Economic Crime and Corporate Transparency (ECCT) act and withdrawal of the Material Fraud Statement

On 16 October, the Department of Business and Trade announced the withdrawal of the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 (“the regulations”).

The press release announcing the withdrawal of the regulations confirmed that the Government remains committed to wider audit and corporate governance reform and that the new reform package will “deliver a more targeted, simpler and effective framework for both business and investors”.

The draft regulations required those companies with 750 employees or more and an annual turnover of £750 million or more to report on various matters including the publication of an annual material fraud statement.

However, with the passing into law last week of the Economic Crime and Corporate Transparency Bill, fraud is still very much on the corporate agenda. The new Economic Crime and Corporate Transparency Act 2023 (“ECCTA”) gained Royal Assent on 26 October 2023 and introduces significant reforms in relation to economic crime, including a new corporate offence of failure to prevent fraud. The timetable for implementation of the ECCTA will be announced revealed in due course when draft secondary legislation will be published.

The New Offence of Failure to Prevent Fraud

The new failure to prevent fraud offence has a familiar feel to the other corporate offences of failure to prevent bribery under s7 Bribery Act 2010 and failure to prevent facilitation of tax evasion under Part 3 of the Criminal Finance Act 2017. Under the proposed 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 the organisation did not have reasonable fraud prevention procedures in place.

With the implementation of this new offence the Government is keen to improve fraud detection and to protect victims, whilst at the same time closing some of the loopholes that organisations have been able to use to avoid prosecution.

What is a fraud offence?

The failure to prevent fraud offence captures most of the fraud and false accounting offences likely to be relevant to corporations and includes aiding, abetting, counselling or procuring the commission of any of the below:

• Fraud by false representation (section 2 Fraud Act 2006)
• Fraud by failing to disclose information (section 3 Fraud Act 2006)
• Fraud by abuse of position (section 4 Fraud Act 2006)
• Obtaining services dishonestly (section 11 Fraud Act 2006)
• Participation in a fraudulent business (section 9, Fraud Act 2006)
• False statements by company directors (Section 19, Theft Act 1968)
• False accounting (section 17 Theft Act 1968)
• Fraudulent trading (section 993 Companies Act 2006)
• Cheating the public revenue (common law)

Which organisations are in scope?

The Failure to prevent fraud elements of the ECCTA apply to “relevant bodies”, which includes “large organisations”. Last minute proposed amendments by the House of Lords to widen the definition of “large organisations” were rejected by the House of Commons meaning that “large organisations” remain defined as fitting two of the following:

• Turnover in excess of £36m.
• Balance sheet total – more than £18m.
• Number of employees – more than 250.

Subsidiaries of large organisations will be in scope, although they will only be responsible for their employees conduct and not that of associated persons.

Available Defences

The defence available to organisations under the ECCTA is very similar to what has been seen previously under both the Bribery Act 2010 and Criminal Finances Act 2017.

The terminology within the ECCTA is that organisations will have a defence if at the time of the commission of the fraud offence they have in place “such prevention procedures as it was reasonable in all the circumstances to expect” them to have or in certain circumstances if it was reasonable for them not to have any prevention procedures in place.

It is worth noting that an organisation will not be guilty of an offence if the organisation was or was intended to be a victim of the fraud offence.

The Government has committed to publishing guidance providing more information on reasonable procedures, which is expected in 2024.

What should companies be doing now?

We continue to watch the progression of the ECCTA closely and are discussing with clients what they should be doing to prepare for the changes.

For those wishing to be proactive, using the framework of the six principles in the Ministry of Justice Bribery Act 2010 Guidance or the Guiding principles within the HMRC Guidance on tackling tax evasion will assist companies and their subsidiaries to consider the procedures and controls that will likely apply to them pending the guidance being published.

One of the stated goals of this new offence is to drive a cultural change towards improved fraud prevention procedures within organisations. Please let us know if it would be helpful to discuss what this new offence may mean for you and the steps your organisation may be able to take to achieve this goal.

FOR MORE INFORMATION:

Ian Bennington
Partner - National Leader for Governance, Risk and Compliance Services
0115 6666 896
ian.bennington@bdo.co.uk

Sannan Khan
Partner - Forensic Services
0121 265 7283
sannan.h.khan@bdo.co.uk

Sally Felton
Director, Fraud Risk Management in Financial Services
07587 912387
sally.felton@bdo.co.uk