ECCTA: transforming corporate governance and fraud prevention
By Joe Woodward
Joe Woodward examines significant changes in corporate governance and fraud prevention under ECCTA
After months of expectation and headlines, the Economic Crime and Corporate Transparency Act (ECCTA) is now law.
Its implications are wide-ranging including a new offence of failure to prevent fraud; increased powers for Companies House; expansion of the “identification principle”; new NCA powers to seize crypto-assets; and additional powers to the Court to deal with “SLAPP” lawsuits.
When do all these changes take place, and what might they mean for practitioners?
Failure to prevent fraud
One of the most concentrated upon areas of ECCRA is the new offence of failure to prevent fraud. This offence only comes into force once the government has issues guidance as to what “reasonable” fraud prevention measure are.
Under the new provision, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place.
A “large organisation” is defined as any company that had any two of the following within the financial year preceding the relevant fraud offence:
- a turnover of more than £36m.
- a balance sheet total of more than £18m.
- more than 250 employees.
This is far reaching and represents a shift towards better corporate governance - it will now be more difficult for relevant organisations to deny knowledge of the fraud and blame rogue employees, without being able to demonstrate proper policies and procedures, the organisation will be drawn in. Based on recent statistics, over 7,500 organisations could be effected.
While these sections will only come into force once the government publishes guidance as to reasonable fraud prevention measures, there is no harm in reviewing existing fraud prevention measures and identifying areas that may require bolstering. This could then of course be tailored or adjusted once the guidance is published.
Practitioners, particularly general counsel for large organisations, should carefully consider what existing fraud prevention measures are in place in their organisations, and whether those measures are “reasonable”.
It will likely be key to consider what the organisation’s fraud risk level is – for high-risk organisations (such as those conducting sales to consumers, or pension providers) it may be prudent to very carefully consider what may be “reasonable” in advance of guidance being published.
Given the prospects of unlimited fines, it may pay to be prudent in this regard. Government guidance is keenly anticipated.
Expansion of the identification principle
ECCTA introduces a test which replicates the definition of “senior manager” in the Corporate Manslaughter and Corporate Homicide Act 2007. In sum, a senior manager is an individual that plays a significant role in the making of decisions about how the whole or a substantial part of the activities of the organisation are to be managed, or the actual managing or organising of those activities. This comes into force on 26 December 2023.
This looks at the senior manager’s role within the organisation and the level of managerial responsibility they undertake rather than merely their job title. It should enable more prosecutions where a senior manager plays a significant role in decision making within the company but may not have been deemed to be the “directing mind and will”.
As with the changes introducing the offence of failure to prevent fraud, practitioners and those in-house in particular will want to consider their organisations corporate governance and compliance measures.
This change, coupled with the new offence, firmly puts the onus on companies to actively prevent fraud and ensure their workforces (especially at the level of senior management and above) act with integrity. It is now clear organisations will be subject to consequences if they fail to do so.
Power to strike out “SLAPPs”
ECCTA grants the courts new powers to deal with so-called SLAPP (Strategic Litigation Against Public Participation) lawsuits (s. 194) and follows scrutiny of several recent high-profile libel actions that have been perceived as SLAPPs. Of note, this is the first time a legislative definition of a SLAPP has been offered, and although limited to cases concerning allegations of economic crime.
This comes into force once the relevant provisions in the CPR are amended. SLAPPs are defined in s. 195 as:
For the purposes of section 194 a claim is a ‘SLAPP claim’ if—
- the claimant’s behaviour in relation to the matters complained of in the claim has, or is intended to have, the effect of restraining the defendant’s exercise of the right to freedom of speech.
- any of the information that is or would be disclosed by the exercise of that right has to do with economic crime.
- any part of that disclosure is or would be made for a purpose related to the public interest in combating economic crime.
- any of the behaviour of the claimant in relation to the matters complained of in the claim is intended to cause the defendant, including harassment, alarm or distress, expense, or any other harm or inconvenience, beyond that ordinarily encountered in the course of properly conducted litigation.
The definition of a SLAPP, and the powers to strike out or otherwise deal with a SLAPP is a welcome step in the right direction to ensure the English courts, long seen as a “claimant friendly” jurisdiction for defamation, are not abused by those seeking to conceal their illicit activities.
The provisions attack the very heart of what makes SLAPPs so effective – costs, or more pertinently, the threat of costs. In order to combat this, the ECCTA provides that, in respect of a SLAPP claim, the Court may not order a defendant to pay the Claimant’s costs unless there is misconduct on the part of the Defendant that justifies it (s. 194(4)). It has also recently been suggested that a cross-undertaking in damages may be an effective measure in this regard.
The onus is on would-be SLAPP claimants to prove that their claim is not a SLAPP, and crucially, that it is more likely than not to succeed at trial – a positive hurdle to clear, and undoubtedly a deterrent to claimants.
This change is key in ensuring defendants are not silenced by the threat of oppressive costs when seeking to expose economic crimes of the rich and powerful. It will be interesting to see how these provisions are enacted, although perhaps the obvious route is an extension by way of a reverse of the QOCS (qualified one-way costs shifting) regime whereby a claimant is not responsible for the costs of a defendant in certain actions, unless there is “fundamental dishonesty”.
That said, there are clear concerns that this will lead to expensive satellite litigation on whether a claim is a SLAPP. This may still ensure that defendants, especially those without the resources of large media organisations, are silenced given that such matters will necessarily be dealt with at an early stage in proceedings.
Defamation practitioners will, however, have to clearly advise both would-be claimants and defendants as to whether the claim is likely to be a SLAPP. If a claim is likely to be considered a SLAPP, consideration should be given from the claimant’s side as to whether such a claim should be brought in the first place. From a defendant’s perspective, the decision to embark on a defence may be made easier with costs likely not a significant factor to bear in mind.
Practitioners will of course also need to keep in mind their ongoing regulatory obligations when assessing whether a client is instructing commencement of proceedings which could run into SLAPP territory.
Joe Woodward is an associate at Ontier