The Economic Crime and Corporate Transparency Act 2023 (the “ECCTA”) received Royal Assent on 26 October 2023. The ECCTA builds on the Economic Crime (Transparency and Enforcement) Act which was passed in 2022 (the “ECTEA”), and it is aimed at preventing abuse of UK corporate structures and tackling economic crime. In this newsletter, we explain some of the key reforms brought about by the ECCTA.
What reforms have been introduced by the ECCTA?
- The ECCTA introduces the following changes:
- Reforms in relation to Companies House
- A new 'failure to prevent fraud' offence
- Changes to the Register of Overseas Entities (“ROE”)
- Change to the ‘identification principle’ in relation to corporate criminal liability
What are the reforms in relation to Companies House?
The ECCTA introduces new identity verification requirements for all new and existing registered company directors, People with Significant Control and the majority of those delivering documents to the Registrar. The aim of this reform is to improve the accuracy of Companies House data, to support business decisions and law enforcement investigations.
There will be two types of identity verification. Namely, direct verification via Companies House, and indirect verification through an Authorised Corporate Service Provider (ACSP). ACSPs must be authorised by the Registrar to deliver documents on behalf of clients, and they will essentially act as intermediaries or agents who file with the Registrar, form new registerable entities, and verify identities.
These measures are yet to come into force as they will require new secondary legislation and guidance, as well as system development. Companies already on the register will have a transition period in which to verify identities, and those that do not comply by the end of the period may face criminal sanctions or civil penalties. Further details about the transition period are yet to be determined.
What is the new ‘failure to prevent fraud’ offence?
The ECCTA introduces a new corporate offence of failing to prevent fraud. The intention behind this new offence is to strengthen the existing powers to fine and prosecute organisations who commit fraud, as well as to close the loopholes that have allowed organisations to avoid prosecution in the past.
Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. This is effectively a strict liability offence, as there is no need to demonstrate that the organisation’s leaders ordered or knew about the fraud.
The offence only applies to ‘large organisations’, using the standard Companies Act 2006 definition. These are organisations which satisfy two or more of the following conditions in the financial year preceding the year of the offence: (i) more than 250 employees: (ii) more than GBP 36 million turnover; and/or (iii) assets of more than GBP 18 million.
If convicted of this offence, an organisation may face an unlimited fine.
What changes are being made to the Register of Overseas Entities?
As explained in further detail in our previous newsletter, ROE was launched in August 2022 under the ECTEA. The ECCTA will make changes to the ROE, including wider disclosure obligations and increasing the amount of information to be supplied to Companies House. The provisions of the ECCTA affecting the ROE are yet to come into force.
For example, the ECCTA amends the ECTEA to ensure that overseas entities are required to record a legal entity trustee as a registrable beneficial owner, whether or not it is ‘subject to its own disclosure requirements’. Trustees will also be excluded from the scope of beneficial owners which are ‘exempt from registration’, which means that certain trustee beneficial owners will no longer be able to rely on the exemption from registration which had applied to them.
Additional information which is now required to be submitted to Companies House includes, for example, the title numbers of all qualifying freehold and/or leasehold property of which the overseas entity is the registered proprietor, as well as additional information related to managing officers if they are under the age of 16.
What is the ‘identification principle’ and what change has been made?
The ECCTA introduces a new test for corporate criminal liability by amending the ‘identification principle’. Previously under the identification principle, a company could only be criminally liable where the commission of an offence could be attributed to someone who at the material time was ‘directing the mind and will’ of the company. However, the scope of the identification principle has now been extended to include senior managers. A company can now be guilty of an offence if one of its senior managers commits an offence whilst acting within the actual or apparent scope of their authority.
This change has been brought about to reflect modern company structures where directing minds are spread across different functions of business. Although the identification principle made it easy to identify the directing mind within smaller corporations (where few directors lead the entire business), it has not been effective for large organisations. Often in large organisations, decision-making is dispersed across multiple directing minds who have significant control across different areas of the business. Due to this type of decentralisation of authority, senior managers often slipped through the cracks and remained unaccountable, as they were not considered sufficiently controlling enough to hold the company liable, despite having the authority to commit large-scale harms. The expanded scope of the identification principle will now help to deter instances where senior managers use their authority to commit economic crimes.
How 3CS can help
Our team of corporate and commercial lawyers and consultants have both domestic and international expertise and offer a full range of corporate and commercial legal services. For further information on these legislative changes or for any guidance on practical steps you should be taking, please get in touch with your usual 3CS contact.