Various parts of The Economic Crime and Corporate Transparency Act 2023 (ECCTA) will come into force from 4 March 2024, marking the introduction of new powers for Companies House and both new and expanded economic crime offences.
The nature of organisations in the life sciences sector is such that they often have sufficient turnover and assets to meet the criteria for application of the new "failure to prevent fraud" offence. As an industry, organisations in this sector also commonly engage contractors and consultants, for whom large companies will become liable in the even such individuals commit specialised fraud offences.
We have prepared a more detailed toolkit to help guide organisations through the effect of the ECCTA which is available on our website ECCTA S&B Toolkit. In this article we provide a snapshot of the key items to look out for.
The government has stated that its three overarching objectives of the legislation are to:
- Prevent organised criminals and other bad actors from using corporate structures to abuse the UK’s open economy,
- Strengthen the UK’s response to economic crime, and
- Improve the services delivered by Companies House.
Looking at the mechanisms to help tackle the first and second objectives, the ECCTA is introducing identify verification and new economic crime offences.
Identity verification
The identity verification requirements will apply to all new and existing company directors, all new and existing persons with significant control and anyone who delivers documents to Companies House on their own behalf or on behalf of another.
The proposal is that the verification process will be digital, utilising face recognition technology alongside photo ID. Successful verification should only take a matter of minutes, but we are yet to see the technology in practice and the date for implementation has not yet been confirmed.
We can only hope that the system works as intended as continuing to act as a director without being verified will amount to an offence committed by the company and every officer in default punishable by a fine; although, importantly, the actions undertaken by the director will not be invalidated. Directors who persistently act without having been verified may also face disqualification.
Economic crime
Economic crimes are introduced through three main devices:
- A new fraud offence
- Changes to what false statements means when filing at Companies House
- Strengthening the principles establishing when a company can be held criminally liable
Penalties for these offences range from fines to up to two years’ imprisonment.
Failure to prevent fraud
The new fraud offence centres on failing to prevent fraud and is intended to hold large companies and partnerships to account if they profit from fraud. Organisations in all sectors need to be careful as they will be liable where a specified fraud offence is committed by an “associated person”, being an employee, agent or subsidiary or anyone else who performs services for or on behalf of the organisation.
Failing to prevent fraud is a strict liability offence: management does not need to have sanctioned or even be aware of the fraud in order to be found liable although having reasonable prevention procedures in place may operate as a defence.
It is important to remember though that the offence will only apply to large organisations which meet two of the following three criteria for the year prior to the offence:
- More than 250 employees,
- More than £36m turnover, and/or
- More than £18m total assets.
The government will need to publish guidance on reasonable prevention procedures before the new offence comes into force. A consultation on this is due to launch this year, so the earliest we expect to see the first prosecutions for this offence is 2025.
False statements
It is currently an offence to “knowingly or recklessly” deliver, or cause to be delivered, to the Registrar a document or statement which is false, deceptive or misleading. The ECCTA replaces “knowingly or recklessly” with “without reasonable excuse”, significantly lowering the threshold for committing the offence.
Expansion of identification principle
The ECCTA also expands the so-called “identification principle” which applies in attributing liability to corporates for economic crimes. The “identification principle” is the principle that, under current law, a company can only be criminally liable where the commission of the offence can be attributed to someone who at the material time was the "directing mind and will" of the company. The ECCTA both codifies and extends the common law “directing mind and will” to include senior managers, with the effect that a company or partnership could be convicted if a senior manager acting within the actual or apparent scope of their authority commits an economic crime. The list of relevant economic crimes is extensive, including bribery, money laundering, terrorist financing, sanctions breaches, fraud and false accounting, and will also apply if a senior manager aids, abets or conspires to procure the commission of a specified offence.
Companies House
In order to deliver on the third overarching objective, Companies House will be granted extended powers including rejecting documents for inconsistencies, requiring additional information, requiring a resolution of inconsistencies and analysing information for the purposes of crime prevention or detection. Companies House will also be able to issue fines directly rather than going through the courts, up to a maximum of £10,000. In addition, there are new requirements for information that must be filed at Companies House.
Contact us
Our multi-disciplinary life sciences team has extensive experience advising on corporate governance. If you have any questions on this topic, or if you would like to discuss how these developments may affect your business, please contact one of our team who will be happy to help.
Jonathan Steele