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A Turning Point in Economic Crime: The Economic Crime and Corporate Transparency Act 

07 November, 2023

As a UK and International Tax Specialist, I see many clients now not realising the importance of compliance. Many have said it is bad enough trying to earn a living: customer and paying on time to rising costs of supplies services etc then to have to worry about this. 

I am pleased to say when explaining both the relevance and importance then coming up with an agreed plan of action has made all clients more relaxed and some have even commented this has made the business better because it has systemised the process. The introduction of the “failure to prevent offence” within the Economic Crime and Corporate Transparency Act is set to dramatically shift the landscape for companies and their top-tier management.

Previously, for a company to face prosecution, evidence had to be presented that a senior figure who was the essential ‘driving force’ of the company played a part in the alleged misconduct. However, with the recent changes, directors can face criminal charges merely for not taking adequate measures to prevent fraudulent acts carried out by an employee. 

The Act is essentially a stern warning against companies who might otherwise overlook fraud. While it’s true that individuals, including directors, can’t be directly prosecuted under this new regulation, the onus of preventing fraudulent activities within a firm squarely falls on them. To steer clear of prosecution and a potential unlimited penalty, directors will have to demonstrate that they’ve instituted reasonable measures to stop fraudulent acts. Otherwise, they might find themselves at odds with this new legal framework. 

The Act brings forth several noteworthy changes that impact the accountability of UK company directors. A salient one is the new corporate criminal offence related to the failure to prevent fraud. This applies particularly to large corporations or those conglomerates lacking in adequate anti-fraud procedures. A representative of the London Solicitors Litigation Association (LSLA) remarked, “This new regulation echoes the already existing offences tied to the prevention of bribery and tax evasion. Companies found guilty under this rule may face hefty fines and could be disqualified from securing public contracts.” 

She added, “Directors are advised to ensure their companies have solid preventive procedures against such fraudulent acts. They must continue to fulfill their enduring responsibilities under the Companies Act 2006.” How the “identification doctrine” reform could simplify the process for the Serious Fraud Office (SFO) to prosecute companies for economic offences. 

The Act has altered this doctrine considerably. Now, actions of a ‘senior manager’, even within their perceived authority, can bring about criminal charges for a corporation. Here, a senior manager is characterized as someone who holds significant influence in an organisation’s management or operations. Though the “failure to prevent fraud” offence targets corporations and not individuals, the revamped identification doctrine will undoubtedly intensify the examination of senior managers’ roles in economic crimes. The Act inherently extends the scope of a senior manager’s responsibilities to encompass economic crimes ranging from bribery and tax to fraud and false accounting. Companies and their leaders must ensure they establish solid corporate governance processes to deter economic crimes, especially concerning those in senior managerial roles. 

This can entail educating these key figures, undertaking risk analyses, updating relevant guidelines, and fortifying whistleblowing systems. Such measures will not only safeguard both the individuals and the corporations but will also likely become the cornerstone of a firm’s robust preventive procedures against economic misdemeanours.