The new Economic Crime and Corporate Transparency Act 2023 and its impact

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) has received Royal Assent. The new act aims to stop organised criminals, fraudsters, kleptocrats and terrorists from using corporate bodies such as companies and partnerships for their purposes.

It is also intended to give prosecuting authorities such as the Serious Fraud Squad more power to investigate and prosecute corporate financial crime and failures to prevent fraud. 

Companies and limited partnerships will face new obligations, which they will need to ensure they meet to avoid breaching the rules.

ECCTA follows the Economic Crime (Transparency and Enforcement) 2022 Act (the ECTE Act), which was introduced following Russia’s invasion of Ukraine. The ECTE Act enabled the government to impose sanctions rapidly on overseas individuals and created a Register of Overseas Entities with the intention of tackling foreign criminals who were using the UK to launder money.

The UK’s Unexplained Wealth Order regime was also overhauled to assist legal investigations into the financial affairs of those believed to be involved in unlawful activity.

Key changes contained in the Economic and Corporate Transparency Act 2023

The new Economic Crime and Corporate Transparency Act provides for:

• Companies House reforms so that:
  • The creation of fraudulent companies can be prevented
  • Fraudulent companies can be shut down
  • An improved service and reporting structure is delivered for companies
  • More reliable data is recorded
• Changes to the law that aim to prevent financial abuse of limited partnerships
• Authority to seize criminal crypto-assets
• A new offence of failure to prevent fraud
• A new test for corporate criminal liability and improved powers for prosecuting authorities to gather information
• More information on real estate ownership to be provided to Companies House and to the Register of Overseas Entities
• Legislation to deal with strategic litigation against public participation, or SLAPPS

Companies House reforms

Companies House reforms are intended to make it harder for criminals to operate and use companies to fund illegal purposes. 

Stricter rules surrounding the verification of new and existing company directors have been implemented, including for overseas businesses with a UK branch. Acting as a director without going through the verification process will be a criminal offence. 

Multiple layers of corporate directors will no longer be allowed.

All new and existing persons with significant control must verify their identity. 

A shareholder list must be provided and updated each year with shareholders’ full names.

Companies House will have greater powers to raise enquiries, reject information, and remove information from the companies register. It will also be able to liaise more extensively with other government bodies to share data and identify economic crime. 

Limited partnership regulation

Limited partnerships have been relatively opaque to date, which has made it difficult to identify their true position. The new act will require substantially more information when a partnership is registered and when dealing with ongoing reporting.

Information that limited partners and general partners will need to provide to Companies House includes:

• The name of a registered officer, who must be one of the partnerships’ managing officers and who has gone through the identity verification process
• The name of a contact for each named corporate managing officer
• Changes to registered officers or named contacts to be notified within 14 days
• Confirmation statements are to be provided in each 12-month review period, giving details of any changes to the partnership 
• An appropriate UK address is to be provided as the registered office. This must be somewhere that any document delivered to the address would be expected to come to the attention of an individual acting on behalf of the limited partnership. It must also be either the principal place of business of the partnership, the address of its general partner or the address of an authorised corporate service provider
• Changes to the registered office address are to be notified within 14 days 

Seizure of crypto assets

The new act aims to tackle the use of crypto assets in crime by providing stronger powers to law enforcement agencies.

Financial investigators, the SFO, the police, and HMRC are authorised to search, seize, and detain information that may assist with the seizure of crypto assets that are the subject of criminal activity or intended for unlawful use. 

Freezing orders will be available from the Magistrates’ Court to freeze crypto assets held by UK crypto asset service providers.

The Magistrates’ Court will also be able to order forfeiture of crypto assets if they are intended for unlawful use or are recoverable property under the Proceeds of Crime Act 2002.

New offence of failure to prevent fraud

A new corporate offence of failure to prevent fraud is included in the act. This relates to:

• Fraud by false representation, failing to disclose information or abuse of position
• Obtaining services dishonestly
• Participating in a fraudulent business
• False accounting
• False statements by company directors
• Fraudulent trading
• Cheating the public revenue
• Aiding and abetting, counselling or procuring the commission of any of the above

Criminal liability will arise when a person associated with a large organisation commits fraud and the organisation fails to have proper fraud prevention protocols. This provision could catch employees, agents, and anyone else engaged in carrying out services for the business. 

Company personnel will not need to be aware of the fraud. The offence extends to holding a corporate body liable if it fails to prevent specified frauds by an associated person as well as a director.

A ‘large organisation’ is currently defined as being a business with two of the following:

• A turnover of over £36 million
• Assets of over £18 million
• More than 250 employees

The offence could be extended to cover smaller businesses in future legislation.

New test for corporate criminal liability

The new rules will allow companies to be liable for the criminal financial activity of a senior manager. Whether an individual is classed as a senior officer will be assessed by looking at their role and responsibilities within the organisation rather than their title. 

Senior managers are identified as being someone who:

• Makes decisions about how the whole or a substantial part of an organisation’s activities will be managed or organised
• Actively manages or organises all or a substantial part of the organisation’s activities

The definition is likely to cover directors, senior managers and those in charge of other departments such as accounting, legal and HR.

This is a change to previous legislation, which required the courts to identify who had the directing mind or will of the company. This proved very difficult to establish, particularly in the case of large organisations.

Officers can also be found guilty if they instruct other individuals to do something illegal. Even if a company has protocols in place to try and prevent this, it can still be found guilty as this will no longer be a defence, although it could be a mitigating factor when the court looks at sentencing.

More transparency on real estate ownership

Changes have been made to the information that will be held on Companies House’s Register of Overseas Entities (ROE), the list of overseas entities who own UK land. The changes aim to look behind nominated holders to see the true ownership and the backstory of who currently holds real estate. The register is held at Companies House and is supported by the Land Registry.

The ROE will need transparent information about the beneficial owners behind nominees and trusts and how the ownership arose.

Notices requiring information provision can be served, and Companies House can remove or amend information on the ROE. Penalties can be imposed for failing to respond to enquiries. 

If the beneficial owner of a property has not been correctly identified and registered, restrictions will be put in place to prevent its sale, mortgage or lease until compliance has been dealt with.

The register will require retrospective information on property purchased by overseas entities up to 20 years ago in England and Wales and since December 2014 for property in Scotland. 

Legislation on SLAPPs

The government has defined strategic litigation against public participation, known as SLAPP, as legal action that is ‘typically brought by corporations or individuals with the intention of harassing, intimidating and financially or psychologically exhausting opponents via improper use of the legal system.’

Wealthy individuals or organisations can use this type of litigation to stifle scrutiny of their actions by overwhelming a defendant or aggressively pursuing litigation.

The new act defines SLAPPs and provides a process for courts to dismiss them promptly if a case meets the new definition or if the claimant cannot show that it is more likely than not to succeed at trial.

Legal action is classed as a SLAPP if:

• The claimant’s behaviour has or is intended to have the effect of restraining the defendant’s exercise of free speech
• Any of the information that would be disclosed relates to economic crime
• Any part of the disclosure relates to the public interest in combating economic crime
• Any of the claimant’s behaviour is intended to cause the defendant:
  • Harassment, alarm or distress;
  • Expense; or
  • Any other harm or inconvenience

Defendants will also be protected from the costs of this type of strategic litigation. Costs fears are a big part of the success of this type of legal bullying and the new law will limit defendants’ exposure to costs. 

When will the Economic Crime and Corporate Transparency Act 2023 take effect?

Some of ECCTA is already in force, but further provisions are still to be implemented as the necessary statutory instruments and guidance documents are drafted and approved. 

Sections still to be implemented include:

• The additional Companies House powers
• Powers relating to the Register of Overseas Entities 
• The power to seize crypto assets
• The new failure to prevent fraud offence

How do businesses need to manage the new economic crime act?

Failure to comply with the new act’s provisions could result in criminal proceedings and stiff penalties. Businesses could be left unable to operate and potentially have to close, with the potential for unlimited fines to be imposed. 

Organisations will benefit from strengthening their financial crime policies and procedures, ensuring they are comprehensive and ensuring that all staff clearly understand their obligations.

Corporate solicitors will be able to assist in drafting comprehensive protocol documents as well as ensuring that the identity verification processes are correctly handled, and Companies House filings made in full and on time.

A primary defence to the failure to prevent economic crimes is to be able to show that reasonable preventative measures were in place.

It is expected that companies will follow six main principles in dealing with compliance with the legislation, as follows:

• Top-level commitment
• Documented risk assessment
• Robust procedures
• Due diligence
• Communication, including whistleblowing, and training
• Monitoring and review

Those in charge must consider ‘the opportunity, the motive and the means by which associated persons could commit fraud…’

Recommended steps that businesses can take to show that reasonable procedures exist to prevent economic crime include:

• Having a comprehensive financial crime prevention policy
• Appointing officers to oversee compliance
• Dividing authority and responsibility to increase security
• Requiring two or more individuals to authorise financial transactions
• Economic crime risk training
• A risk assessment process and regular risk assessments
• Having a whistleblowing management system in place
• Having software in place to analyse and identify financial discrepancies, for example, in invoicing, procuring and payments
• Enhanced checks on employees

Detailed records need to be kept of the ‘reasonable preventative measures’ taken so that, should it be necessary, these can be put before the court as part of a defence to allegations of economic crime.

At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. As well as in-depth commercial expertise we provide an excellent service to our clients and practical advice and guidance.

We have wide-ranging experience in litigation and corporate law, and were named as winner of the Global 100 for Best Firm for Commercial Disputes of the Year 2024 and Gamechangers Global Awards for Boutique Litigation Law Firm of the Year 2023.

If you would like to talk to one of our expert legal team about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.