UK Enacts Law to Combat ESG Fraud in Corporate Sector

The UK government has enacted the Economic Crime and Corporate Transparency Act 2023, introducing a ‘failure to prevent fraud’ offence. This legislation holds large organisations criminally liable if an associated person commits fraud for the company’s benefit, even without senior management’s knowledge.

This development is significant as it expands corporate criminal liability, compelling companies to implement robust fraud prevention measures. Organisations must now ensure that their Environmental, Social, and Governance (ESG) claims are accurate and substantiated to avoid potential prosecution.

The legislation defines fraud broadly, encompassing dishonest sales practices and misrepresentations in financial markets. Companies can defend against prosecution by demonstrating ‘reasonable procedures’ to prevent fraud. Guidance on these procedures is expected before the law takes effect.

As ESG disclosures become increasingly scrutinised, this law underscores the necessity for companies to maintain integrity in their ESG reporting. Implementing effective fraud prevention strategies is now crucial to comply with the new legal requirements.

The Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October 2023, marking a significant step in the UK’s efforts to combat economic crime. A key provision of this Act is the introduction of a ‘failure to prevent fraud’ offence, which holds organisations accountable if they profit from fraud committed by their employees or agents.

This new offence is particularly relevant in the context of Environmental, Social, and Governance (ESG) claims. As companies increasingly promote their ESG credentials, there is a growing risk of ‘greenwashing’—the practice of making misleading claims about a company’s environmental practices. The ‘failure to prevent fraud’ offence aims to address this issue by ensuring that companies are truthful in their ESG disclosures.

Under the new law, companies can be prosecuted if they fail to put in place reasonable procedures to prevent fraud. This means that organisations must implement robust measures to ensure the accuracy of their ESG claims. The government is expected to publish guidance on what constitutes ‘reasonable procedures’ in the near future.

The introduction of this offence represents a shift in the UK’s approach to corporate liability. Previously, companies could only be held liable for fraud if it could be proven that senior management was involved. The new law removes this requirement, making it easier to hold companies accountable for fraudulent activities conducted by their employees or agents.

This change is expected to have a significant impact on how companies approach their ESG reporting. Organisations will need to ensure that they have effective fraud prevention measures in place and that their ESG claims are accurate and verifiable. Failure to do so could result in criminal prosecution and significant reputational damage.

The Economic Crime and Corporate Transparency Act 2023 introduces a new ‘failure to prevent fraud’ offence that holds companies accountable for fraudulent activities related to their ESG claims. This development underscores the importance of accuracy and transparency in ESG reporting and highlights the need for robust fraud prevention measures within organisations.