The Economic Crime and Corporate Transparency Act 2023: Full Steam Ahead.

Amy Nesbitt, Partner, Weightmans LLP, and member of the D&O FOIL Sector Focus Team takes a look at the implications of the ECC Act for insurers.

On 26 October 2023, the Economic Crime and Corporate Transparency Act 2023 (“the ECC Act”) received Royal Assent, several months earlier than anticipated. The ECC Act forms part of a suite of legislative measures specifically designed to combat economic crime, the primary catalyst for which was Russia’s invasion of Ukraine and the Government’s attempt to cleanse the UK of “dirty” Russian money.

The first notable step in the Government’s journey towards cracking down on abuse of the UK’s open market to facilitate corruption overseas, was the introduction of the Economic Crime (Transparency and Enforcement) Act 2022 (“the ECTE Act”), which received Royal Assent around one year ago. The ECTE Act created powers and mechanisms for responding quickly and imposing greater sanctions on overseas actors using UK property to launder money through a variety of measures.

Those measures include the introduction of a register of overseas entities owning UK property, changes to the unexplained wealth order (“UWO”) regime, amendments to the UK sanctions legislation, and it granting additional powers to the Serious Fraud Office (“SFO”) to move more quickly and harder when imposing sanctions. For example, the ECTE Act increases the potential number of individuals who may be subject to UWOs, such as company directors and owners of property held in trust and off-shore. The scope of UWOs will also increase to include property. Failure to comply with the registration requirements is a criminal offence for the entity and may prevent it from being able to buy, sell or mortgage property in the UK.

The ECC Act complements the ECTE Act and takes matters one step further by introducing reforms to Companies House, enabling the Registrar to become a more active gatekeeper over company incorporation through the creation of greater investigative and enforcement powers, including the power to reject and check information submitted to the companies register, and – perhaps more importantly – it introduces the new offence of failing to prevent fraud. These measures in combination are expected to allow the authorities to bear down further on bad actors who abuse and undermine the legitimacy of business in the UK, representing an important move towards meeting the Government’s overarching objective to combat the exploitation of our economy, driving dirty money away from the UK.

Does the ECC Act apply to everyone?

No, and this is perhaps its greatest shortfall. The offence currently applies to all large bodies corporate, subsidiaries, partnerships, charities, incorporated public bodies, and not-for-profit organisations. Whilst its scope and application is not limited to specific sectors, the ECC Act only applies to “large” organisations; in particular, an organisation will need to meet two out of the following three criteria¹:

• more than 250 employees,
• more than £36 million turnover and
• more than £18 million in total assets. 

Discussions took place as the Economic Crime & Transparency Bill was making its way through parliament as to whether these thresholds should be lowered. A decision was ultimately made for them to remain as above, however, it seems to us that a future downward adjustment to this threshold criteria should not be ruled out, particularly as the ECC Act receives more traction and generates results – or, perhaps, if it fails to live up to expectations.

Thresholds and strict eligibility criteria aside, it is important to note that the ECC Act is the latest step in a whole host of measures intended to achieve greater transparency and scrutiny. It seems to us, therefore, that a crack-down by regulators across the piece, particularly in the financial sector, is on the horizon – irrespective of whether it is achieved through the ECC Act, or through other existing legislative framework.

New Offence: Failing to prevent fraud

Directors will no longer be able to turn a blind eye to suspected criminal activity. Following implementation of the ECC Act, if Directors, or indeed Senior Managers, suspect any members or employees of their organisation are involved in fraud, money laundering or bribery, action will be required otherwise a prosecution against those Senior Managers and Directors will ensue. This new offence of failing to prevent fraud widens the pool of culpability, and so criminal and regulatory investigations will be more commonplace.
An organisation will not be prosecuted unless an individual associated with it commits a relevant offence. Under the ECC Act, the Secretary of State is required to provide guidance setting out the steps organisations will be required to take to prevent fraud taking place. However, organisations will need to be proactive in demonstrating its anti-fraud credentials.

The action required of a business should be proportionate to the risks it faces and its size. Those at the top of an organisation are best placed to ensure the organisation has a zero tolerance to fraud. Those running a business will want to show they have been pro-active in making sure that staff have received appropriate anti-fraud training and that the key people it does business with understand that it does not tolerate fraud through the inclusion of anti-fraud clauses in policies for goods and services.

Organisations ought to assess the risks they face.

For example, conducting research into the markets and sectors it operates, and in respect of the people it deals with, especially if entering into new business arrangements and new markets overseas, and undertaking proper due diligence.

Considerations for insurers

The implementation of the new offence is likely to result in an increase in criminal investigations and prosecutions against organisations. To avoid sanctions, an organisation will need to demonstrate that reasonable procedures were in place to prevent fraud.

Failure to comply with the new requirements will likely frustrate an organisation’s ability to operate, leading to losses. Moreover, there will be greater exposure to civil penalties, criminal sanctions, and fines – not to mention huge reputational harm.
The ECC Act grants wider investigative powers to the SFO, which can be utilised before a formal investigation is opened in relation to a potential criminal offence. D&O insurers will therefore need to consider carefully the definition and scope of the “investigation” cover afforded under policies at the underwriting stage, because claims for an indemnity under D&O policies may be triggered much earlier without formal investigations having been commenced.

Insurers of SMEs will likely want to keep abreast of developments and trends, with an eye to the potential for the financial thresholds which relate to the application of ECC Act to reduce. Even if there is to be no imminent change to those thresholds, underwriters will need to pay close attention to collective revenue and turnover when the SME organisation falls within a group of companies. Insurers ought to have an eye to the general shift towards greater scrutiny of the regulated sectors more generally on the basis that they are likely to be viewed as a potential conduit for money laundering, and may therefore be targeted for intervention under pre-existing legislative framework pursuant to the Government’s general crack-down.

Insurers may need to consider the increased risk of investigation and prosecution to businesses, and consider introducing conditions to D&O policies, or questions in proposal forms, which address the following:

• Robust fraud policies and procedures – these are key to any defence. Businesses will need to ensure they are able to demonstrate they are able to prevent fraud. Regular monitoring of their implementation and compliance is required.

• Company fraud training – this should be ongoing and delivered to all relevant employees with key personnel receiving bespoke training.

• Risk assessments – to assist businesses to fully understand their exposure to fraud, the associated risks and the strength of their existing controls.

Concluding remarks

These legislative changes demonstrate the UK’s commitment to combat economic crime, and it is part of a more general shift towards greater intervention by regulators, meaning investigations will be more commonplace. Pre-emptive measures are likely to hold the key to effective risk mitigation and defence. There is much for insurers to think about, and underwriting practices will invariably need to evolve to respond to this evolving risk landscape.