Economic Crime And Corporate Transparency Act, 2023: A Comprehensive Analysis – Corporate Crime

The enactment of the Economic Crime and Corporate
Transparency Act, 2023 (‘ECCTA’) in the United Kingdom
(‘UK’) marks a significant milestone in the jurisprudence
of economic crimes. This article discusses the reforms introduced
by the ECCTA and their impact on determining the liability of
corporate entities and their controlling minds in cases of economic
crimes. It also sheds light on the criminal liability of corporates
in India while noting the valuable lessons that need to be learnt
from the UK reforms, especially in today’s complex corporate
landscape.

I. Introduction

Prosecuting corporates for economic crimes has never been an
easy task. The ‘directing mind and will’ test, which seeks
to identify the ultimate decision-maker to hold liable for an
alleged offence, often falls short in tracing accountability in
complex corporate structures with multi-level management and
decentralised decision-making mechanisms.

It was to address this lacuna in the framework governing
economic crime and corporate liability, along with the objective of
reducing corporate frauds, that the ECCTA was enacted in the
UK.¹

The ECCTA has expanded the former identification principle,
making corporates liable for specific criminal offences based on
the Senior Manager Test instead of the previous
‘directing mind and will’ test. The reform broadens the
scope of accountability of senior executives whose actions can be
attributed to a corporate for the purpose of establishing criminal
liability. It has also introduced a new offence, namely failure to
prevent fraud, thereby further increasing the scope of a
corporate’s criminal liability.

II. Redefining the Identification Doctrine

The identification doctrine, also known as the identification
principle, is a legal concept in common law that holds a corporate
criminally liable for the actions of its ‘directing mind,’
typically high-level executives or senior management, if those
individuals commit criminal acts in the course of their duties for
the corporate. This principle is based on the idea that the actions
of these individuals represent the actions and intentions of the
corporate itself, preventing the abuse of the separate legal
personality of a company by its executives.

Under the erstwhile legal framework, for a corporate to be found
guilty of a criminal offence requiring proof of mens rea,
it was necessary to establish that an individual representing the
company’s ‘directing mind and will’ possessed the
requisite state of mind.

Advocates for reform argued that this rule was inadequate for
addressing misconduct in larger companies with complex
decision-making structures, where responsibility is spread across
multiple individuals or committees. Establishing mens rea
behind the relevant acts, particularly in large corporates with
decentralised and multi-layered management, was remarkably
difficult. To address this challenge, a category of ‘failure to
prevent’ corporate criminal offences was introduced. These
offences, which cover bribery, tax evasion, and now fraud under the
ECCTA, do not directly attribute primary liability to the company
for the substantive offence. Instead, they impose liability for
failing to prevent the offence from occurring. This approach allows
for a more effective prosecution of corporate misconduct in cases
where individual culpability is difficult to establish.

S. 196 of the ECCTA extends liability for economic crimes to
companies or partnerships where the offence involves a senior
manager, thereby broadening the range of individuals whose actions
can result in liability for the corporate entity. This change
simplifies charging decisions and subsequent prosecutions of
companies and partnerships, making them more straightforward for
prosecutors. The reform amends and broadens the grounds on which
companies and partnerships can be held primarily liable for a
variety of economic crimes, applying to both the UK and non-UK
businesses.

III. Expanding the Scope of Corporate Criminal Liability

Taking a step forward from the identification principle, the
ECCTA introduces the Senior Manager Test, attributing liability in
an economic crime by a corporate. Under the new standard, a
corporate can be held criminally responsible following the
identification doctrine if a senior manager commits a relevant
crime while ‘acting within the actual or apparent scope of
their authority’. This increased liability applies only to
specified economic crimes. A senior manager is described as someone
who significantly contributes to the decisions regarding the
management or organisation of the entire or a significant part of
the activities of the corporate body or partnership or the actual
management or organisation of the entire or a significant part of
those activities. The specific title of the individual is not
important as long as they meet this definition.

The reform expands the group of senior executives whose actions
could be linked to a corporate, establishing criminal liability
against it. The explanatory notes of the Corporate Manslaughter and
Corporate Homicide Act, 2007, which influenced the concept of
senior management, suggest that this could include individuals
directly involved in management, as well as those in strategic or
compliance roles. This broader category may encompass company
directors, senior officers who are not on the board, and possibly
individuals in departments like HR, in-house legal teams, and
regional or divisional managers in nationwide
organisations.²

Under the failure to prevent fraud offence, a corporate can be
held responsible if it fails to prevent specified fraud offences
committed by an associated person. The new set of strict liability
criminal offences is modelled after existing ‘failure to
prevent’ offences in the UK, such as failure to prevent bribery
and the facilitation of tax evasion. However, this new offence
applies only to large organisations and excludes small and
medium-sized companies. A corporation is considered a large
organisation under the ECCTA, if, in the financial year before the
alleged fraud, it meets two or more of the following
conditions:

1. It has more than 250 employees,




2. It has a turnover exceeding £36 million, and/or




3. It has a balance sheet total exceeding £18 million.

Further, for a parent company of a group to be classified as a
large organisation, it must meet at least two of the following
criteria:

1. An aggregate turnover exceeding £36 million (or
   £43.2 million gross),




2. An aggregate balance sheet total exceeding £18 million
   net (or £21.6 million gross), and/or




3. More than 250 aggregate employees.

Any person, agent, employee, or subsidiary providing services
for or on behalf of a large company will come under the umbrella of
an associated person. This definition closely mirrors how an
associated person is defined in other UK anti-corruption laws.
Consequently, parent companies can now be held accountable for
fraud committed by an employee of a subsidiary if that employee has
the necessary intent. It is important to note that the associated
person must intend to benefit either the corporate directly or a
person to whom services are provided on behalf of the
corporate.

IV. Defence of Reasonable Procedure

In case a corporate fails to prevent fraud offences, there are
two available defences. The first defence is available in cases
where the corporate itself was the intended target of the fraud.
The second defence is called the defence of ‘reasonable
procedure’, where the failure to prevent the offence of
economic crimes can be defended if the organisation can demonstrate
that it had reasonable prevention measures in place or that it was
not reasonable under the circumstances to expect it to have such
measures.

However, what constitutes reasonable procedure to prevent fraud
under the ECCTA has not been outlined yet, and hence, the new
offence will come into effect once the statutory guidelines
defining the scope and extent of reasonable procedure are defined.
Based on the draft statutory guidelines, the reasonable procedures
align with the six compliance principles. These principles resemble
those found in the UK’s Bribery Act, 2010, referred to as
‘adequate procedures’, but there are differences,
particularly regarding the methodology for risk assessment and the
significance of financial controls. Having a documented risk
assessment is a crucial aspect of the defence based on reasonable
procedures. The focus of this assessment is on the risk of
associated persons within the organisation engaging in specified
economic crimes to benefit the organisation, the group, or its
customers rather than the risk of internal fraud against the
organisation. The importance of risk assessment can be understood
from the draft statutory guidance, which states that in some
limited circumstances, it may be considered reasonable not to
implement measures in response to a particular risk. However, it
will rarely be considered reasonable not to have conducted a risk
assessment at all.

V. Extra-Territorial Application of the ECCTA

The failure to prevent fraud offences has broad extraterritorial
reach, applying to a corporate or partnership regardless of where
they are incorporated or established. According to a government
factsheet summarising the offence, if an employee commits fraud
under the UK law, or targets UK victims, their employer could be
prosecuted, even if the organisation (and the employee) is based
overseas.

The definition of body corporate or partnership wherein the
senior managers are liable for economic crimes includes entities
incorporated outside the UK, so a non-UK company could also be held
liable if an offence is committed by a senior manager who is a UK
national or a foreign national, as long as the offence occurs in
the UK. For the failure to prevent fraud offences, it is possible
that foreign organisations can be implicated if an employee or
agent commits fraud under UK law or targets UK victims, provided
that the organisation meets the criteria for being a large
organisation.

VI. Drawing Parallels in the Indian Legal System

While it is undisputed that a company can be prosecuted for
criminal offences as an artificial entity, it cannot possess the
necessary mens rea, an essential element of any criminal
offence. Therefore, the issue of whether a company can be
prosecuted for an economic crime depends on the identification
principle and the doctrine of vicarious liability. Presently, the
established legal stance is that if a company commits a criminal
offence, the responsibility lies with the directors. The liability
of the directors is primarily determined in two ways:

1. In cases where the offence committed shows mens rea,
   the investigation seeks to focus on determining the intention and
   actions of the responsible individuals acting on behalf of the
   company.




2. In cases where the statutory framework itself invokes the
   doctrine of vicarious liability; accountability is held by
   explicitly outlining such liability.

However, such tasks are easier said than done. Attributing
criminal liability to individuals on behalf of a corporate that
cannot have mens rea by determining its ‘alter
ego’ is often precarious. So, what lessons do we need to learn
from the ECCTA in the UK, and are there any parallels that already
exist in India?

The ECCTA mandates that all current and prospective company
directors, individuals with significant control, ‘relevant
officers’ of relevant legal entities
(‘RLEs’), and Authorised Corporate Service
Providers (‘ACSPs’) must verify their
identities, confirming their true identities. In India, the
Companies Act, 2013 (‘CA’) introduces a
concept of Significant Beneficial Owner
(‘SBO’) in line with the Financial Action
Task Force (‘FATF’) regulations. S. 90(1)
of the CA is the main governing provision in this regard. The
purpose of this provision is to seek the ultimate persons
benefitting from the ownership of the company. In some ways, this
provision works similarly to the intended objectives of the ECCTA,
where the Senior Manager Test is applied to determine liability
based on the identification of interest and autonomy.

Besides this, there are various other laws in India, such as
foreign exchange regulations, environmental laws, labour laws, and
tax laws, that attract vicarious liability that specifically
outline the responsibilities of individuals in charge or directors
when a company commits an economic crime. Directors can also be
held responsible under certain provisions of the Insolvency and
Bankruptcy Code, 2016 and the Prevention of Money Laundering Act,
2002. The presumption is that despite being a separate legal
entity, a company works based on directing the will of the
individual, and any individual having the controlling will of a
company shall be culpable for a crime committed by the company if
the relevant acts can be traced back to his decisions.

Failure to prevent fraud by a corporate is revolutionary
legislation, and so far, there is no parallel to it in India.

VII. Conclusion

The landmark legislation in the UK will have far-reaching
consequences. Once enacted in its entirety, it will inspire other
common-law countries to bring similar legislation. The question of
accountability in economic crimes by a corporate is no longer a
matter of simple investigation. The globalisation and
digitalisation of the economy have already changed the corporate
management landscape, and the recent emergence of technologies like
artificial intelligence (‘AI’) and its
possible role and use in corporate decision-making will continue to
add layers of difficulty in determining human actors behind a
corporate’s action. Therefore, a re-evaluation of the
identification principle and liability doctrine is the call of the
hour. The reforms in the UK only apply to criminal offences, but
the nature of the crime itself has been changing with time, and
conventional principles of interpretation need to be revisited.

A growing commercial market like India with an evolving
corporate sphere will need to keep an eye on the global tides and
adapt its best practices to prevent the repetition of the mistakes
of its fellow nations.

Footnotes

1. Economic Crime and Corporate
Transparency Act 2023. (n.d.). https://www.legislation.gov.uk/ukpga/2023/56/enacted

2. Fraud Strategy (Home Office, ed.
2023); https://www.gov.uk/government/publications/fraud-strategy

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