Jul 4, 2023

What is the potential impact of the Economic Crime and Corporate Transparency Bill?

The Economic Crime and Corporate Transparency Bill is currently passing through the House of Lords - the bill is currently in its report stage and implementation will proceed following royal assent. There are a variety of reforms encompassed in the bill including a new “failure to prevent fraud” offence,  the extension of  the identification principle (where currently only the actions of senior offices of a company will be attributed to make a company criminally liable) and proposed changes to the law concerning “strategic litigation against public participation” (“SLAPPs”).

In advance of the new offences coming into force, businesses will want to carefully consider their anti-fraud measures with a particular emphasis on outward fraud committed for the benefit of the organisation. In this article we examine the proposed reforms in more detail and what steps companies should consider taking in anticipation of the bill coming into force.

What is the Economic Crime and Corporate Transparency Bill?

It is estimated that fraud accounted for around 40% of all crime experienced by adults in England and Wales in the year ending September 2022. The National Crime Agency assesses it as a realistic possibility that over £100 billion is laundered every year through the UK or through UK corporate structures. Although some economic crimes are committed by lone actors it is clear that corporate structures are frequently used by criminals in order to conduct economic crimes such as bribery, fraud and money laundering. The bill is aimed at closing existing loopholes and bringing the legal framework up to date to reflect the changing corporate environment in the UK.

In broad terms, the UK government’s factsheet regarding the bill states that it will deliver:

  • 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.

Arguably, however, the most significant reforms that the bill will introduce are those which were added most recently: the failure to prevent fraud offence and the extension of the identification principle.

Failure to prevent fraud

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. There is no requirement to demonstrate that the company bosses knew about or ordered the fraud. According to Home Office Guidance conduct caught will include “dishonest sales practices, false accounting and hiding important information from consumers or investors”.

At present the offence applies only to large bodies corporate and partnerships. Large organisations are defined in the Companies Act 2006 as organisations meeting two of the three following criteria: more than 250 employees, more than £36 million turnover and more than £18 million in total assets. The threshold will be kept under review and secondary legislation may be used in the future to extend the offence to smaller organisations.

Organisations will be able to avoid prosecution if they can show that they have reasonable procedures in place to prevent fraud. The government will issue guidance on what would constitute reasonable procedures before the new offence comes into force. The Bribery Act 2010 marked a sea-change in the law of corporate criminal liability by enacting the UK’s first “failure to prevent” offence. The Bribery Act, however, provides that it is a defence for the corporation to show that it had “adequate procedures” designed to prevent bribery. The inclusion of the word “reasonable” as opposed to “adequate” demonstrates a shift away from the higher threshold of adequacy. This would indicate that, in certain circumstances, it may be reasonable for an organisation to have no fraud prevention measures at all where the particular business conducted is considered at low risk of such misconduct.

Extension of the identification principle

The identification principle is the legal test for deciding whether the actions and mind of a natural person can be regarded as those of a legal person. In England and Wales, the current law (common law) requires that an offence must be committed by the “directing mind and will” of a corporation in order for the corporation itself to be liable. The legal test was established in 1971 and requires that an individual or individuals should be established as the “directing mind and will” behind the company. If that individual or individuals commits a criminal offence in that capacity, that offence, including the guilty mind to commit the offence is considered that of the company.

In smaller companies the “directing mind and will” has been reasonably easy to establish but it has traditionally been much harder in big corporations. The bill proposes introducing a test which replicates the definition of “senior manager” in the Corporate Manslaughter and Corporate Homicide Act 2007. This would look at the senior manager’s role within the organisation and the level of managerial responsibility they undertake rather than merely using their job title. It should provide an ability to bring more prosecutions where a senior manager plays a significant role in decision making within the company but may not have been deemed to be the “directing mind and will”.

SLAPPs in relation to defamation claims

This amendment appears to be a reaction to a raft of libel claims that were brought by Russians in the English courts in 2022 shortly after the Russian invasion of Ukraine. The amendment inserts two new clauses into the bill. Clause 193 mandates the making of new civil procedure rules which must:

  • Contain provision that a SLAPP claim may be struck out if the claimant has failed to show that it is more likely than not the claim would succeed at trial; and
  • Include a provision that, in a SLAPP claim, the defendant cannot be ordered to pay the claimant’s costs unless the defendant’s misconduct justifies such an order.
  • Clause 194 provides the definition of a SLAPP:
  • The claimant’s behaviour in relation to the matters complained of in the claim must have the effect of restraining the defendant’s exercise of the right to freedom of expression
  • Any of the information that would be disclosed by the exercise of the right has to do with economic crime
  • Any part of the disclosure would be for “a purpose related to the public interest in combating economic crime”
  • Any of the behaviour of the claimant in relation to the matters complained of in the claim is “intended” to cause the defendant harassment, alarm or distress, expense or any other harm or inconvenience, “beyond that ordinarily encountered in the course of properly conducted litigation”

The definition of SLAPP extends only to information relating to economic crime because the amendment had to fit into an economic crime bill. It seems likely that subsequent legislation will extend the definition to other types of information.

While this article is not the place to debate this amendment in full, it seems likely that this amendment will increase costs of defamation actions as defendants will bring “SLAPP applications” seeking to bring the action within the definition of a SLAPP. This has been observed in Canada where similar provisions exist.

What does this mean for businesses?

While the government has not yet published its suggested fraud prevention measures it would be advisable for businesses to consider their anti-fraud measures in advance of the new offences coming into force. This would include taking legal advice about internal reporting and compliance requirements and educating staff on both new and existing fraud prevention measures. In particular, current anti-fraud measures and procedures may not mitigate outward fraud committed for the benefit of the organisation.

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