The passage of the Economic Crime and Corporate Transparency Act 2023 (ECCTA) on 26 October 2023 represents one of the most important developments in the criminal law for UK corporates, their senior management, and their advisers, since the Bribery Act was introduced.
Once all relevant provisions of ECCTA have come into force, companies, partnerships and other corporate entities will face a significantly increased risk of corporate liability in the UK.
Corporate criminal liability in general
The current position: Under the common law ‘identification principle’, a corporate can be criminally responsible for the actions of an individual that represents its ‘directing mind and will’. Prosecutors have found it particularly difficult to prove the criminal involvement of sufficiently senior individuals (e.g. board directors or other senior officers who carry out management functions on the company’s behalf) in the case of large, distributed organisations.
Changes introduced by ECCTA: Section 196 of ECCTA sets out that if a senior manager of a body corporate or partnership, acting within the actual or apparent scope of their authority, commits any of the offences listed in Schedule 12 of ECCTA, the body corporate is also guilty of the offence.
The scope of the changes: This doctrine applies to cases of economic crime only. Schedule 12 includes offences under the Theft Act 1968, the Fraud Act 2006, the Bribery Act 2010, the Financial Services and Markets Act 2000 and money-laundering offences under the Proceeds of Crime Act 2000. The list of offences may be amended by order of the Secretary of State in future.
A ‘senior manager’ is any individual who plays a “significant role” in making the decisions about how the whole or a substantial part of the activities of the body corporate are managed or organised or actual manages or organises these activities.
The impact of the changes: It will be up to the courts to further refine the principles set out in ECCTA, including as to how exactly the definition of a “senior manager” should be interpreted.
However, it is very likely that section 196 will make it significantly simpler for prosecutors to hold corporates to account for crimes committed by their senior leaders.
Section 196 and Schedule 12 of ECCTA come into force from 27 December 2023.
Failure to prevent fraud
The current position: Prosecutors who consider that a corporate entity has been involved in fraudulent criminal behaviour currently need to use the ‘identification principle’ to attribute liability to the corporate based on the involvement of senior individuals.
Changes introduced by ECCTA: Under section 199 of ECCTA, a ‘large organisation’ will be criminally liable where it fails to prevent a person associated with it from committing a fraud offence intending to benefit (directly or indirectly) the organisation or its clients.
It is a defence for the organisation to have reasonable prevention procedures in place at the time of the offence (or to show that it was not reasonable in all the circumstances to expect it to have any such procedures in place). Official guidance on those procedures is yet to be published.
The scope of the changes: This new offence will cover any large company with significant turnover or assets that has engaged in fraudulent behaviour if this activity was carried out for the benefit of the corporate.
Section 201 of ECCTA defines a “large organisation” as a corporate that in its financial year that precedes the year of the fraud offence satisfies two or more of the following conditions:
- Turnover of more than £36 million
- Balance sheet total of more than £18 million
- Number of employees of more than 250
A person is “associated” with the corporate if the person is an employee, agent or subsidiary or “otherwise performs services for and on behalf of the body”. This is the same principle as found in the Bribery Act 2010 and Criminal Finances Act 2017.
A “fraud offence” is an offence listed in Schedule 13 of ECCTA (or aiding or abetting such an offence). This includes common law offences such as cheating the public revenue as well as statutory offences under the Theft Act 1968 and the Fraud Act 2006. The list of offences may be amended by order of the Secretary of State in future.
The impact of the changes: Before these new provisions come into force, large organisations will need to ensure that they have in place reasonable fraud prevention procedures. The nature of those procedures will depend on the size and risk profile of the organisation.
In preparing their procedures, it will be vital for organisations to consider official government guidance. Work on this guidance is understood to be underway; however no timeline for its publication has yet been produced. This is a more complex exercise than production of previous guidance, on failure to prevent bribery and facilitation of tax evasion, due to the broad range of offences covered under ECCTA.
Section 199 comes into force on a date yet to be specified (which must be after guidance has been published).