Understanding the Economic Crime and Corporate Transparency Act

Large firms can potentially be held liable for failing to prevent fraud under the government’s new economic crime legislation, writes Thirdfort’s GC Sam Ruback

The UK government is clamping down on economic crime and corporate fraud Shutterstock

The Economic Crime and Corporate Transparency Act, which received Royal Assent on 26 October, is a comprehensive piece of legislation to fortify the fight against corruption, money laundering and fraud.

The act introduces several wide-ranging reforms including a new offence of failure to prevent fraud for large firms, reforms to Companies House introducing identity verification, to requirements for new and existing directors and increased fines for law firms.  

Law firms must be prepared. 

Continued focus on economic crime 

The act represents the government’s continued effort to combat fraud and money laundering. It is an extension of the 2022 Economic Crime (Transparency and Enforcement) Act, introduced in response to Russia’s invasion of Ukraine. 

The 2022 act accelerated the government’s sanctioning process, introduced a register for foreign entities specifically targeting overseas criminals utilising UK real estate for money laundering, and revamped the UK’s approach to unexplained wealth.

Key elements in the act

The 2023 act continues the trend of escalating regulation to protect society from money laundering and fraud. 

It overhauls Companies House by giving the UK company registrar new and stronger powers to query information and to amend or remove information from the companies register. It also introduces identity verification requirements for new and existing directors, people with significant control and those delivering documents to the register.  

It will also grant authorities increased power to confiscate suspected illicit crypto assets. Moreover, the government seeks to enable companies to more confidently exchange information to counteract money laundering and similar financial crimes. 

For those in the legal profession, two primary reforms stand out. 

First, the introduction of an offence for failing to prevent fraud.

Here, a relevant firm will be criminally liable where an employee, agent or subsidiary commits fraud intended to benefit the organisation and the organisation did not have reasonable procedures in place to prevent the fraud. 

Importantly, prosecutors will not need to show that the firm’s leaders authorised or had knowledge of the fraud. If convicted, the firm is liable to an unlimited fine. 

Though applicable across sectors, only large enterprises fall under its purview. Qualification criteria include having more than 250 staff members, a turnover exceeding £36m, or assets surpassing £18m.

Second, the act reforms limited partnerships law intended to address concerns that UK limited partnerships are being used for fraudulent purposes. 

Among other things, the act introduces changes to the process for registering UK limited partnerships with Companies House and additional transparency obligations on general partners and limited partners.

Moreover, the act revokes the financial penalty cap for law firms, previously set at £25,000 for breaches of economic crime. Now, the Solicitors Regulation Authority (delegated by the Law Society) can impose unlimited fines.  

This change intends to align the Law Society’s penalty capabilities with other primary regulators. However, the ability to impose non-financial sanctions remains constant.

Implications for law firms

The rising cost of economic crime on the UK economy, estimated to exceed £290bn annually and exacerbated by geopolitical situations like the Ukraine crisis, has thrust the legal sector and its regulatory framework into focus. The act therefore enhances regulatory powers to address these challenges.

As a result, law firms must implement robust frameworks and procedures to deter fraud and money laundering. 

Recommended action for lawyers

Legal firms should foster a culture where staff actively participate in the compliance process alerting managers to issues and concerns as they arise. A proactive stance on anti-money laundering ensures firms remain compliant amid changing regulations. 

When considering a specific client and/or transaction, firms should encourage employees to follow the six-question approach. These questions lay the foundations for many scenarios to support the lawyer in gathering the information they need to decide whether the client, the transaction and any funds are genuine. 

The questions include: who is the client? What do we know about the third party? Where are they located? When did they incorporate the business or make the request? Why does the client want the transaction structured this way? And how is the third party linked to the client? 

However, it is not enough to simply ask these questions and look out for the warning signs. Firms must also document the process they are going through and record their considerations at the time. 

All law firms need to make a conscious effort to ensure their files are documented so that a bystander could look in and understand the logic and considerations, and work out how the firm concluded what it did. Making such records helps firms reduce the risk of money laundering and fraud failings. 

Harnessing technological advancements, such as AI, biometrics and Open Banking, can augment and expedite processes like Know Your Client (KYC) and Anti-Money Laundering (AML) verifications. These tech-driven methods not only save time and resources but also fortify firms against financial crime, helping them reduce the risk of fraud while meeting regulatory requirements. 

As the act shows, the government and its regulators are stepping up their focus on fraud and money laundering. 

For solicitors, this is no longer just a reputational matter. Instead, it could materially impact a business’s viability. So, law firms need a proactive, technological approach to economic crime and compliance to stay competitive and compliant.

Sam Ruback is general counsel at Thirdfort, a compliance platform.

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