Instigating the Economic
Crime and Corporate Transparency Act 2023 (ECCTA 2023) into legislation within
the United Kingdom represents a landmark moment in the government's ongoing
efforts to combat economic crime and improve its legislative framework. One of
the key provisions of this legislation is introducing a ‘failure to prevent
fraud’ offence, which seeks to hold organisations accountable for fraud
committed by individuals associated with them.
The Need for Ethical
Standards
Large organisations and
their subsidiaries often wield significant influence and power, both
economically and socially. As such, they are responsible for conducting their
business operations in a manner that not only complies with legal regulations
but also aligns with the highest ethical standards. The ECCTA 2023, amongst
other areas of legislation, aims to create a level playing field and promote
fair competition in the marketplace by implementing offences that hold these
organisations accountable for any wrongdoing or unethical behaviour.
Partnerships, on the other
hand, are often characterised by shared responsibilities and decision-making
among partners. All partners must uphold ethical standards and adhere to the
law to maintain the integrity of the partnership and the trust of their clients
and customers. Including partnerships within the scope of the offence ensures
that all entities, regardless of their legal structure, are held to the same
standards of conduct.
In addition, including large
not-for-profit organisations such as charities and incorporated public bodies
within the scope of the offence is a positive development. These organisations
play a crucial societal role by providing essential services and support to
vulnerable populations. They must operate transparently and be accountable for
maintaining public trust and confidence. By subjecting them to the same
standards as for-profit organisations, the legislation ensures that all
entities, regardless of their profit motive, are held to the same high
standards of conduct.
The Failure to Prevent Fraud
Offence
Introducing this offence
marks a significant shift in the approach to combating economic crime.
Previously, organisations could only be held criminally liable for fraud if it
could be proven that senior management or the organisation's directing minds were
involved or aware of the fraudulent activities. This high threshold often made
it difficult to prosecute organisations for fraud, especially in cases where
lower-level employees or third parties committed the offence.
With the ‘failure to prevent
fraud’ offence, the liability scope for organisations has significantly
expanded. Now, organisations can be held criminally liable for fraud committed
by anyone acting on their behalf, including employees, agents, and contractors.
This expansion pressures organisations to implement robust fraud prevention
measures and monitor the actions of those associated with them.
Introducing the 'failure to
prevent fraud' offence necessitates a significant review and strengthening of
organisations' anti-fraud policies and procedures. Organisations must ensure
that their standards, policies and procedures effectively deter and detect
fraudulent activities. This may involve:
- Implementing stricter internal
controls.
- Conducting regular fraud risk
assessments.
- Providing employee fraud awareness
training, and
- Actively monitoring and
investigating suspicious activities.
In addition to provisions
targeting money laundering and corruption, the Act includes a significant
offence: the ‘failure to prevent fraud’. This offence holds organisations
accountable for fraud committed by their employees, agents, or representatives
unless they can demonstrate that they have adequate policies and procedures to
prevent such misconduct.
Under the legal framework,
organisations that fail to take the necessary steps to prevent fraud within
their ranks will face serious consequences. In addition to potential criminal
prosecution, organisations found guilty of the ‘failure to prevent fraud’
offence could be subject to hefty fines, which could significantly impact their
financial stability. Moreover, the reputational damage associated with being
implicated in a fraud scandal could have long-lasting consequences for an
organisation’s brand and standing in the business community.
Definition of Organisations
Affected
The ‘Failure to Prevent
Fraud’ offence, which will apply to large organisations, subsidiaries,
partnerships, and not-for-profit organisations across all sectors, is valuable
for promoting accountability, transparency, and ethical behaviour in business.
The legislation aims to create a more responsible and ethical business
environment that benefits all stakeholders by holding organisations accountable
for their actions and ensuring compliance with the law.
Two of the three criteria
below must be met for the ‘failure to prevent fraud’ offence to apply to an
organisation:
- More than 250 employees
- More than £36 million
turnover
- More than £18 million in total
assets
The offence will also apply
to parent organisations of a group which meets at least two of the
following criteria in the final year preceding the year in which the offence is
committed:
- More than 250 aggregate employees
- An aggregate turnover of over £36
million net (or £43.2 million gross)
- Aggregate balance sheet of over £18
million net (or £21.6 million gross)
The ‘Failure to Prevent
Fraud’ offence is a step in the right direction towards ensuring accountability
and transparency across all sectors. In today's globalised and interconnected
world, organisations of all types and sizes must act ethically and responsibly
to maintain trust and credibility with their stakeholders.
Applying the offence across
all sectors is a significant step towards promoting a culture of ethical
behaviour and compliance with the law. It sends a clear message that unethical
conduct will not be tolerated, regardless of the industry in which the organisation
operates. This will help to create a more level playing field and foster a
business environment that values integrity and honesty.
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