Complying with the Economic Crime and Corporate Transparency Act: what businesses need to do now
Since the UK Government introduced the Economic Crime and Corporate Transparency (ECCT) Bill in September 2022, there has been much debate as to the scope of the proposed legislation and the impact it might have on reducing economic crime and fraud.
The Act has now received Royal assent, adding a significant piece of legislation to help tackle corporate crime, and is expected to come into force by the end of 2024.
One key amendment adopted by the Government was the introduction of a ‘failure to prevent’ fraud offence. Supported by both the Serious Fraud Office and the Crown Prosecution Service, the failure to prevent fraud offence will require organisations to implement ‘reasonable procedures to prevent fraud’ in order to protect the company and its directors from prosecution if a specified fraud has been committed.
What does the new failure to prevent fraud offence cover?
An organisation will be liable under the new offence if a person acting on its behalf commits a specified fraud intending to benefit the organisation or its connected entities, whether directly or indirectly. In other words, this is not about employees or connected parties stealing from the company, but is directed at protecting victims from fraud, be they individuals, customers, suppliers, or other businesses, as well as the taxpayer, all of whom could be left out of pocket as a result of dishonest practices.
The specified fraud offences have been defined as follows: –
- False representation
- Failure to disclose
- Abuse of position
- Obtaining services dishonestly
- False accounting and false statements by company directors
- Fraudulent trading, and
- Defrauding the Revenue
In practice, this means that under the new legislation, employees or connected third parties of companies and affiliated organisations would be committing fraud through activities such as dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets. One other area that has been strongly emphasised by proponents of the Act is the need to address over-charging, false claims and mis-selling to government, examples of which became only too apparent during Covid and are all addressed by the proposed amendment.
Who will be covered by the new offence?
The new offence applies to specific organisations, with smaller entities and SMEs currently exempt. Consequently, the law will only apply to large corporates, defined as those with two of the three following three criteria :-
- more than 250 employees,
- more than £36 million turnover, and/or
- more than £18 million in total assets.
Like the Bribery Act, the penalty for conviction could lead to an unlimited fine for the prosecuted organisation. In deciding the appropriate level for a particular case, the courts will take account of all relevant circumstances. It is also worth noting that to strengthen enforcement, the Act proposes enhanced powers for both the Serious Fraud Office and the Solicitors’ Regulation Authority.
Why is the Act being introduced?
Faced with growing calls to tackle fraud more robustly, this Act forms part of the government’s three-year economic crime plan. The aim is to improve fraud prevention and protect victims, addressing the fact that fraud is the most common offence in the UK, amounting to 41% of all crime in the year ending September 2022.
The new offence was strongly pushed by the Serious Fraud Office and supported by the Law Commission. They take the view that current laws, and the UK Bribery Act in particular, are too narrowly drawn and make it difficult to prosecute companies that behave fraudulently.
In the Government’s various speeches about the Bill during its transition through Parliament, the emphasis was on strengthening corporate culture and encouraging good practice, with a particular focus on improving fraud prevention procedures within organisations.
Adequate procedures to prevent fraud
Guidance on the Act will be published in due course and is likely to be similar to the ‘adequate procedures’ logic of the UK Bribery Act 2010. As such, GoodCorporation expects that this will focus on:
- Top level commitment – management is serious about honest dealings and sets out a clear tone to prevent fraud, corruption or any form of behaviour that might deliberately mislead
- Risk assessment – ensuring that the organisation evaluates its operations, considers where these risks of fraud might occur in the organisation and ensuring that suitable controls and mitigation are put in place
- Training and communications – the relevant employees and third parties are trained so they understand how they are expected to behave. Correct training should help employees and other stakeholders to understand and properly implement controls. It will also be necessary to develop regular supporting communications to set the right tone.
- Due diligence – to make sure that in any transaction, the organisation engages with legitimate third parties and any risks of fraud in the transaction, or resulting from the new relationship after the transaction (e.g. a new business partner) do not lead to fraud.
- Proportionate procedures – to ensure that controls are in place in the key functions of the company to prevent fraudulent behaviour by employees and other agents. Reading the aims of the Bill, these procedures should probably cover the following topics:
- Sales – avoiding any risks of false claims, mis-selling, fraudulent advertising, unfair sales practices, phishing, market manipulation
- Procurement – not selecting suppliers and business partners that might act as an agent to commit fraud; using illegal or corrupt means to purchase goods and services that would not be normally obtainable or at a price that is undue; not paying suppliers for goods and services properly received
- Human resources – hiring people who have committed fraud, allowing conflicts of interest that encourage fraud, using politically connected people to obtain government deals that are undue
- Finance – ensuring proper books and records, correct reporting, documented and clear controls
- Government interactions – clear tax policy, paying the correct taxes, false claims to government, overcharging, using deception to obtain government contracts.
- Monitoring and compliance – ensuring that the company has its own processes to monitor its policies and procedures to prevent fraud, including an adequate ethics/compliance function and a strong speak-up system.
In practice, businesses should review their current policies and procedures against these criteria to ensure they can evidence clearly that they have adequate procedures in place to prevent fraud. In the longer term, these procedures are likely to be amalgamated within a company’s wider integrity programme which is likely to encompass failure to prevent corruption, tax evasion and fraud as one combined set of measures.
Irrespective of the fine detail, organisations can usefully prepare ahead of the guidance being published by reviewing the effectiveness of their current fraud prevention procedures. GoodCorporation’s framework on preventing fraud and fraudulent behaviour provides a useful checklist. Click the button below to download a copy or contact us to find out more about our fraud prevention services.