Following our recent article covering the latest updates on the Economic Crime and Corporate Transparency Act, the Parliamentary ping-pong has concluded and the Bill received Royal Assent today (26 October 2023).
We have been tracking the legislation's evolution and engaging with policymakers on its development. We will continue to do so as the important work of consultation on appropriate Guidance (explaining the steps that organisations should take to avoid liability under the new offences) begins.
Our view is that the voice of business was missing from the development of the legislation (which all happened rather quickly). Therefore, over the summer, we surveyed 1,000 senior managers to assess their awareness of the new legislation and their business' current attitude towards fraud.
It is clear to us that, in addition to the new offences, the wider policy changes signify a shift in the UK's fraud prevention and response culture.
The purpose of this article though is to delve into the detail of the two new key offences. Those offences are:
- The offence of Failure to Prevent Fraud
- Corporate criminal liability for economic crimes of employees
The Failure to Prevent Fraud Offence
The long-awaited failure to prevent fraud offence (at section 198 of the Act) is based on the model of corporate criminal liability first adopted in the Bribery Act 2010 and later used for the tax evasion offences contained in the Criminal Finances Act 2017. However, the failure to prevent fraud offence certainly does not cover everything that one may assume. For instance, the scope of the offence is not broad enough to capture all facilitators of fraud or to cover money laundering; the Government having rejected various wider proposals from the Lords.
The key aspects of the offence's application are as follows:
- The offence only applies to corporations or partnerships which meet the "large organisation" criteria (or, in the year of the offence, a subsidiary undertaking (as defined in the Companies Acts) with a large organisation as its parent body) (the "Relevant Body").
A "large organisation" is one that meets at least two of the following conditions in the financial year preceding the offence:
- Turnover of more than £36m;
- Balance sheet of more than £18m;
- More than 250 employees.
- The predicate fraud in question must be an offence as listed in schedule 13 (which includes most common fraud offences) and is committed (or is aided, abetted, counselled or procured) by an associate of the Relevant Body:
- An "associate" of the Relevant Body is a person who is:
- An employee, agent or a subsidiary undertaking; or
- A person who performs services for or on their behalf (which 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); or
- An employee of a subsidiary undertaking (but not someone performing services on its behalf).
- The Relevant Body is guilty of an offence if the associate commits a fraud intending to directly or indirectly benefit either the Relevant Body or any person (or subsidiary undertaking) to whom the associate provides services. If the offence continues over a period, the offence is considered to have occurred on the last day that it was continuing.
- However, the Relevant Body is not guilty of an offence if: (i) the benefit intended to be conferred by the fraud was to a person (or a subsidiary undertaking) to whom the associate provides services (i.e. not the Relevant Body); and (ii) the Relevant Body was (or was intended to be) a victim of the offence.
- The Relevant Body also has a defence if it can prove that during the time of the offence: (i) the body had in place such prevention procedures (meaning "procedures designed to prevent persons associated with the body from committing fraud offences") as it was reasonable in all the circumstances to expect the body to have in place; or (ii) it was not reasonable in all the circumstances to have any prevention procedures in place. The government must issue guidance on prevention procedures before the offence becomes enforceable.
- A Relevant Body guilty of an offence is liable for an unlimited fine. These could be significant given the size of previous fines for money laundering control failures or failure to prevent bribery (e.g. NatWest and Santander were fined £264.8m and £107.7m respectively for money laundering control failures and Petrofac was fined £47m failing to prevent bribery).
Corporate criminal liability for economic crimes of employees
Section 195 of the Act seeks to address the perceived imbalances in the UK's existing corporate criminal liability regime as highlighted by the Law Commission in 2022 by exposing organisations to liability in circumstances where senior employees are found to have been involved in committing an offence.
The Law Commission's report was fuelled by the difficulties faced by the Serious Fraud Office in various high-profile prosecutions in which senior officers of large companies failed to be considered as the "directing mind and will" of their respective organisations.
- For liability to arise under this new offence there must be a senior manager of a body corporate/partnership who commits (or attempts, conspires, aids, abets, counsels or procures) an offence as listed in schedule 12. This includes a wide range of offences relating to theft, fraud, tax, terrorism, forgery, false accounting, as well as offences under the Financial Services and Markets Act 2000 and the Proceeds of Crime Act 2002):
A "senior manager" is an 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 or partnership are to be managed or organised; or
- The actual managing or organising of the whole or a substantial part of those activities.
How does this contrast with the Senior Managers Regime definition?
- The Senior Managers Regime (by which the FCA and PRA approve individuals as senior managers) has its own definition of this category. The FCA defines senior managers as "the most senior people in a firm with the greatest potential to cause harm or impact upon market integrity". Examples of Senior Management Functions include executive directors of regulated firms and responsibility for FCA and money laundering compliance.
- Therefore, the Act's new definition suggests the key aspects are decision-making and managing or organising the organisation's activities in contrast to the FCA definition which specifies general decision-making and responsibility for compliance and financial services regulation.
- The offence must be committed by the senior manager "acting within the actual or apparent scope of their authority" and there is no specific defence to this offence so the organisation must focus on the senior manager's activity/authority.
- The offence can be carried out in the UK or elsewhere (provided it is an offence in that other jurisdiction) and there is no need for the offence to directly or indirectly benefit the organisation.
How we can help
The introduction of the new corporate offences and potential liability under the draft legislation promises to have a significant impact on organisations and their risk exposure. We will continue to closely monitor the Act's progress and keep our clients and contacts updated accordingly. Please do view the findings of our surveys in the full report here. If you have any questions or concerns, please contact a member of our expert Fraud team.