The Economic Crime and Corporate Transparency Act (ECCTA) received royal assent last week and affects the way financial institutions manage economic crime.

The bill is part of the UK Government’s wider economic crime plan, which was detailed earlier this year by MP Suella Braverman. The bill aims to limit the “dirty” money coming into the UK market by tightening up certain areas of legislation.

The main target of this Act is organised crime, however, it is likely to have a significant impact on financial institutions.

Failure to prevent fraud

For financial services, failure to prevent fraud is one of the more intimidating aspects of the ECCTA.

This Act updates the law surrounding the ‘identification doctrine’, which is a legal test from 1971. This test decided whether the actions and mind of a natural person can be regarded as those of a legal person. The current law (common law) requires that an offence must be committed by the “directing mind and will” of a corporation to trigger attribution to the corporation itself. If the person(s) identified as the “directing mind and will” of the corporation commits a criminal offence in that capacity, that offence, including the guilty mind to commit the offence, is considered that of the corporation.

However, with the current company structure and decision-making, it is hard to trace this back to an individual or individuals, meaning it is harder to hold people accountable.

Banks and other organisations are now at risk of getting  “unlimited” fines for failing to prevent fraud. However, this will only apply to large companies and not SMEs.

Also, this relates only to fraud and false accounting, while money laundering is contained under existing regulatory schemes.

The aim of this is to discourage organisations from turning a blind eye to fraud.

Therefore, to avoid prosecution, financial institutions should ensure they have reasonable procedures in place to prevent fraud. The UK Government reports that they will be providing further guidance on what would be considered ‘reasonable’.

Data sharing between banks

To further support AML, the Act has allowed for greater data sharing between banks in cases of suspected fraud, money laundering, and other economic crimes.

In certain situations financial institutions, for the purposes of preventing, investigating or detecting economic crimes, will more easily be able to share information.

The ECCTA will enable proactive intelligence gathering by law enforcement and strengthening the National Crime Agency’s Financial Intelligence Unit’s ability to obtain information from businesses relating to money laundering and terrorist financing by removing the requirement for a pre-existing Suspicious Activity Report (SAR) to have been submitted before an Information Order can be made.

There will be a shift of focus to “high value” activity, reducing the reporting burden on businesses and enabling greater prioritisation of law enforcement resources by expanding the types of cases in which businesses can deal with clients’ property without having to first submit a Defence Against Money Laundering (DAML) SAR.

Companies House reform and limited partnerships reform

The Act aims to improve transparency in UK companies by reforming the role of Companies House. According to the UK Government, these reforms include:

• Identity verification for all new and existing registered company directors, People with Significant Control, and those delivering documents to the Registrar.
• Broadening the Registrar of Companies House’s powers so that the Registrar can become a more active gatekeeper over company creation and custodian of more reliable data, including new powers to check, remove or decline information submitted to, or already on, the companies register.
• Improving the financial information on the register so that the register is more reliable, complete and accurate, reflects the latest advancements in digital technology, and enables better business decisions.
• Providing Companies House with more effective investigation and enforcement powers and introducing better cross-checking of data with other public and private sector bodies. Companies House will be able to proactively share information with law enforcement bodies where they have evidence of anomalous filings or suspicious behaviour.
• Enhancing the protection of personal information provided to Companies House to protect individuals from fraud and other harms.
• Broader reforms to clamp down on misuse of corporate entities.

In line with these reforms, the UK Government has also made changes to limited partnerships:

• Tightening registration requirements.
• Requiring limited partnerships to maintain a connection to the UK.
• Increasing transparency requirements.
• Enabling the Registrar to deregister limited partnerships which are dissolved, no longer carrying on business, or where a court orders that it is in the public interest to do so.

These moves give Companies House more transparency and enforcement power in their records but also mean financial institutions will need to ensure that all of their current and future Companies House records are correct and in line with this new legislation.

Cryptocurrency

The ECCTA provides additional powers to law enforcement to quickly seize and recover cryptoassets which have been linked as the proceeds of crime or associated with illicit activities such as money laundering, fraud, and ransomware attacks.