The Economic Crime and Corporate Transparency Act 2023 (ECCTA) is a cornerstone of the Government’s ongoing legislative strategy to tackle economic and financial crime. However, many charities, particularly smaller ones, will face more onerous compliance burdens as a result and are being urged to brush up on the new rules – or face the consequences.

Changes introduced under the ECCTA, which passed into law in October 2023, include a new duty for large charitable companies to avoid specific economic crimes and a more proactive Companies House with powers to scrutinize and verify company information. 

Jonathan Brinsden, a partner at law firm BDB Pitmans, says that although this huge piece of legislation is not specifically aimed at charities, they will undoubtedly face increased administrative costs and compliance burdens as a direct result of the new rules. Brinsden will present a session at ICAEW’s forthcoming Charity Conference outlining the impact of the ECCTA on charities. 

New ‘failure to prevent fraud’ offence

The largest charities – those that satisfy two out of the following three criteria: more than 250 employees; more than £36m in turnover; and more than £18m in total assets – will feel the impact of a new corporate criminal offence of ‘failure to prevent fraud’, Brinsden explains. 

“It follows the trend of other types of duties to avoid in economic crime areas, including money laundering and bribery. Essentially, it creates a strict liability unless you’ve got policies and procedures in place that say that you did everything that you could reasonably do to mitigate those risks.” 

With 85% of charities having an annual gross income of below £250k, it is expected that just a small number will fall within the scope of this new duty. 

Increased rigour and vigour

However, the reform of Companies House will see it transition from a glorified regulatory post box for filing returns to a proactive regulator able to scrutinize the information that is submitted to it. “There’s going to be much more vigour and rigour in relation to how company information is managed, administered, curated and verified,” Brinsden explains.

In particular, the ECCTA provides Companies House with the power to mandate digital filing of company accounts via its Registrar’s Rules so that it can check, reject and improve the quality of data on the Register. Once Registrar’s Rules and secondary legislation are written, Companies House will require company accounts to be ‘fully tagged’.

Disproportionate impact of mandatory digital tagging

Because charitable companies are required to prepare accounts in accordance with the Charities Statement of Recommended Practice irrespective of size, they don’t benefit from the proportionate reporting requirements afforded to comparable commercial companies. “Mandatory tagging may therefore disproportionately impact charities and will be unwelcome,” ICAEW warns in its representation on an FRC discussion paper on opportunities for the future of digital reporting. 

“However, if the sector’s concerns about the burdens of tagging prove to be well-founded, then we would expect the regulators to consider in due course whether there might be better approaches. For instance, by exempting charitable companies below a defined threshold from complying with the Companies House tagging requirements.” 

Meanwhile, from this autumn, directors, company officers and people who file company information will need to verify their ID through the government gateway. “That’s going to have more complexity attached to it and so there will be greater levels of cost associated with managing companies,” Brinsden says. 

“It’s all about improving that level of rigour, creating better transparency, giving Companies House the power it needs to properly administer and regulate this, and part of how it’s going to regulate behaviour is the ability to give fines in a way which it currently can’t do,” he adds.

Increased administrative expense

Attempts to clamp down on fraud are to be welcomed, not least because of the devastating impact of fraud on the charity sector. According to a report by the Fraud Advisory Panel published in November last year, 42% of charities admitted to experiencing fraud or attempted fraud over the previous 12 months.

“For smaller charities, this will require a greater level of committed administrative expense on an ongoing basis. The prospect of fines will be greater – not just for filing your accounts or your annual return late, but if your company director information is not up to date and you haven’t verified their ID. But ultimately, we’ll have a much more robust Companies House register, which will probably be for the benefit of everybody,” Brinsden says. 

He says the new regime brought in by the ECCTA is an opportunity for charities to get their house in order. “Take time to do an audit of your company information now to make sure that it’s all present and correct. Acquaint yourself with the information that Companies House will need and make sure you’re in a position to comply.” 

Compliance housekeeping

The prospect of a greater compliance burden and increased administrative costs will be a further blow to the sector against a backdrop of increased demand on their services, a growing cost base and pressures on funding.

However, Brinsden believes that the long-term pros will outweigh the cons. “Once we get through the hump of transitioning from where we are now, which is a pretty light touch, to where we need to get to, it will become part of the cadence of running an organisation. Anything that encourages organisations to do housekeeping is no bad thing.

“Charities are, I suspect, on the better end of the compliance spectrum already, by virtue of having to file accounts and submit annual returns to the Charity Commission. So it might not be such a big deal – but you don’t want it to sneak up on you.”