How Directors of Overseas Companies may be Impacted by the UK’s Economic Crime and Corporate Transparency Act 2023
This article follows an earlier article published in September 20221 entitled: ‘How Directors of Overseas Companies may be Impacted by the UK’s Economic Crime (Transparency and Enforcement) Act 2022’. Both articles have in common to focus on the potential impact of UK legislation on directors of overseas companies; in today’s article, this is by reference to the new Economic Crime and Corporate Transparency Act 2023 (here, the ECCTA) which was granted Royal Assent only a couple of weeks ago2 and which, like the EC(TE)A, contains a number of provisions that should be of particular concern to directors of overseas companies.
Despite the similar titles, the ECCTA of 2023 and the EC(TE)A of 2022 differ in their objects. As we wrote in September 2022, the 2022 Act aimed to reinforce the UK’s powers to fight economic crime in three different ways: a public national registry of overseas interests in UK properties, the relaxation of the conditions for the granting of unexplained wealth orders (UWOs) and the introduction of a strict civil liability test for sanctions violations.
The ECCTA, on the other hand, aims3 to introduce a new corporate criminal strict liability offence of failing to prevent fraud and to make it easier for prosecutors to pin criminal liability for economic crimes onto a business for the acts of persons associated with them.
The new offence (of failing to prevent fraud)4 joins a pair of other offences of failing to prevent corporate criminal offences introduced in recent years5. The idea is to side-step the difficulty of proving the primary liability of a business6 for the substantive offence (of fraud) in complex business conditions by assuming its criminal liability for an omission to prevent it, that is to say irrespective of the fact that the business may be unaware of the offence – unless the business can show (in the ECCTA) that it had the right type of procedures in place to prevent the occurrence of fraud or that it was not reasonable in the circumstances to expect such procedures to be in place. Concerned businesses therefore will need to review and implement or improve their compliance policies (including whistleblowing) and training, in particular in light of new statutory guidance when published; this will be the only defence available where the fraud has been committed.
The types of fraud that are covered by the Act7 extend to a selection of common law and statutory offences including fraud by false representation or failure to disclose, false accounting, false statements by directors and obtaining services dishonestly, among others, as well as aiding, abetting, counselling or procuring the commission of such frauds.
The scope of the offence is intended to assist prosecution where there are risks of substantial fraud8 and therefore the Act targets only large businesses9 but both UK and non-UK businesses are within its scope. The other elements of the offence are as follows: (1) the fraud is committed by any ‘associated person’ of the business, which extends beyond its employees to any persons that perform services for or on its behalf such as consultants and agents; and (2) the associated person committing the fraud intends to benefit, directly or indirectly, the business (or its customers or clients10); but (3) prosecutors need not show that the business’s leaders authorised or had knowledge of the fraud, although the business will not be guilty if it was itself the intended victim of the fraud. Upon conviction the business is liable to an unlimited fine.
Within a group of companies, liability can be attached to the subsidiary directly at fault for failing to prevent the fraud or to the parent company if the fraud committed by an associated person of the subsidiary has benefitted the parent. This will have particular relevance in the case of cross-border groups with affiliates in the UK. If the associated person commits fraud under UK law, or targets UK victims, the business may be prosecuted even if it and the associated person are based overseas.
Although the Act does not set any criminal penalties on the innocent directors or managers of the business, the goal is to discourage them from turning a blind eye to fraud by employees which may benefit them and they will be concerned that criminal liability could attach to their organisations as simply as, for example, where a senior representative makes misleading statements to obtain a public procurement contract or engages a third party for services which they have no intention of paying for or know they cannot afford.
The ECCTA also amends11 the way the prosecution can pin criminal liability for economic crimes in general12 onto a business by including ‘senior managers’ in the scope of attribution of a crime to a corporation, which is intended to be both broader than, as well as an alternative to, the requirement that the criminal offence be committed with the involvement of the ‘directing mind and will’ of the business13. Accordingly, whenever a senior manager acting within the actual or apparent scope of their authority commits (or attempts, aids or abets the commission of) the relevant economic offence14, the organisation will be also guilty of that offence. Although ‘senior manager’ is simply defined in the Act15 by reference to the significance of their role, one can expect that the relevant circumstances will matter more than job descriptions and titles, and directors of overseas businesses will need to concern themselves with potential criminal offences committed by anyone who could be held to be a senior manager of the organisation.
Other than the provisions concerning the enforcement of economic crime described above, the ECCTA contains a number of other provisions, some of which should also retain the attention of directors of overseas companies affiliated to the UK: the Act introduces16 a substantive package of proposals enhancing the powers of Companies House and increasing the transparency of UK corporate entities with a view to better ascertain the identity of its management and ultimate beneficial owners: e.g. by giving the Registrar the right to verify the identity of persons with initial significant control and where that person is a corporate entity (for instance a non-UK business), the identity of its officers; or by providing that an individual must not act as a director of a company unless and until their identity is verified, failing which they are committing an offence punishable by a fine.
1. Published on 8 September 2022
Reposted by the Institute AML and Financial Crime Digest #82 – 15/9/22
2. 26 October 2023.
3. Part 5 of the Act; see also the final paragraph of this article.
4. Ss 199-206 of the ECCTA.
5. The offence of failure to prevent bribery was introduced by the Bribery Act 2010 and the offence of failure to prevent the facilitation of tax evasion was introduced by the Criminal Finances Act 2017.
6. The Act concerns ‘relevant bodies’ which are defined as any body corporate or partnership wherever incorporated or formed.
7. Secondary legislation may widen the scope of offences of dishonesty within the scope of the ECCTA.
8. Note that by contrast the Bribery Act 2010 and the Criminal Finances Act 2017 apply to all businesses regardless of size, although the thresholds set in the ECCTA may be amended by secondary legislation.
9. Those satisfying, or being the parent of a group satisfying, two or more of the following in the financial year preceding the year of the fraud: more than 250 employees, more than £36m turnover and more than £18m in total assets.
10. i.e. those to whom services are provided.
11. Section 196, which will come into force on 26 December 2023.
12. Mirroring the Corporate Manslaughter and Corporate Homicide Act 2007.
13.. As formulated in the traditional English law doctrine of identification for corporate criminal liability in Tesco Supermarkets Ltd v Nattrass  AC 153 to demonstrate that the acts and the mental state of the offender can be attributed to the business.
14. The offences listed in Schedule 12 of the ECCTA.
15. Subject to statutory guidance to be published; the existing explanatory notes of the Corporate Manslaughter and Corporate Homicide Act 2007 provide some idea of what a ‘senior manager’ could be.
16. Part 1 of the Act.
Azmi & Associates
11 November 2023