SHIPPING companies need to be aware of and comply with the UK Economic Crime and Corporate Transparency Act 2023, even if they are incorporated in other jurisdictions, lawyers have warned.

The legislation is being presented by politicians as a crackdown on Britain’s ‘Londongrad’ reputation as a bolthole for dirty money, aimed particularly at those described by former home secretary Priti Patel as “Putin’s cronies”.

But legitimate businesses are covered too, and while the law is not specifically aimed at shipping companies, they do come within its ambit and will face prosecution where in breach of its stipulations.

Under the previous legal framework, corporate entities could only be prosecuted for criminal offences if it could be shown that an individual acting as their “directing mind and will” had displayed the requisite state of mind — such as intention, recklessness or dishonesty — to commit the offence.

In practical terms, this made it relatively difficult to mount successful prosecutions, particularly against large corporates with complex management systems, in which it was not clear which employees constituted the directing mind and will.

Under the ECCTA, a corporate will be guilty of certain criminal offences — including bribery, tax, money laundering, fraud and false accounting — simply if the offence is committed by a senior manager acting within the actual or apparent scope of their authority.

That marks a sweeping shake-up.

New range of ‘failure to prevent’ offences

The Act introduces a new strict liability criminal offence modelled on earlier “failure to prevent” offences, such as failure to prevent bribery and the facilitation of tax evasion.

Under the failure to prevent fraud offence, a corporate will be held liable if it fails to prevent a set of specified fraud offences being committed by an “associated person.”

However, this is subject to a threshold of at least two of the following criteria: An aggregate turnover of more than £36m; an aggregate balance sheet total of more than £18m net; and/or more than 250 employees.

“Associated persons” include employees, agents, subsidiaries or any person who otherwise performs services for or on behalf of the corporate.

The legislation also contains amendments to the rules governing the Register of Overseas Entities, which details beneficial ownership information for foreign entities that are registered proprietors of certain interests in the UK.

Barry Vitou is head of regulatory investigations and white-collar defence at law firm HFW, which has a substantial shipping practice.

Vitou described the legislation as omnibus in nature but stressed that it had far wider implications than the aspects that have grabbed the headlines.

The ‘directing mind’ elements of the Act, although relatively unheralded, have been in force since last Boxing Day. Companies are now liable for acts and omissions of senior managers acting within the their authority.

UK law now ‘akin to US position’

“The old position, where it was practically impossible to go after a company, is now blown away. The UK has moved to a situation that is akin to the US position, where you can attribute liability to companies on a much broader basis.

“Actually, it is a bit better than the US, where a tea lady can trigger the liability, whereas here that is limited to senior managers.”

The consequence of this is that companies now have an exposure from which they have previously been shielded, with the deeds of senior managers a potential gateway to prosecuting a company.

The date on which failure to prevent fraud becomes an offence under ECCTA has yet to be set, but is likely to be before the end of the year.

Shipping not immune

Shipping is hardly any more immune from either petty or large-scale fraud — ranging from cargo misdeclaration to insurance scams and fake certification — than any other business.

“Twelve years ago, there was a big hoo-ha over the failure to prevent bribery offence, which was an outlier at the time.

“Failure to prevent fraud works in basically the same way; an associated person, employee or distributor could commit fraud that benefits the company, and the company will be on the hook for it unless it has in place reasonable procedures to prevent this.”

This will represent a major sea change, Vitou believes. Government guidance has already been circulated in draft form and publication of the finalised guidance is expected perhaps later this year.

HFW has already been talking to shipowners at board level about this situation and recommends overhauling existing anti-fraud measures to make sure they meet the tougher requirements.

Another sensible precaution would be to have comprehensive directors’ and officers’ liability insurance — known in insurance jargon as D&O — in place. The cost of legal representation could otherwise be hefty.

Allen Marks, the Newcastle-based director of law firm Campbell Johnston Clark, said that both the senior managers’ stipulation and failure to prevent fraud offence have potentially wide-ranging application to the shipping industry, both at home and outside the UK.

The senior managers’ offence can apply equally to shipping companies inside or outside of the UK, he pointed out.

Therefore, a non-UK registered shipping company could be liable if an offence is committed by a UK national if they fall within the definition of senior manager, where the offence is committed in the UK.

An example would be a non-UK domiciled shipping company with a subsidiary in the UK, or alternatively, a non-UK domiciled shipping company that has its ship management or agency based in the UK.

“Perhaps one of the more obvious areas that needs to be considered in conjunction with the Act is the increasing use of e-bills of lading,” Marks said.

“Unlike paper bills, e-bills require high-level digital security to prevent unauthorised access, which could lead to modification for fraudulent purposes.

“Therefore, shipping companies involved with e-bills will need to be able to show that they had reasonable fraud prevention procedures in place at the time if there is any link to the UK.” 

While the new offence applies only to large organisations, many of the largest container shipping lines with a UK presence would meet that criterion, Marks went on.

The Act is intended to change corporate culture. This might be achieved by extra training for staff, particularly senior management, so that they can identify risks.

“I am not sure how tightly the Act will be enforced by the authorities, but if large organisations fail to evidence reasonable fraud prevention procedures and consistently fail, it is not outside the realms of possibility that they could be subject to high-profile prosecution,” Marks said.

Norton Rose Fulbright partner Andrew Reeves also highlighted the fact that the ECCTA goes well beyond the existing Bribery Act.

“It will apply to non-UK ship operators where part of the offence takes place in the UK, such as a meeting or communication in the UK, or where there are victims in the UK, which could include investors or counterparties, such as insurers. It will also apply for certain offences where there is a gain in the UK.

“Many multinational companies are therefore conducting risk assessments and enhancing fraud procedures on a global basis.

“It is likely that they will require ship operators to adopt these procedures through more extensive and demanding charterparty terms and audit requirements.”