UK Parliament Enacts Sweeping New Fraud Legislation Aimed at AML/TF Activities
Alexander J. Cotoia currently serves as the Regulatory Compliance Manager at The Volkov Law Group, where he regularly advises the firm and its clients on international developments implicating compliance concerns. He is a regular speaker at compliance events and webinars, and provides training to AML officials in a variety of areas. He may be reached at [email protected].
On October 26, 2023, the Parliament of the United Kingdom of Great Britain and Northern Ireland enacted—after obtaining Royal Assent—a sweeping set of statutory requirements aimed squarely at combating fraud and money laundering in one of the world’s major financial markets. Titled the Economic Crime and Corporate Transparency Act 2023 (“ECCT Act”), the new legislation follows the enactment of more targeted requirements and prohibitions contained in predicate legislation adopted last year under the aegis of the Economic Crime (Transparency and Enforcement) 2022 Act (the “ECTE Act”). Among other things, the ECTE Act permitted His Majesty’s Government (“HM Government”) to move more swiftly to impose sanctions against individuals and entities allied with adversary governments in times of foreign crisis. Significantly, the ECTE Act also mandated the creation of a new register of overseas entities to address the specific problem of foreign criminals utilizing property located in the UK to launder and conceal the source of monies derived from international criminal activity.
Significant Expansion of Companies House Authority and Limited Partnership Reform
The ECCT Act 2023 significantly expands upon this framework in several principal areas—not the least of which is a precipitous increase in Companies House’s authority to encompass:
(1) the expansion of identity verification requirements for all new and existing registered company directors, Persons with Significant Control, and those tendering the delivery of corporate documents to the commercial registry with a view towards improving the accuracy of corporate data to support both business decisions and law enforcement activity;
(2) the broadening of Companies House’s powers to equip the Registrar of Companies to become a “more active gatekeeper over company creation” as well as the custodian of more reliable data;
(3) the collection of more reliable financial information by the commercial register to ensure that company information is more reliable, complete and accurate, and thus suitable for more sophisticated analysis leading to more reliable business decisions;
(4) the provision of “more effective investigation and enforcement powers” along with the ability to “cross-check” data with other public and private sector bodies to ascertain the legitimacy of company filings;
(5) the enhancement of protective measures designed to control the unlawful dissemination of personal information provided to Companies House to more sufficiently protect individuals from the intentional or negligent disclosure of information that would promoted fraud and other harms; and
(6) the enactment of broader reforms that clamp down on the “misuse” of corporate vehicles—among them, limited partnerships (“LPs”).
HM Government’s crackdown on LPs—including LPs of Scottish origin—is largely in response to independent data consistently demonstrating that such corporate vehicles are leveraged heavily by criminal enterprises to conceal illicit financial activity. This same data demonstrates that roughly 1 in 10 UK organized LPs act as front companies to conceal financial crime at global scale. While LPs have traditionally enjoyed significant latitude from the government in terms of formal registration requirements and lax oversight, the ECCT Act follows up on efforts originally commenced in 2018 to propose even more restrictions on LPs by tightening legal registration requirements; requiring LPs to maintain a connection to the UK; increasing transparency requirements; and empowering the Registrar to maintain a more accurate registry by permitting personnel to deregister LPs that are dissolved, no longer actively trading, or that have been rendered in-operational by court order.
Aggressively Tacking the Plague of Money Laundering
Most notably, the ECCT Act significantly strengthens HM Government’s anti-money laundering powers by, inter alia, enabling businesses in certain situations to share information more easily for the purposes of “preventing, investigating or detecting economic crime” by expressly disallowing claims for civil liability arising from breaches of confidentiality. In addition, the ECCT Act’s AML provisions aim to promote “proactive intelligence gathering” by law enforcement and the strengthening of the National Crime Agency’s Financial Intelligence Unit’s (“FIU’s) ability to obtain information from businesses related to money launder and terrorist financing by removing the longstanding requirement that a pre-existing Suspicious Activity Report (“SAR”) be submitted before an Information Order (“IO”) may be made. Finally, the ECCT Act focuses on the coalescence of public and private sector resources to expand the ability of businesses under certain circumstances to deal with client’s property without having to first submit a Defense Against Money Laundering (“DAML”) SAR. Ostensibly, the assumption of additional public responsibilities by private entities will allow law enforcement resources to be targeted more effectively, thus reducing the workload for a system already beset with bureaucratic difficulties.
Implementing a New ‘Failure to Prevent Fraud Offense’
Prior to the passage of the ECCT Act by the UK Parliament, several aspects of the statute were improved through a series of technical amendments that—among other things—introduced the new criminal offense of ‘failing to prevent fraud.’ Under the ECCT Act, a “relevant body” that is identified as a “large organization” pursuant to sections 201 and 202 of the ECCT may be convicted of a criminal offense if, “in a financial year of the body, a person who associated with the body . . . commits a fraud offense intending to benefit (whether directly or indirectly)” the body itself or any “subsidiary undertaking, [where] the [accused] provides services on behalf of the relevant body.” A “relevant body” may similarly be found guilty of a criminal offense to the extent an employee of that body commits a fraud offense intending to benefit (whether directly or indirectly) the relevant body; the fraud offense is committed in a financial year of a parent undertaking of which the relevant body is a subsidiary undertaking; and the parent undertaking is a relevant body defined as a “large organization.” Logically, the criminalization provisions related to the expansion of fraud offenses does not apply where the relevant itself “was, or was intended to be, a victim of the fraud offense.”
Of significant import to legal practitioners and compliance professionals alike is the statute’s enumeration of defenses to criminal liability for fraud offenses. This includes proving that, at the time the offense was committed, “the body had in place such prevention procedures as it was reasonable in all the circumstances to expect the body to have in place” or, in the alternative, proving that “it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place.” In the context of this section of the ECCT Act, the term “prevention procedures” specifically means procedures designed to prevent persons associated with the body from committing any fraud offenses as designated elsewhere in the Act. Section 204(1) of the ECCT Act specifically directs the Secretary of State to issue guidance about procedures that relevant bodies can adopt to prevent persons with whom they affiliate from committing fraud offenses. Finally, it should be noted that the ECCT Act has extraterritorial application.Therefore, the ECCT Act not only applies domestically to large organizations in the UK, but also to any covered organization where an employee commits fraud as defined by UK law or targets UK victims, even if the employer and employee are based wholly overseas.
The Bottom Line for Compliance Professionals
With the sophistication of anti-money laundering and terrorist financing activity increasing precipitously, HM Government, in tandem with a multitude of other jurisdictions, are acting decisively to tackle both the means and methods employed by international criminal cartels to conceal their illicit activity. While the reforms adopted in the ECCT Act are modest, we can expect to see vigorous enforcement of the ECCT Act’s failure to prevent fraud prohibitions, especially given recent geopolitical tensions with the Russian Federation—whose oligarchs have notoriously attempted to obscure ownership of UK entities with the express purpose of evading sanctions regulations in direct contravention of the UK’s prohibition against fraud by false representation, among other things. In anticipation of the issuance of more definitive guidance concerning the prevention of fraud offenses by HM Government, companies operating in the UK—either at the parent company or subsidiary level—should take heed of the ECCT Act’s requirements; such that the ultimate promulgation of government guidance will have less of an impact on the compliance operation overall, which can proactively recommend the adoption of additional internal controls to mitigate the potential for fraudulent offenses to occur in the first instance.