Employer Fault in Internal Misconduct Under the Economic Crime and Corporate Transparency Act
Within the framework of the "Economic Crime and Corporate Transparency Act" enacted by the United Kingdom, significant provisions came into effect as of March 2024.
In this context, it is understood that companies operating in the United Kingdom that fail to take adequate measures to combat internal misconduct and benefit from the misconduct of their employees may face sanctions. Under this law, a new offense called 'failure to prevent fraud' has been defined, where companies can be held responsible for crimes such as fraud committed by their employees.
Purpose of the Law
The Economic Crime and Corporate Transparency Act aims to significantly reduce corporate misconduct by implementing strict verification of identity processes for company directors and shareholders. The law seeks to enhance data integrity and accountability of companies registered with Companies House by enabling the UK Companies House to examine and challenge suspicious filings. Under these measures, it is anticipated that fraudulent and similar activities will become more difficult to conceal behind shell companies, thereby increasing transparency and trust in overall corporate governance. Enhanced transparency will enable more effective investigations of economic crimes and expedite companies' compliance processes.
Actions Covered
The law indicates that companies can be held responsible for the following situations created by employees, even if they are not results of corporate decisions:
- Making false representations to public institutions
- Making misleading statements to third parties with whom the company has business relationships
- Undisclosed information despite legal obligation
- Abuse of position to gain advantage for oneself or others
- Partial or complete payment evasion
- Participating in an organization with the intent to defraud
- Making misleading, false, or deceptive statements about financial condition
- Altering accounting records or using false documents in accounting records
- Making false tax declarations to mislead relevant government administrations or customs officers
What Measures Should Companies Take to Act in Compliance with the Law?
To act in compliance with the law, it is recommended that companies implement the following measures/improvements:
- Establishing policies and procedures to prevent misconduct
- Developing and implementing a compliance program
- Conducting comprehensive and regular fraud and corruption risk assessments
- Organizing fraud/corruption awareness training for employees
- Developing policies and procedures to manage third-party due diligence in terms of compliance risk
- Establishing new mechanisms to ensure the accuracy of company records to prevent companies from using fake addresses and making misleading statements in financial documents
- Regularly checking, improving, and updating the effectiveness of anti-corruption procedures
Sanctions Following the Law's Implementation
Companies that fail to comply with the renewed identity verification and data retention provisions under the law may face financial penalties and various sanctions. Furthermore, it has been stated that criminal liability may arise for company directors and officials who act contrary to the transparency provisions defined under the Law.
The process of determining the limits for monetary and imprisonment penalties under the Law is ongoing. Therefore, it is not currently possible to definitively predict the criminal sanctions under the Law. However, the Law removes previous legal limitations on monetary penalties for certain regulatory bodies, allowing them to determine their own financial penalties. For example, the Solicitors Regulation Authority can now impose fines for economic crimes without being bound by predefined monetary limits.[1] Additionally, based on other legal regulations referenced by the Law, it is anticipated that individuals found guilty under the Law may face imprisonment terms ranging from 6 months to up to 10 years.[2]
What is the Significance for Türkiye?
The law covers foreign companies operating in the United Kingdom and requires these companies to register with the UK Companies House. Furthermore, it has been stipulated that foreign companies and their officials can be penalized under this law even if the action contrary to the regulations is conducted by a foreign company not operating in the United Kingdom. As of 2022, the foreign trade volume between Türkiye and the United Kingdom was 18.9 billion Dollars. Companies doing business with the United Kingdom should closely monitor the "Economic Crime and Corporate Transparency Act" which has now come into effect. This law will be of great importance considering the trade scale between the two countries. As there is no upper limit for fines under the law, companies must take necessary precautions to avoid potentially high financial sanctions. Additionally, under this Act, besides high financial sanctions, broader sanctions such as cancellation of company registrations made with false declarations and dissolution of companies' operations can also be applied. Therefore, it is becoming increasingly imperative for companies to take necessary measures to avoid sanction risks arising from potential misconduct within their organization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
