The Economic Crime and Corporate Transparency Act 2023: A Questionable Late Christmas Present for Companies and Senior Managers

Background

The Serious Fraud Office and other prosecutorial authorities in the UK have long been campaigning for reform of the so called identification principle. The position in common law dating back to a House of Lords decision in 1971  is that only if those persons identified as the “directing mind and will” of a company commit an offence (and have the requisite guilty mind to commit such offence), will the company be guilty of it.

The problem here is that companies are legal constructs. For those corporate offences which require knowledge or intent, prosecutors must establish that such knowledge or intent resides with one or more individuals. That proved a challenge especially for companies with large executive teams which presided over complex businesses. (English courts, unlike the counterparts in the US, do not permit knowledge or intent to be aggregated between individuals.) Therefore, by expanding the net of individuals whose acts and knowledge can be attributed to the company, ECCTA addresses this issue for certain categories of crime while the common law rules are preserved for the rest.

Who are senior managers?  

For better or worse, ECTA borrows the definition from the Corporate Manslaughter and Corporate Homicide Act 2007 (CMCHA) under which “senior management” means any person who plays a significant role in:

(a)the making of decisions about how the whole or a substantial part of the company or partnership's activities are to be managed or organised, or

(b)the actual managing or organising of the whole or a substantial part of those activities. 

The Explanatory Notes to the CMCHA state that this covers both those in the direct chain of management and those in, for example, strategic or regulatory compliance roles. Whilst directors and officers are plainly and deliberately in scope, it is less clear whether all those involved in taking decisions relating to corporate strategy and policy in areas such as finance, risk management and legal affairs will also be. Much will depend on the size and structure of the company concerned.

An obvious question is as to the meaning of “substantial” in this context. This has yet to be litigated under the CMCHA but prosecutors are likely to look at what an individual's role and responsibilities are within the organisation and the level of managerial influence they exert, rather than solely their job title. A further fact-sensitive question (and requirement under ECTA) is whether the particular senior manager has acted within the scope of his or her “actual or apparent authority.”

The new offence of failure to prevent fraud

In addition to the expansion of the scope of corporate criminal liability to all companies and across a long list of offences based on economic crime including fraud and theft, Section 199  of ECTA  introduces a new criminal offence of failure to prevent fraud. This is modelled on the equivalent offence created under Section 7 of The Bribery Act 2010 and applies to “relevant bodies” who are guilty of an offence when  “a person associated with that body commits a fraud offence intending to benefit the relevant body.”

“Person” for this purpose is not limited to senior managers but extends to all employees and arguably also to other entities within the company’s supply chain.

“Relevant Body,” however, is limited to large organisations i.e. ones which in the year preceding the fraud:

• have a turnover exceeding £36 million; or
• a balance sheet total of more than £18 million; or
• employ more than 250 employees.

As with the Bribery Act offence, a defence is available if the relevant body can demonstrate that it had in place fraud prevention measures that were reasonable in all the circumstances (or that it was reasonable not to have any). The Government has promised to publish guidance on what it considers constitutes “reasonable fraud prevention measures” early in 2024 and the new offence will come into force after that. It is nevertheless likely that large organisations will already be conducting reviews of their systems and controls aimed at preventing fraud and that this issue will (or should) be finding its way onto boardroom agendas in the near future. 

Conclusion

A bit like London buses, after waiting a long time, two significant criminal legislative changes have come along at the same. Interestingly there does not seem to have been much discussion so far of the potential interplay between the two. It is now unquestionably, easier to bring a prosecution for fraud (among other economic crime offences) directly against virtually any company based on the extension of the identification principle to senior managers. At the same time, an additional weapon has been added to the prosecutors’ arsenal but only in respect of large organisations for failing to prevent fraud. It seems not impossible, however, that prosecutors may opt to pursue both options on the same set of facts.

What does this mean in practice for companies and senior managers? It is likely that companies will be taking advice from HR consultants, lawyers and others as to which categories of employees in a large organisation might qualify as “senior managers” and thus be potential vehicles for the new corporate offence. (It is worth emphasising that under the new attribution rules, prosecutors do not need to establish that the senior manager was seeking through his or her conduct to benefit the company in any way). Additionally, they may wish to focus on the particular job and role descriptions of such individuals and especially on the question as to their “actual or apparent authority” within the relevant company on which corporate criminal responsibility also rests.

Whilst the legislative changes may not directly increase personal liability of senior managers or other employees for any new substantive offences, they do place a new spotlight on the conduct of such individuals and make it perhaps more desirable than ever before that such individuals have access to independent legal advice before submitting to what may turn out to be a gruelling series of external and internal interviews regarding their conduct. In that context, it may be desirable to ensure that such advice is covered and paid for under any directors and officers (D&O) liability insurance.

Finally, a potential effect of this increased scope for corporate criminal liability in respect of future prosecutions is the corresponding increase in scope for deferred prosecution agreements between prosecutors and companies. Here, the scope for pursuing separate subsequent criminal proceedings against individuals based on their own conduct is usually expressly preserved. Again, in this context. D&O insurance is likely to be of prime importance to senior managers, not least because the company may have little interest in indemnifying the individuals concerned.  

This article is intended to highlight general issues and benefits relating to its subject matter and does not take into account the individual circumstances or requirements of individual recipients. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.

Written by Francis keen, partner, McGill and Partners.