Economic Crime and Corporate Transparency Act 2023 (ECCTA): Public bodies and the failure to prevent fraud offence

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) gained royal assent at the end of October this year. It introduced, amongst a host of other provisions, criminal liability for the failure to prevent fraud. At face value the ECCTA may appear a means of curtailing economic crime within the private sector. However, the application of the failure to prevent fraud offence to public bodies poses a series of interesting and presently muddied answers.

A recent blog article from Nicola Evans detailed the impact the ECCTA may have on companies and charities. Here we unpack which public bodies could be liable under the failure to prevent fraud offence, how they can prevent liability and the policy vacuum that needs to be filled before the offence is in force.

The Application of the failure to prevent fraud offence

Section 199(1) of the ECCTA provides that:

‘A relevant body which is a large organisation is guilty of an offence if… a person who is associated with the body commits a fraud offence intending to benefit the relevant body or a person or subsidiary undertaking to whom the associate provides services.’

The bite of the failure to prevent fraud offence is in the definition of the two underlined terms, ‘relevant body’ and ‘large organisation’.

‘Relevant body’

The question of whether ‘relevant body’ includes a public body is one that raises some difficult questions of public law and the identity of public bodies.

‘Relevant body’ is defined by section 199(13) as a ‘body corporate or a partnership (wherever incorporated or formed)’. No further definition of ‘body corporate’ is given for the purposes of the failure to prevent fraud offence.

Many would think that public bodies would only have to look at their governance structure to see if had been established as a body corporate (eg a company). Simple enough, right?

However, the general legal meaning of ‘body corporate’ extends beyond companies to include any incorporated body, including those incorporated by or pursuant to an Act of Parliament such as building societies, industrial or provident societies, co-operative and community benefit societies. It also extends to public corporations created to fulfil some special social or economic purpose created by either royal charter (like the BBC) or statute (like Transport for London).

Whilst ‘body corporate’ is defined more narrowly in the economic crime provisions to exclude corporations sole, the failure to prevent fraud offence casts a much wider net. This becomes more evident as you begin to unwind the governance structures of public bodies.

Public bodies and public offices should be actively looking into their governance structures to understand whether they are captured under this wide definition of public bodies. It seems clear that:

• government departments since they are generally not specifically incorporated by statute, do not have the requisite legal personality and therefore would not be captured as a ‘relevant body’;
• Secretaries of State, whilst not generally bodies corporate, can be made a corporation sole under the Ministers of the Crown Act 1975. Examples of this are the Secretary of State for Justice and the Foreign Secretary were made corporations sole; and
• other public bodies may be bodies corporate, depending on their legal status.

However, even though an organisation is considered a ‘relevant body’ does not automatically mean they are captured under the failure to prevent fraud offence.

‘Large organisation’

An organisation must be a relevant body which is a large organisation to be potentially liable under the failure to prevent fraud offence.

A relevant body is a large organisation only if two or more of the following statutory conditions are met in the financial year that precedes the year of the fraud offence being committed. The conditions are as follows:

• turnover of more than £36 million;
• balance sheet total of more than £18 million; and
• more than 250 employees.

Where a relevant body is a parent undertaking it is a large organisation only if the group headed by it satisfies two or more of the following conditions in the financial year of the body that precedes the year of the fraud offence:

• aggregate turnover of more than £36 million net (or £43.2 million gross);
• aggregate balance sheet total of more than £18 million net (or £21.6 million gross); and
• aggregate number of employees more than 250.

The aggregate figures are the result of aggregating the relevant figures for each member of the group.

If the thresholds are not met, then, regardless of the governance structure of the body, it cannot be liable under the failure to prevent fraud offence. However the Secretary of State may amend the thresholds of what constitutes a large organisation and may even remove the large organisation requirement entirely.

Fraud offences and procedures to prevent liability

The failure to prevent fraud provision is designed as a punitive measure where a ‘fraud offence’ has occurred. The ECCTA defines fraud offences as:

• the common law offences of cheating the public revenue and in Scotland, fraud, uttering and embezzlement; and
• certain statutory offences under the Theft Act 1968, Theft Act (Northern Ireland) 1969, Companies Act 2006 (fraudulent trading) and Fraud Act 2006.

It will be the relevant body that is liable under the failure to prevent fraud offence rather than the individual itself. It is a defence under the ECCTA if an organisation can prove they have reasonable procedures in place to prevent fraud.

Commencement

Whilst the ECCTA was given Royal Assent in October this year, the failure to prevent fraud offence is yet to come into force. It does so once guidance is published on how organisations can avoid prosecution (under section 199) .

We are cautiously optimistic that this guidance will also provide a further steer on the interpretation of the failure to prevent fraud offence. These provisions were introduced into the Bill late into the parliamentary process and were subject to much debate in both Houses. The guidance will hopefully give further clarity to organisations (and particularly those in the public sector) as to which bodies would be captured under the definition of ‘relevant body’.

Time will tell if the potentially wide ambit of the offence was intended.