Explaining 'ECCTA' and the impact on customers
In light of the new Economic Crime and Corporate Transparency Act 2023 (“ECCTA”), which received Royal Assent on 26 October 2023, this note explains some of the upcoming changes it intends to make which may have an impact for our customers.
The ECCTA facilitates the transformation of Companies House, provides new investigation and enforcement powers to law enforcement, introduces a new corporate offence of the failure to prevent fraud and amends how corporate criminal liability can be established. Most of the measures will be implemented through secondary legislation, providing companies and Companies House time to prepare.
The changes by ECCTA will likely create significant extra administrative work for government organisations such as Companies House and the Serious Fraud Office. We are yet to see how this will impact the services provided, given there may be limited resources available within those organisations.
The changes made by ECCTA may have an impact on our customers who have Directors & Officers Insurance or Civil Liability Insurance with us.
Changes to Companies House
The ECCTA introduces measures that will deliver significant changes to Companies House, with the aim of improving transparency over UK companies, partnerships and other entities to deliver a more reliable companies register. This will include the introduction of identity verification for all new and existing registered company directors, People with Significant Control and those delivering documents to the Registrar. This aims to improve the accuracy of Companies House data and aid law enforcement investigations.
To facilitate a more accurate register, the Registrar of Companies House’s powers will be broadened, giving them new powers to check, remove or decline information submitted to or already on the companies register. Companies House will also have effective investigation and enforcement powers and allow them to proactively share information with law enforcement bodies where they have evidence of anomalous filings or suspicious behaviour. There will also be better cross-checking of data with other public and private sector bodies.
New Investigation Powers
The overarching purpose of the ECCTA is to prevent criminals from abusing our financial system. The ECCTA gives the National Crime Agency and Serious Fraud Office (“SFO”) additional powers to compel businesses and individuals to provide information. In the case of the SFO, where they previously could only use their pre-investigation powers in limited circumstances, they can now use their pre-investigation powers in relation to all potential SFO cases.
Nick Ephgrave, director of the SFO, has stated that the ECCTA is “the most significant boost to the Serious Fraud Office’s ability to investigate and prosecute serious economic crime in over 10 years” and the SFO “welcome the expansion of [their] search powers, which will help speed up [their] investigations.”
Given the increased abilities to investigate, it seems possible that there may be a higher level of SFO investigations. These investigations can be extremely costly for organisations to deal with and respond to.
The New Offence – Failure to Prevent Fraud
The ECCTA also establishes a new offence called the “failure to prevent fraud.” This provides that a “relevant body” will be criminally liable where an associated person (an employee, agent or subsidiary undertaking of the relevant body or person performing services on behalf of the body) commits a fraud intending to benefit the organisation, and the organisation did not have reasonable procedures in place to prevent the fraud offence. Crucially, the prosecutor will not need to demonstrate that the organisation’s leaders authorised the fraud or even had knowledge of it. The consequence for a conviction is an unlimited fine.
The ECCTA contains a list of the fraud offences that are within the scope of ECCTA, which can be amended by the Secretary of State at any time. The list currently includes core common law and statutory fraud offences.
The offence applies to “relevant bodies” only, which are defined as “large organisations” in any sector. To be a “large organisation,” at least two of the following requirements in the financial year preceding the fraud offence must be met:
- Turnover of more than £36m;
- Balance sheet total of more than £18m;
- More than 250 employees (on average).
Given these requirements, small to medium sized businesses are currently exempt from this new offence, although the legislation provides the Secretary of State the power to modify the above requirements to alter the meaning of a “large organisation.” It may be that the scope of this definition is widened in the future to include smaller organisations.
Organisations should consider their current procedures that are intended to prevent fraud by their agents and satisfy themselves that they are reasonable. If they consider that their current procedures are not reasonable, they should seek to amend these as soon as possible.
Changes to Identification for Corporate Criminal Liability
The ECCTA seeks to make it easier to prosecute a company for criminal misconduct by changing how corporate criminal liability is established for certain economic crime offences. Prior to the ECCTA, the test for identifying a company’s criminal liability was to assess whether the wrongdoer was the “directing mind and will” of a company. Under the ECCTA, it will not be necessary to show that anyone who had the “directing mind and will” of the company was involved at all in the offence. A company or unincorporated partnership can be guilty of an offence if a “senior manager” commits an offence whilst acting within the actual or apparent scope of their authority. These changes are applicable to all organisations, not just large organisations.
These changes are likely to lead to uncertainty as to who is to be considered a “senior manager” for these purposes, as the ECCTA focusses on the actions of the senior manager rather than the job title. It appears likely that these changes could lead to a wider scope for corporate criminal liability. Allied to this, for individuals involved and implicated in any formal investigations and in possibly defending allegations of an offence being committed by them (and the company ultimately), this is likely to result in significant legal representation expenditure and associated costs.
Concluding Thoughts
The changes made by the ECCTA could result in higher levels of SFO investigations and proceedings relating to fraud and corporate liability. Organisations should carefully consider the procedures that they have in place to prevent fraud including their agents and consider whether those procedures are reasonable to prevent fraud. Organisations may consider documenting these considerations, in light of the new offence of the failure to prevent fraud. It should be flagged that SFO investigations can be extremely costly to deal with, so in addition to examining internal fraud prevention measures, customers should make sure the coverage they have available is adequate in light of the changes which the ECCTA may bring.
If you have any questions, do not hesitate to reach out to your Zurich contact.
