Exploring the impacts of the Economic Crime and Corporate Transparency Act, Partners Bambos Tsiattalou, Maria Theodoulou and Richard Cannon and Solicitor Advocate Abigail Ashford author the Trends & Developments section of the Chambers & Partners Litigation Guide 2024. Partners Bambos Tsiattalou and Solicitors Rhianna Tsiattalou, Jessica Sarwat and Andrew Brown also author the Law & Practice section.
The Chambers & Partners Litigation Guide 2024 was published 5 December, and can be found here.
Following a Q&A format, the Law & Practice section of the Guide offers practitioners insight into the unique characteristics of global jurisdictions and the ability to compare and contrast features of these varying legal systems. In this section, Bambos, Rhianna, Jessica and Andrew explore topics ranging from the process of initiating a lawsuit, to litigation funding, legal privilege and proposals for dispute resolution reform. Their analysis can be found here.
In their Trends & Developments article (below), Bambos, Maria, Richard and Abigail explore how the recent assent of the Economic Crime and Corporate Transparency Act will likely impact fraud and white-collar crime litigation in the UK, and discuss the new powers given the authorities, regulators and Companies House under this Act.
The Economic Crime and Corporate Transparency Act (ECCTA) and its Impact on Fraud and White-Collar Crime Litigation
Having completed the legislative process after nearly 18 months of debate and amendment, the ECCTA received Royal Assent on 26 October 2023.
The accompanying headline on the gov.uk website describes it as “new laws to fight corruption, money laundering and fraud”. The language used by the government to describe the ECCTA is characteristically robust: “These provisions will bear down further on kleptocrats, criminals and terrorists who abuse our financial system, strengthening the UK’s reputation as a place where legitimate business can thrive, whilst driving dirty money out of the UK.”
One of the most significant pieces of economic crime legislation this century, the ECCTA has two overriding objectives:
• to address the criminal use of the UK’s corporate and business sectors; and
• to alter the perception of London – and the City of London in particular – as a place where money laundering and fraud are widespread. This concept has become so well-ingrained that the UK’s financial hub has earned two derogatory sobriquets: “The Laundromat” and “Londongrad”.
The Act runs to 376 pages and contains over 220 provisions and 12 schedules. Its impact will be felt across the corporate compliance and business crime landscape. The bulk of the content of the Act is concerned with significant changes to the way in which Companies House operates, with the powers given to Companies House having been described as the biggest shake-up to the service in its 180-year history.
The Act also represents the second phase of the UK government’s package of reforms, designed to combat the abuse of UK corporate structures for perpetrating fraud and money laundering – in part, by incentivising the private sector to tackle these crimes through preventative measures and enhanced due diligence. The Act’s formal stated objectives are: “To make provision about economic crime and corporate transparency; to make further provision about companies, limited partnerships and other kinds of corporate entity; and to make provision about the registration of overseas entities.”
Together with sanctions legislation and regulations, it forms a critical part of the UK’s legislative response to Russia’s invasion of Ukraine in February 2022, aiming “to crack down on dirty Russian money in the UK, and other foreign elites abusing our open economy”, according to the UK government.
In doing so, the ECCTA follows on directly from the first phase of legislation: the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA), which came into force in March 2022 after being fast-tracked through parliament, where it received all-party backing.
The ECTEA strengthened the existing UK sanctions regime, created a register of overseas entities (ROE) at Companies House to “help crack down on foreign criminals using UK property to launder money”, and reformed and strengthened the UK’s unexplained wealth order (UWO) regime, as well as strengthening the UK’s asset recovery powers. The new ROE is designed to break the anonymity of foreign UK property owners, requiring those who own land to register the identity of beneficial owners of these entities at Companies House and then to keep the register regularly updated.
In respect of white-collar crime, the Act also makes significant changes by introducing a new offence entitled “failure to prevent fraud”, as well as redefining where the misconduct of individuals can leave the corporate criminally liable.
Aside from these sweeping overhauls, the ECCTA seeks to change corporate culture, in part by increasing the role of business in fraud prevention. Overall, it aims to deliver on five principal objectives:
• reforms to Companies House;
• reforms to prevent the abuse of limited partnerships;
• additional powers to seize and recover suspected criminal crypto-assets;
• reforms to give businesses more confidence to share information in order to tackle money laundering and other economic crime; and
• new intelligence gathering powers for law enforcement and the removal of nugatory burdens on business.
The comprehensive nature of this means that there is much for companies and directors to consider.
Among its many provisions, the new failure to prevent fraud offence and an extension of corporate liability to all economic crimes committed by a company’s senior manager stand out in terms of the criminal law. Both reforms are designed to reduce fraud and other economic crimes by shifting the responsibility for tackling misconduct onto businesses. Together, they arguably represent the biggest legislative shake-up in fraud and white-collar crime since the Bribery Act 2010.
The Act will expand the scope of persons whose criminal conduct can be attributed to a company under the identification doctrine: the legal test for deciding whether the actions and mind of a natural person can be regarded as those of a legal person. The ECCTA places the identification doctrine on a statutory footing for economic crimes and redefines when responsibility for wrongdoing by individuals can be attributed to a company.
Previously, a company could only be found guilty of an offence that required a specific state of mind (such as dishonesty) of an individual who represented the company’s “directing mind and will” and possessed the requisite state of mind.
The decision to make this change was driven by failures to successfully prosecute corporates in a number of high-profile cases involving larger companies with complex decision-making structures, where ultimate responsibility is spread across multiple individuals or committees. In particular, the UK Serious Fraud Office (SFO) has been calling for a change in the law to effectively lower the bar in the prosecution of corporate wrongdoing.
The extension of corporate criminal liability under the identification doctrine applies to all body corporates or partnerships and will make it easier to prosecute economic crimes that are committed by a company’s senior manager(s) acting within the actual or apparent scope of their authority, or that they have attempted or conspired (or been encouraged or assisted by someone else) to commit. In defining a “senior manager”, the ECCTA focuses on the roles and responsibilities of the relevant individual, rather than their job title, making it easier to prosecute a company for criminal misconduct. In addition to more successful prosecutions being achieved, the government also hopes that the new law will act as a deterrent.
In contrast to the changes to the identification doctrine, the new failure to prevent fraud offence only applies to large organisations, defined under the ECCTA as organisations that satisfy two out of the following three criteria in the financial year preceding the year of the fraud offence:
• a turnover greater than GBP36 million;
• a balance sheet exceeding GBP18 million; or
• more than 250 employees.
Large organisations can include commercial businesses, charities, NGOs and public bodies, for example. Under the offence, a company will automatically become liable if an employee or a third party (eg, an agent, subsidiary or person performing services on its behalf) commits external fraud that is intended to benefit the organisation. This is similar in scope to the failure to prevent bribery offence under the Bribery Act 2010 and the failure to prevent tax evasion offence under the Criminal Finances Act 2017.
The new ECCTA offence of failure to prevent fraud will not require prosecutors to show that the company’s leadership either authorised or knew about the fraud. As a defence, the company will have to show that, at the time of the offence was committed, it had implemented reasonable preventative procedures, or that it was reasonable not to have such procedures in place. Guidance on what constitutes a reasonable procedure will be published in due course, but it is self-evident that companies should take reasonable steps to put appropriate policies and due diligence procedures in place. If convicted, the company will be liable to pay an unlimited fine.
For now, the provisions only apply to economic crimes, such as bribery, fraud, false accounting, fraudulent trading, money laundering, sanctions violations, tax evasion, terrorist financing, and other related offences. But the government may extend the offence wider in the future.
The Act will also extend the powers of both the SFO and the National Crime Agency (NCA). The SFO’s power to compel individuals or companies to provide information at a pre-investigation stage was previously limited to suspected cases of international bribery and corruption but with the ECCTA has been widened to include serious or complex fraud. The NCA will now have greater powers to obtain information from businesses relating to money laundering and terrorist financing by removing the requirement for a pre-existing Suspicious Activity Report to have been submitted before an Information Order can be made.
Speaking on the Act, the new director of the SFO Nick Ephgrave stated: “This is the most significant boost to the Serious Fraud Office’s ability to investigate and prosecute serious economic crime in over ten years. This new law will help prevent crime, as big businesses can no longer turn a blind eye to fraud. We welcome the expansion of our search powers, which will help speed up our investigations.”
For companies registered in England and Wales, the ECCTA amends the Companies Act 2006, introducing new requirements as to how they interact with Companies House and submit information to it. The reform of Companies House is therefore a central plank of the ECCTA, designed to improve transparency over UK companies and other legal entities, strengthen the UK’s business environment and combat economic crime. The reforms include:
• introducing identity verification for all new and existing registered company directors, People with Significant Control (PSC), and those delivering documents to the Registrar;
• broadening the Registrar of Companies House’s powers so that the Registrar can become a more active gatekeeper over company creation and custodian of more reliable data, including new powers to check, remove or decline information submitted to, or already on, the companies register;
• improving financial information on the register so that it is more reliable, complete and accurate;
• providing Companies House with more effective investigation and enforcement powers, and introducing better cross-checking of data with other public and private sector bodies; and
• enhancing the protection of personal information provided to Companies House to protect individuals from fraud and other harms.
Critically, these reforms give Companies House the authority to scrutinise the identity of company directors and prevent the creation and shutting down of fraudulent companies, ensuring that the company register remains a trusted source of information. In turn, it is anticipated that these measures will help to mitigate the current levels of corporate financial crime and fraud. The expansion in Companies House powers marks a significant shift in its role from being a passive depository of company information to becoming an active monitor of incorporations and a custodian of reliable data.
Compliance with the ECCTA will be of paramount importance. An identity verification requirement will apply to new and existing company directors, PSCs and relevant officers of a registrable relevant legal entity (RLE).
For directors of new companies, identity verification must be completed before applications for the formation of these companies are delivered, making it harder to register fictitious directors or beneficial owners.
Two types of identity verification are anticipated:
• direct verification via Companies House; or
• indirect verification through an Authorised Corporate Service Provider (ACSP) that is registered with a supervisory body for AML purposes.
Likewise, a director newly appointed to an existing company must verify their identity as soon as possible before the Registrar of Companies is notified of their appointment.
Until their identity has been verified, a director will not be permitted to act as a director, and companies must ensure that they do not do so. A breach of either requirement – by the company or the director – will be a criminal offence. A similar verification and sanction process also applies to PSCs or relevant officers of a registrable RLE: failure to comply will mean that they have committed a criminal offence. It is anticipated that Companies House will adopt a transition period for compliance, after which directors and PSCs who fail to comply may face criminal sanctions.
The Act also restricts who can file documents at Companies House on behalf of companies. An individual delivering documents on their own behalf must have had their identity verified, and the documents must be accompanied by a statement confirming their verified status. Similar requirements apply to individuals delivering documents on behalf of another individual or firm (companies, LLPs and limited partnerships).
For large corporate groups with numerous subsidiary companies, this may present significant practical challenges. In addressing concerns that these new requirements are over-burdensome, secondary legislation to implement these processes will hopefully make them workable in practice. Similar concerns exist in relation to changes relating to increased record-keeping requirements by companies, since this may place an undue burden on them, which could be problematic.
In practice, several of the measures introduced by the ECCTA will need secondary legislation, Companies House guidance and the development of new systems before the changes can be implemented in full. It is therefore anticipated that many of the ECCTA provisions will not be in force until 2025. Businesses therefore have some time to plan ahead.
The ECCTA is heralded by the UK government as setting a new benchmark for corporate accountability, transparency and ethical business practices. But enforcement, of course, is everything. Given the robust nature and broad scope of the new Act, enforcement authorities will come under pressure to show their teeth. As fraud offences now account for 41% of all crime against individuals in England and Wales, that pressure will be significant.
Therefore, it remains to be seen whether this new legislation can be underpinned by sufficient resources that will give regulators, authorities and the UK government the tools to do the job, and whether they can finally deliver.
15 Feb 2024
Partner Richard Cannon comments on the SFO and whistleblowers in The Times, City A.M. and The Law Society Gazette
09 Feb 2024