Company directors need to be aware of new economic crime and failure to prevent fraud offences

Published on 21.06.24
Published on 21.06.24

The Economic Crime and Corporate Transparency Act passed into law late last year, and the first measures under the Act came into force in March. The Act aims to fight fraud, counter corruption and bolster legitimate business. In this article, Corporate Commercial partner Robert Gould highlights some of the Act’s key provisions, specifically two new offences that officers will need to be aware of.

The government has described the new Act as providing “world-leading powers, which will allow UK authorities to proactively target organised criminals and others seeking to abuse the UK’s open economy”.

Company officers and partners in partnerships should be aware of two new laws under the Act in particular:

    1. Liability for economic crimes (which is now in force).
    2. Failure to prevent fraud (which is expected to come into force later this year).
  1. Liability for economic crimes

“Economic crimes”

The list of economic crimes covered by the Act is extensive and includes theft, false accounting, concealing criminal property, money laundering and proceeds of crime offences, bribery, tax offences, market manipulation offences, terrorism offences, as well as any attempt or conspiracy to commit any of the listed offences.

How do companies and partnerships become liable for these offences?

It has long been problematic for prosecutors to attribute criminal liability to corporations. The legal test for deciding how criminal liability is attributed to a company or partnership is the ‘identification doctrine’. If the person identified as the “directing mind and will” of the organisation commits a criminal offence in that capacity, the offence is considered to be that of the organisation.

This test has always been interpreted narrowly by the courts. In large organisations with various levels of management, it has proved difficult to link relevant decision-makers with the committing of a criminal act.

“Senior managers”

Under the new Act, organisations will now be liable for offences committed by a “senior manager”. A “senior manager” will not be defined by their job title but will be someone who plays a “significant role in making decisions about how all or a substantial part of the organisation’s activities are to be managed or organised, or in actually managing or organising a whole or substantial part of those activities”.

The result of the Act is that the actions of a larger pool of people within an organisation could result in the company committing an offence. It is likely that a “senior manager” would include someone making decisions in areas such as finance, legal and health and safety. It may also include other senior people within the organisation, such as regional and divisional managers.

What happens if an organisation commits an economic crime?

If a senior manager “acting within the actual or apparent scope of their authority” commits an offence under the Act, the senior manager and the organisation will commit an offence.

The organisation will face criminal conviction and a fine, with the maximum fine depending on the offence committed. For the most serious crimes, the fine a court can impose is unlimited.

  1. Failure to prevent fraud 

According to government statistics, 40% of all crime committed in England and Wales is due to fraud. The Act introduces a new “failure to prevent” (“FTP”) offence, which Lisa Osofsky, Director of the Serious Fraud Office, has called “a game changer for law enforcement”.

Under the new offence, an organisation will be liable when an employee or agent commits a specified fraud offence for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. It does not need to be shown that the organisation’s management ordered or knew about the fraud.

This offence aims to discourage organisations from turning a blind eye to fraud by employees that may benefit them. The intention is that the offence will encourage organisations to implement or improve their fraud prevention procedures.

Organisations will be able to avoid prosecution if they have reasonable procedures in place to prevent fraud. The government is planning to publish guidance for organisations with more information about what “reasonable procedures” are, and once these have been published, the new offence will come into force.

If you have any queries concerning the new Economic Crime and Corporate Transparency Act, please contact Robert Gould at [email protected].

Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional legal advice before taking any action in relation to the issues discussed above.