Failure to prevent fraud: New offence for large corporates

What is the failure to prevent fraud offence?

The new failure to prevent fraud offence is a notable step in the government’s agenda to create a corporate culture focused on fraud prevention. Chief Crown Prosecutor for the CPS, Andrew Penhale said “the new corporate offence of failing to prevent fraud is another important measure to drive better corporate behaviours…”

The offence forms part of the Economic Crime and Corporate Transparency Bill, which is currently nearing the end of the legislative process. It will provide a means of prosecuting large organisations with greater ease if they fail to prevent an employee or agent from committing fraud or false accounting for the organisation’s benefit. This benefit test provides protection for businesses that find themselves the victim or intended victim of the fraud.

Crucially, prosecutors will only have to show a lack of reasonable procedures within the organisation for failure to prevent fraud. There’ll be no requirement for knowledge of, or an order to commit, the fraud on the part of senior officers. The lack of any need to identify a directing mind and will of the company will make prosecution much easier than ever before.

The government will publish guidance, prior to enactment, as to reasonable preventative measures. It’s anticipated that the guidance will have similarities to Bribery Act guidance.

The scope of offences captured by the new offence of failure to prevent fraud is broad. Offences include:

• False representation
• Failing to disclose information
• Abuse of position
• Obtaining services dishonestly
• Participation in a fraudulent business
• False statements by company directors
• False accounting
• Fraudulent trading, and;
• Cheating the public revenue

(Note: money laundering offences are not included, as they are covered by existing law.)

Which businesses will be affected?

The failure to prevent fraud offence will apply to large corporate bodies and partnerships. That includes large not-for-profit organisations and incorporated public bodies. Small and medium sized enterprises will be exempt, and therefore remain accountable under the existing legal framework.

An organisation will be ‘large’ where two out of the three below requirements are met:

• More than 250 employees
• An annual turnover of more than £36 million
• Balance sheet worth more than £18 million.

The offence will apply to UK-based organisations and to those based overseas if the fraud by the employee or agent is committed under UK law or targets UK victims.

The government will not be introducing individual liability for failure to prevent fraud as part of this new offence.

A welcome development?

According to the National Crime Agency, fraud is the most commonly experienced crime in the UK. The government says its recently published Fraud Strategy “marks a fundamental shift in our approach to tackling fraud”. This new failure to prevent fraud offence is one of a number of measures expected to be implemented. While a lot of the focus is on the scale of fraudulent activity committed against individuals (and a key target of the new offence), the UK findings of PwC’s Global Economic Crime Survey 2022 showed that 64% of businesses had experienced fraud, corruption or other economic/financial crime in the previous two years. That’s up quite significantly from 56% in 2020. Lisa Osofsky, director of the Serious Fraud Office in the UK, said: “This new offence would be a game-changer for law enforcement – bringing the law on fraud in line with bribery.” It’s also anticipated that the “new failure to prevent fraud offence will protect consumers from dishonest and misleading sales practices, and level the playing field for the majority of businesses that behave responsibly“.

So, in many respects, the new failure to prevent fraud offence is likely to be a welcome development. It will, however, place additional compliance burdens on large corporates. What practical steps can businesses take to facilitate compliance and minimise risk of exposure to fraud and prosecution?

Practical steps to prevent fraud

Government guidance as to what constitutes reasonable preventative measures is awaited. In the meantime, businesses can take the following practical steps to proactively address fraud and compliance risks:

• Consider risks of fraud and false accounting to the particular business. Identify areas of vulnerability and high risk.
• Remember to consider both external/third party fraud threats and internal/employee threats.
• Critically assess the business’ existing internal policies, procedures and resources for responding to fraud.
• Consider, in particular, the business’ internal reporting, anti-fraud and whistleblowing policies and fraud prevention tools and controls. It’s important to keep these regularly under review. They should be updated to keep up with rapidly developing tech and increasingly sophisticated fraud schemes, and will need to take account of soon-to-be-published government guidance.
• Carry out thorough background checks when hiring new employees and at regular intervals during employment.
• Carry out appropriate due diligence in relation to agents and subsidiaries at the beginning of, and regularly during, commercial relationships.
• Review/update/implement a fraud response strategy. This should include a protocol for undertaking internal investigations. That should, in turn, include the business’ policies and procedures in relation to document retention and preservation of legal professional privilege
• Review/update/implement a regular training programme so that staff at all levels are alive to the risks and indicators of fraud, the consequences of committing fraud and the new offence of failure to prevent fraud.

Failure to prevent fraud: How we can help

Walker Morris Commercial Dispute Resolution and Regulatory specialists are experienced and expert in dealing with all aspects of fraud prevention and cure. We help clients with the provision of staff training and the preparation of policies and procedures to prevent, mitigate and respond to fraud. If the worst does happen, we can deal urgently and effectively with internal investigations and we can advise on an appropriate strategic response (which may involve litigation, tracing, recovery, damage limitation and enforcement action).

For further advice, assistance or training in relation to the risks and prevention of fraud, please contact Gwendoline Davies or Andrew Northage.