New anti-fraud law leaves charities facing unprecedented criminal liability

New provisions under the Economic Crime and Corporate Transparency Act 2023 are placing charities across the UK under unprecedented legal scrutiny, with potential criminal liability for fraud committed by staff and volunteers. The legislation, which began taking effect in late 2023, introduces strict liability offences that could see organisations prosecuted even when leadership had no direct knowledge of wrongdoing.

The changes represent one of the most significant shifts in charity regulation in recent years, creating potential financial and reputational risks for an sector already struggling with public trust issues. Experts warn that many charities remain unprepared for the new legal landscape despite the measures having already come into force for some provisions.

Background and Context

The Economic Crime and Corporate Transparency Act 2023 emerged following growing concerns about financial crime in the UK, with particular attention on the misuse of corporate structures for illicit purposes. For charities, which handle billions in public donations annually, the legislation addresses longstanding regulatory gaps that allowed fraud to occur with minimal organisational accountability.

The charity sector has faced repeated scrutiny over financial controls, with high-profile cases involving misappropriated funds and inadequate oversight damaging public confidence. According to government statistics, the UK charity sector manages over £80 billion annually, yet transparency measures have historically lagged behind those in the private sector.

Key Figures and Entities

Section 199 of the Act creates a new offence of "failure to prevent fraud" that applies specifically to large organisations—defined as charities meeting two of three thresholds: annual turnover exceeding £36 million, balance sheet totals above £18 million, or more than 250 employees. According to government guidance, this criteria captures approximately 2% of UK charities, including many household-name organisations.

More concerning for smaller charities is Section 196, which imposes corporate liability for fraud committed by senior managers. This provision applies regardless of organisational size and carries no defence for having preventative procedures in place. The legislation defines "senior managers" broadly, potentially capturing trustees, executives, and other decision-makers within charities.

Legal and Financial Mechanisms

The two provisions create complementary but distinct risks for charitable organisations. Under Section 199, charities can face prosecution if an "associated person"—including employees, volunteers, or subsidiary organisations—commits fraud intending to benefit the charity or its service users. The offences covered include false accounting, fraud by false representation, and relevant money laundering offences under the Proceeds of Crime Act 2002.

Charities can defend against Section 199 charges by demonstrating they had "reasonable prevention procedures" in place. The government guidance suggests this requires comprehensive risk assessments, proportionate controls, and an embedded anti-fraud culture with top-level commitment.

Section 196 presents greater challenges as it creates strict liability for fraud offences committed by senior managers acting within their authority. Unlike Section 199, no defence exists for having preventative measures. Legal experts note this section came into force on 26 December 2023, meaning charities may already be vulnerable to prosecution under its provisions.

International Implications and Policy Response

The UK's approach follows international efforts to strengthen corporate accountability for economic crime. The legislation mirrors elements of the US Corporate Enforcement Policy and reflects growing consensus that organisations bear responsibility for financial crimes committed within their structures, regardless of direct knowledge.

For charities operating internationally, the provisions create particular challenges. The Charity Commission has warned that organisations with overseas operations must ensure consistent standards across all jurisdictions, as enforcement action could be triggered by misconduct in any part of their operations.

The legislation represents a fundamental shift from reactive to preventative regulation in the charity sector. While welcoming the focus on transparency, some sector bodies have expressed concern that the compliance burden may disproportionately affect smaller organisations with limited resources for sophisticated financial controls.

Sources

This report draws on the Economic Crime and Corporate Transparency Act 2023, government guidance on fraud prevention procedures, and analysis from the Charity Commission. Additional context was provided by parliamentary records and regulatory statements published between 2023 and 2024.