Guest blog: The Economic Crime and Corporate Transparency Act 2023 – what does it mean for building societies?

Ben Cooper, partner in TLT’s economic crime compliance team outlines the reforms included in The Act, what they will mean for building societies and what they can do to prepare.

Ben Cooper, TLT LLPThe Economic Crime and Corporate Transparency Act (the ”Act”) received Royal Assent on 26 October 2023. The Act is incredibly wide-ranging, from the reforms to Companies House, described by its Chief Executive Louise Smyth as “without doubt the most significant change for Companies House in our long history”, through to new provisions to encourage businesses to share information to tackle economic crime, and greater powers to the National Crime Agency to compel businesses to hand over information in relation to money laundering and terrorist financing. 

However, it is the introduction of the failure to prevent fraud offence and the extension of corporate liability for all economic crimes committed by a firm’s senior manager that means the Act will represent the biggest legislative shake up in economic crime the UK has seen since the Proceeds of Crime Act in 2002. In this blog I look at what the failure to prevent fraud offence and extension of corporate liability will mean for building societies and what they can do to prepare.

Failure to prevent fraud

Following a lengthy debate between the House of Commons and the House of Lords, the failure to prevent fraud offence only applies to large organisations. The Lords’ view was that it should apply to all corporate bodies, but the government were concerned about the cost of compliance for small and medium enterprises. Large organisations are companies, firms and partnerships that meet two of the following three criteria:

  • Turnover – more than £36m
  • Balance sheet total – more than £18m
  • Employees – more than 250

Building societies that meet the large organisation definition will be criminally liable if an employee or third party acting on its behalf commits external fraud (not fraud against the building society itself). The types of fraud covered by this offence are very broad and include false statements by firm directors, fraud by false representation and cheating the public revenue. In practice, this could mean building societies being automatically liable for greenwashing offences, false statements in marketing materials or false statements in their annual returns. However, it will be a complete defence for the building society to show it had reasonable preventative procedures, or that it was reasonable not to have them, in place at the time of the offence. 

The government will issue guidance on what constitutes reasonable procedures before this offence comes into force, so building societies have about six months to prepare. Nevertheless, the government’s guidance is likely to closely follow the guidance for the similar bribery and tax evasion failure to prevent offences. As a result, building societies can get ahead now by assessing their fraud risk and mapping existing fraud controls to see if any gaps exist and put controls in place to fill those gaps. 

It may be that no additional fraud controls are required, it is just a matter of identifying them and ensuring appropriate monitoring and testing of those controls is in place. In relation to third parties, the requirements mirror the bribery and tax evasion failure to prevent offences, so it may be possible to extend the third-party risk management processes for those offences to also cover fraud. If no such processes are already in place, building societies should consider updating their third-party risk management processes to cover the fraud, bribery and tax evasion failure to prevent offences.

Extension of corporate liability 

The extension of corporate liability will make it easier for law enforcement to prosecute building societies for economic crimes committed by senior managers. Economic crime in this instance is very broad and includes money laundering, sanctions, bribery, tax evasion and even misleading the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). The term senior manager is defined in the Act as a person playing a significant role in decision making or management of the organisation, allowing prosecutors to assess what the employee was doing in practice and whether this can be attributed to the building society, rather than their job title. Unlike the failure to prevent fraud offence, the extension of corporate liability will apply to all building societies, regardless of size. 

Furthermore, there is also no statutory defence for building societies to count on. Building societies will have to rely on their compliance programmes to prevent senior managers from committing economic crimes or, if that fails, using the existence of their programmes to mitigate its penalty. 

This offence will come into force at the end of December 2023 and so now is the time for building societies to review and refresh their economic crime compliance programmes to ensure they are fit for purpose to seek to prevent their senior managers from committing economic crime.

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The views, opinions and positions expressed within guest blogs are those of the authors and do not necessarily represent those of the BSA.