Preventing fraud: new legislation to tackle corporate crime at all levels
As the Economic Crime and Corporate Transparency Act comes into effect, Dan Stowers, partner and head of business crime and compliance at leading independent law firm Brabners, discusses its ramifications for the aerospace industry, and how businesses can best prepare.
The UK boasts one of the world’s largest and most open economies, with aerospace playing a key role – adding £37bn to GDP. However, the sector’s prominence, monetary and strategic value also leaves it vulnerable to internal and external threats, including financial crime and serious fraud.
A recently-published Home Office report showed that one in five UK businesses fell victim to fraud between 2018-2020 – and this figure is likely to have increased in the years since, driven by the challenging economic environment which has impacted both the cost-of-living and business health. The threat remains elevated in aerospace where contracts are of high value and national importance.
Indeed, there have been some notable instances of misconduct closer to home. For example, as recently as December, the Serious Fraud Office (SFO) launched a criminal investigation into London-based AOG Technics, with one arrest being made and a property searched with the assistance of the National Crime Agency (NCA), over the provenance of parts supplied to airlines including Ryanair, American Airlines and Delta.
Law enforcement powers to address such activity was bolstered by the introduction of the Economic Crime (Transparency and Enforcement) Act 2022. This was fast-tracked through parliament in 2022 to enable it to address, amongst other things, Russian-owned assets in the UK at the start of the war in Ukraine, and introduced a register of overseas entities that hold a beneficial ownership in UK property, thus creating greater transparency in a sector known for money laundering. This legislation also strengthened the application of Unexplained Wealth Orders and allows for easier prosecution of those in breach of sanctions.
Following on from this, the teeth of law enforcement agencies have been further sharpened by the complementary Economic Crime and Corporate Transparency Act 2023 (ECCTA), which received Royal Assent last Autumn, and is now coming into force.
Indeed, initial reforms to Companies House have already been implemented as of 4th March 2024, including enhanced powers for Companies House to impose financial penalties and more stringent requirements relating to the registration of office addresses. In essence, these changes are designed to deliver a more reliable companies register and prevent the moving of money between complex and opaque intercompany structures.
But, while the ECCTA adds to existing legislation and intends to prevent money being laundered or hidden, it has most notably restructured the corporate criminal liability regime in the UK – something that directors will need to take note of.
Greater corporate liability
Of particular importance is the expansion of the identification principle which, in its simplest form, means that the pool of actors within a business that can render a company criminally liable for its malicious actions has now grown significantly.
This is accompanied by the introduction of the ‘Failure to Prevent Fraud’ offence, which means that an organisation (caught by the relevant criteria) will now be liable for acts of fraud committed by associated persons, including employees, if it is found not to have reasonable prevention procedures in place. Combined, these reforms are intended to reduce the number of senior managers exploiting their authority to commit financial crimes and, critically, make corporates far more liable to criminal charges as a result.
It is worth noting that businesses are yet to receive information on the “reasonable fraud prevention procedures” that were slated to accompany the ECCTA – and until this guidance is published, the new law will not be enforced. However, having already gained clarity on the stringent approach to punishment the government is set to take, many of the businesses we work with are already considering how they can review and adapt their own practices to protect themselves. There are other offences that carry a similar ‘reasonable procedures’ defence, such as the failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017, which can provide a practical stepping-stone for businesses to start preparing their ‘reasonable fraud prevention procedures’.
Pre-flight checklist
Indeed, while the sector generally takes fraud prevention seriously, it’s important that every business – regardless of size or structure – remains proactive in reviewing their policy framework consistently. Regular monitoring and review will help to confirm that arrangements are being properly implemented and can be adapted as required.
In reviewing their financial crime compliance programme in light of the ECCTA, questions businesses should be asking themselves may pertain to whether senior management has taken the appropriate action to counter fraud. For example, is the business’ compliance programme considered at board level? Does the business have a counter-fraud policy, and if so, is it adequately implemented?
We would also advise leadership teams to consider how any provisions to prevent fraud are communicated to their workforce. For example, what training is delivered to employees in respect of identifying fraud and how often? Alongside this, who in the business is responsible for monitoring risks and communicating them effectively?
A fraud risk assessment is a vital tool in deciphering this, accounting for internal and external threats the business is exposed to, and which areas of the business are most susceptible. This can allow the business to develop and implement a proportionate response.
A key first step to achieving compliance with the new rules will be to develop an accurate picture of your business’ current performance. Our specialist Business Crime and Compliance team brings years of experience in dealing with complex cases and serious fraud and is well-placed to advise on prevention strategies.
The ECCTA undoubtedly represents a turning point in the SFO and the NCA’s ability to tackle fraud. Proactivity will be key in preparing for the new rules – and as is always the case with any issue of financial or organisational compliance – those who adopt best practice will be best placed to protect themselves.
For more information on how Brabners can support your business in preparing for the Economic Crime and Corporate Transparency Act, contact Dan.Stowers@brabners.com
