024

Claire Hills

Director, Claire Hills outlines the requirements of the new economic crime legislation.

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) was granted Royal Assent on 26 October 2023. There has been widespread press coverage on some of the other ECCTA provisions such as new Companies House enforcement powers (along with increased filing fees to pay for them), verification of directors’ identity and increased accounts disclosure.   However, it also contains a new groundbreaking measure: ‘the Failure to Prevent Economic Crime” criminal offence which will render large companies liable for fraud committed by their employees where the fraud was committed with the intention of benefitting the organisation or those to whom it provides services.  We consider the offence and implications for businesses.

Under this new law, companies can be prosecuted if they fail to prevent their employees, agents, or associated persons from facilitating certain economic crimes, such as bribery, fraud, money laundering, and tax evasion. This places a greater onus on corporations to implement robust compliance measures and due diligence procedures.

The new offence applies widely, with any organisation that meets two of three specific criteria in scope. These criteria are that an organisation has more than 250 employees; an annual turnover that is above £36m and/or has more than £18 million in total assets. A failure to comply with the requirements set out under the legislation could result in an unlimited fine.

The rationale behind this legislation is clear: traditional methods of prosecuting corporations for economic crimes have often proven ineffective, with companies being able to shield themselves behind layers of bureaucracy and plausible deniability. By introducing a “failure to prevent” offence, the UK aims to close this loophole and ensure that companies are actively working to prevent economic crimes from occurring.

One of the key features of the new offence is its applicability to a wide range of economic crimes, reflecting the evolving nature of financial misconduct in today’s globalised economy. Moreover, the legislation adopts a principle of strict liability, meaning that a company can be held accountable for the actions of its employees and associated persons, regardless of whether senior management had any knowledge or involvement in the unlawful conduct.

Critics of the new law have raised concerns about the potential for overreach and the burden it may place on businesses, particularly smaller enterprises with limited resources. However, proponents argue that the benefits of deterring economic crime and promoting a culture of compliance far outweigh any potential drawbacks.

Furthermore, the UK’s move to introduce a “failure to prevent” offence aligns with global efforts to combat corporate wrongdoing and promote transparency in business practices. Similar legislation has been enacted in other jurisdictions, including the United States and Australia, reflecting a growing consensus on the need for corporate accountability in the face of economic crime.

In practical terms, companies can mitigate their risk of prosecution by:

  • implementing robust compliance programs, such as carrying out regular reviews into fraud policies and procedures to ensure sufficient prevention procedures, effective controls and well-designed processes are in place;
  • conducting thorough due diligence on agents, clients, suppliers and targets, including getting advice on appropriate contractual provisions;
  • fostering a culture of integrity and ethical conduct within their organisations; and
  • obtaining crisis response assistance should the worst happen and there is an allegation of failing to prevent fraud, this will provide independent support through the investigation and remediation process.

By taking proactive steps to prevent economic crime, companies not only protect themselves from legal liability but also contribute to the broader goal of building a more transparent and responsible business environment.

If you have any questions relating to the legislation, please contact us.

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