The Economic Crime and Corporate Transparency Act 2023 (ECCTA) was introduced following growing concerns about money laundering, fraud and other financial crimes. It became law on 26 October 2023, but its provisions are being implemented in stages.
The main aims of ECCTA are to:
- Prevent the abuse of UK corporate structures
- Tackle economic crime
- Improve the reliability and transparency of Companies House data
Many provisions have already been brought into force, including:
- Company address. Companies must ensure that they have appropriate registered postal and email addresses for the business on Companies House (note – PO boxes are not allowed).
- Company name. Companies House can query, and even prohibit, names which are misleading and/ or may facilitate crime. Businesses should review company names to confirm they are compliant.
- Confirmation statements. Every company, even dormant/ non-trading companies, must file confirmation statements on time at least once a year.
- Identity verification. A voluntary identity verification process has been introduced for directors and People with Significant Control.
You can find out more about these provisions and their implications for companies via our ECCTA hub.
ECCTA also creates a number of new criminal offences including the new failure to prevent fraud which will come into force on 1 September 2025.
What is failure to prevent fraud?
The new offence means that large organisations can be held criminally liable if an employee, agent, subsidiary, or other “associated person” commits a fraud intending to benefit the organisation –even if the fraud is unsuccessful – unless they can prove that they had ‘reasonable’ procedures in place to prevent fraud at the time of the offence.
Crucially, it is not necessary for directors or senior managers to have ordered or known about the fraud for a prosecution under this offence to succeed.
Example scenarios
Fraud by abuse of position
The payroll department of a large company diverts employee pension contributions to benefit other projects within the company. This is an abuse of position – the payroll department was entrusted to make those pension payments. The company may be prosecuted for failure to prevent fraud if its procedures are unsatisfactory.
Fraud by false accounting
A large company wants to attract investors. To do this, the head of accounts deliberately inflates the company’s profits. The aim is to make the business look more attractive to investors. The company may be prosecuted for failure to prevent fraud if its procedures are unsatisfactory.
Fraud by false accounting
A large company has an environmental permit for limited discharges into a river. The company discharges more pollution than it is allowed so the head of the technical department falsifies its discharge monitoring system to avoid EA penalties. The company may be prosecuted for failure to prevent fraud if its procedures are unsatisfactory.
Might my organisation be at risk?
The offence only applies to ‘large organisations’ in the UK. To determine if it applies to your organisation, follow these two steps:
Step 1: Organisation type
- Is your organisation an incorporated company or partnership in the UK?
- Or is it incorporated outside the UK but has a UK nexus (i.e. the act took place in the UK, or the gain/ loss occurred in the UK)?
Step 2: Organisation size
Does your organisation meet at least two of the following three criteria (based on the financial year preceding the base fraud offence)?
- more than 250 employees
- turnover exceeds £36 million
- total assets exceed £18 million
Fraud by subsidiaries
A subsidiary can be liable for the offence if it qualifies as a “large organisation” in its own right, or it may be prosecuted instead of the parent if the subsidiary’s employee commits the fraud.
Parent organisations should take preventative steps, such as implementing group-wide policies, training, and appointing fraud prevention leads in each subsidiary. For overseas groups, the need for group-wide measures depends on how much of their activity is UK-based or poses a UK fraud risk.
How can my organisation avoid prosecution?
Your organisation should be able to avoid prosecution if it can demonstrate:
- that it has ‘reasonable’ procedures in place to prevent fraud; or
- it was not reasonable to expect the organisation to have procedures in place (i.e. very low risk, although it will rarely be considered ‘reasonable’ to not have even conducted a risk assessment).
What amounts to ‘reasonable’ is, of course, the key question, and a word that haunts every lawyer. According to government guidance, this is ultimately going to be a matter for the courts, and we expect case law to shape its meaning over time. This should hopefully lead to further guidance in due course clarifying the expectations on businesses.
The burden will be on the organisation to prove, on the balance of probabilities, that its procedures were ‘reasonable’. Companies House recommends seeking professional advice to meet the highest standard of compliance. Our Regulatory & Business Defence team is able to assist with any queries or matters concerning ECCTA and Companies House.
The government has also produced a really helpful guide, which can be accessed here: Guidance to organisations on the offence of failure to prevent fraud.