Enter the ECCTA: tackling economic crime in the UK

March 2024  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

March 2024 Issue

Economic crime in the UK is a rapidly growing, increasingly complex issue. Believed to run to tens or hundreds of billions of pounds every year, it is also a major threat to national security and prosperity.

While the precise scale of such crime in the UK is unknown, the types of crime being perpetrated are not. According to the UK government’s ‘Factsheet: economic crime in the UK’, such crime encompasses a broad category of activity involving money, finance or assets, the purpose of which is to unlawfully obtain a profit or advantage for the perpetrator or cause loss to others.

Moreover, economic crime is criminal activity which: (i) allows criminals to benefit from the proceeds of their crimes or fund further criminality; (ii) damages the UK’s financial system and harms the interests of legitimate business; (iii) undermines the integrity of the UK’s position as an international financial centre; and (iv) poses a risk to the UK’s prosperity, national security and reputation.

Committed to tackling economic crime, the UK government’s response is a collaborative effort, with policy ownership resting with central government, led by the Home Office and HM Treasury, with some specific policy areas held by other government departments.

“We are fully committed to pursuing criminals, kleptocrats, and enablers of economic crime,” states the UK government’s ‘Economic Crime Plan 2: 2023-2026’ report. “In 2022, the UK took significant action, introducing the Economic Crime (Transparency and Enforcement) Act to tackle foreign criminals using UK property to launder money and enhance sanctions enforcement, as well as establishing the Combating Kleptocracy Cell.”

More recently, another tool has been added to the UK government’s legislative arsenal with the introduction of the Economic Crime and Corporate Transparency Act (ECCTA) 2023 – an ambitious step toward improving corporate transparency, as well as enhancing confidence for those investing in UK businesses and property.

“The ECCTA complements measures previously introduced under the Economic Crime Transparency and Enforcement Act 2022,” notes Andrew Rafferty, a director at Crestbridge. “The 2022 legislation was fast-tracked through parliament to prevent Russian oligarchs shielding UK property in ‘overseas entities’ to evade sanctions following Russia’s invasion of Ukraine.”

The new legislation includes reforms designed to adapt to the challenges that agencies such as the Serious Fraud Office (SFO) have encountered in prosecuting large corporates for economic crimes, such as reform of the identification principle which is applied to determine corporate criminal liability.

“The ECCTA also includes a new strict liability offence for large corporates which is broader than the Bribery Act 2010 and Criminal Finances Act 2017, in that it automatically applies to agents and subsidiaries of an in-scope organisation,” adds Alistair Graham, a partner at Mayer Brown.

Unpacking the ECCTA

As the latest in a number of recently enacted measures to tackle economic crime and increase corporate transparency, the ECCTA received royal assent on 26 October 2023 following an often challenging parliamentary process of debate and amendment. It has introduced a host of significant measures, the majority of which will be implemented through secondary legislation.

The new measures include: (i) reforms to prevent the abuse of limited partnerships; (ii) additional powers to seize and recover suspected criminal cryptoassets; (iii) reforms to give businesses more confidence to share information to tackle economic crime; (iv) the introduction of a ‘failure to prevent fraud’ offence; (v) introducing identity verification for registered company directors, people with significant control and those who file on behalf of companies; (vi) improving the financial information on the register so that it is more accurate; (vii) providing Companies House with more effective investigation and enforcement powers, and introducing better cross-checking of data with other bodies; (viii) enhancing the protection of personal information provided to Companies House; and (ix) changing the filing requirements for smaller companies.

Of these measures, the Institute of Chartered Accountants in England and Wales (ICAEW) suggests four areas of reform, outlined below, that are particularly worthy of a deep dive.

The first concerns Companies House. The legislation aims to broaden the registrar of Companies House’s powers so that it can become a more active gatekeeper over company creation. It will become a custodian of more reliable data, including new powers to check, remove or decline information submitted to, or already on, the companies register.

Companies House will also have more effective investigation and enforcement powers, with better cross-checking of data with other public and private sector bodies. The ability of Companies House to protect the personal information provided to it will be enhanced to safeguard individuals from fraud and other harms.

“Many measures address shortcomings with the accuracy of information submitted and held by Companies House,” observes Mike Miller, economic crime manager at the ICAEW. “Identity verification for all new and existing registered company directors, people with significant control and those who file on behalf of companies will be required.

The second area of reform is simplifying filing obligations. The ECCTA simplifies and streamlines the filing options for small companies, which will no longer have the option to prepare and file abridged accounts. “Small companies will be required to file both their profit and loss account and directors’ report, also removing the option of filing so-called ‘filleted’ accounts,” explains Mr Miller. “Micro entities will similarly be required to file their profit and loss account but will still have the option not to prepare or file a directors’ report.

The ECCTA includes provisions allowing the registrar to make the profit and loss accounts of small or micro entities (or parts of them) unavailable for public inspection. This will provide comfort to those concerned about trading information becoming publicly available on the grounds of commercial sensitivity, while ensuring Companies House receives the information to verify that companies are filing accounts correctly.

The third area of reform concerns the register of overseas entities (ROE). The ROE was introduced in 2022 with the aim of creating a standard of transparency for overseas entities that was similar to the existing people with significant control regime for UK companies and limited liability partnerships. The disclosure requirements for the ROE are being enhanced by ECCTA, particularly where trusts are involved in an ownership structure.

In these instances, additional information relating to the trust must now be disclosed to Companies House (but will not be made publicly available), and certain exemptions for disclosing ‘beneficial ownership’ can no longer be utilised by overseas entities owned by trusts. Entities that do not declare their ‘beneficial owner’ will face restrictions over selling their property, and those people who break the rules could face up to five years in prison.

All companies on the register need to file an update statement every year to confirm that the information held by Companies House is correct and up to date, even if nothing has changed. It is a criminal offence not to file the update statement and entities may face prosecution or a financial penalty if they do not file.

The fourth area of reform is the failure to prevent fraud offence. As part of the ECCTA, the government is creating a new failure to prevent fraud offence to hold organisations to account if they profit from fraud committed by their employees. 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 it did not have reasonable fraud prevention procedures in place.

The offence applies to companies in all sectors. However, despite repeated attempts by parliamentarians to widen the scope of the offence, only large organisations are in scope. These are defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three of the following criteria: (i) more than 250 employees; (ii) more than £36m turnover; and (iii) more than £18m in total assets.

“The new failure to prevent fraud offence applies to larger companies and partnerships which meet criteria set in the Act,” explains Mr Graham. “Businesses must ensure that they have ‘reasonable procedures’ in place to prevent the fraud, or be able to demonstrate why it was reasonable for them not to. This is the only defence available.

“The reforms to the identification principle mean that businesses can be held criminally liable for the acts and omissions of their ‘senior managers’ in relation to specified economic crimes,” he continues. “The definition of senior manager focuses on the individual’s role – not their job title. Businesses should identify their senior managers, and ensure that appropriate corporate governance processes to prevent economic crime are in place.”

Concerns and adjustments

While the ECCTA is now part of law and thus beyond the tabling of any further amendments, the ambitious nature of the reforms will require significant resourcing and operations to deliver on the requirements set out in the legislation.

“Some of the measures, such as identity verification, will not be introduced straight away,” notes Mr Miller. “Several changes will require system development and secondary legislation before they are introduced. Other measures – such as greater query powers and more stringent checks on company names – will come into force sooner. These earlier measures are expected to be in place by early 2024.”

In the view of Mr Graham, given the scope of the Act, businesses affected must look anew at their risk assessments, policies and procedures, and controls. “Rehashing existing ones will be insufficient,” he contends. “While this may present some additional compliance burden for in-scope businesses operating in the UK, if the Act has its intended effect, it should make the UK more attractive by tackling criminality.”

Impact of the Act

With the ECCTA, the UK government has set out its commitment to tackle the economic crimes that fund organised crime groups, terrorists and other malicious actors. Its measures are designed to foster good governance and faith in the UK economy, as well as burnish its global reputation.

“The significant changes to Companies House especially are long overdue and, if effectively implemented, should provide an effective mechanism to reduce the prevalence of bad actors committing economic crime in this country,” contends Mr Miller. “However, the ability to implement these changes will be dependent on a sufficient level of resource to ensure that these new powers can be utilised effectively.”

For Mr Graham, the true impact of the Act will be determined by how UK law enforcement agencies use the new powers. “They will be under significant pressure to do so, considering that fraud alone accounts for 41 percent of all crime in the UK,” he affirms. “If used properly, the reformed identification principle in particular should be of aid to the SFO. The proposed expansion of this principle in the Criminal Justice Bill 2023-24 to cover all UK criminal offences would serve to significantly bolster the tools available to hold organisations to account.”

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Fraser Tennant