Failure to prevent fraud offence puts liability on company directors

The Economic Crime and Corporate Transparency Act has now been passed after delays in the House of Lords where there were calls to extend the anti-fraud rules to all sizes of businesses, not just the largest corporates. This was rejected by the government and the Act has now been given Royal Assent.
One of the main developments is the creation of a criminal offence, called ‘failure to prevent fraud’, which will hold a large organisation criminally liable if it benefits from a fraud that is committed by a member of staff.
An update to the legal principle known as the ‘identification doctrine’ will also ensure businesses can be held criminally liable for the actions of their senior managers who commit an economic crime.

This will enable corporates to be prosecuted for economic crimes and deter instances where senior managers use their authority granted under the corporation to commit economic crimes.
Johanna Walsh, partner and head of Mishcon de Reya’s white-collar crime and investigations group, commented: ‘The really big difference this Act will make is the reform of the identification principle – that principle was devised over fifty years ago and is now accepted by almost everyone in this area of practice as the single biggest obstacle to the prosecution of companies in the UK.
'So the impact of this reform, which will allow enforcement bodies to hold companies liable for the actions of their senior managers, cannot be overstated.’
The government said: ‘If a corporation is successfully prosecuted under the offence, it will receive a criminal conviction and fine, in addition to any sentences imposed on individuals involved in the offending. The criminal conviction can impact on other parties, including investors, other employees, and even customers.’
Both changes remove the ability for a large company to hide behind complex management structures to evade scrutiny.
The Act also gives Companies House new powers to verify the identities of company directors, remove fraudulent organisations from the company register and share information with criminal investigation agencies.
Invalid registered office addresses, such as those used fraudulently to set up companies, will be removed.
Verification checks will assess the identities of people setting up and managing companies, stopping criminals hiding behind false names or registering companies with fictional characters. This will help prevent fraudulent appointments and avoid people involved in money laundering hiding behind false names.
Mike Miller, ICAEW economic crime manager, said: ‘We have long campaigned for these important reforms to improving the quality of information held on the Register, which had been subject to abuse for many years. It’s vital for both the business community and the public interest that the platform contains accurate and verified company data, and these changes should achieve this.

‘These are ambitious reforms and will take both time and a significant increase in resourcing to implement effectively. We look forward to working with Companies House to overcome any challenges as these changes are introduced.’
Law enforcement agencies will have greater powers to seize, freeze and recover cryptoassets, while legal reforms will allow the courts to dismiss spurious lawsuits, known as Strategic Lawsuits Against Public Participation (SLAPPs), which seek to stifle freedom of speech when wealthy individuals try to stop reporters exposing their misconduct. Prosecutors will also be in a stronger position to hold large corporations accountable for malpractice.
Companies House chief executive Louise Smyth said: ‘These new powers are without doubt the most significant change for Companies House in our long history.
‘We have known for some time that UK companies have been misused by criminals to commit fraud, money laundering, and other forms of economic crime and our thoughts have always been with those affected.
‘We will now play a much greater role in preventing further abuse of the register. We will be taking unprecedented steps to crack down on fraudulent activities, help victims quicker and clean up the register by removing information we know to be incorrect. This will underpin our efforts to improve the quality and reliability of our data.’
Criticism has been levelled at the Companies House register for failing to check multiple entries using the same address and often hijacking residential addresses without the property owners knowing their information is being used fraudulently.

Business minister Kevin Hollinrake said: ‘We’re providing Companies House with the tools to take a much harder line on criminals who take advantage of the UK’s open economy, ensuring the reputation of our businesses is not tarnished by the UK playing host to the world’s scammers.
‘These reforms will remove the smoke and mirrors around companies hiding behind false identities, provide further protection to the public from companies fraudulently using their addresses, and deliver better data to support business and lending decisions across the economy.’
New powers will additionally allow law enforcement to target illicit cryptoassets. The NCA’s National Assessment Centre estimates that over £1bn of illicit cash was transferred overseas using cryptoassets in 2021. The Act has introduced provisions for police and the NCA to seize cryptoassets more easily and convert them into money before a forfeiture hearing has taken place. In exceptional circumstances, there will also be a power to destroy seized cryptocurrency.
Factsheet: Economic Crime and Corporate Transparency Bill