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Failure to prevent fraud – a new criminal offence for big business

Editors PickFailure to prevent fraud – a new criminal offence for big business

At a time where fraud was found to have been the most common criminal offence committed in England as of September 2002[1], the UK government has officially announced intentions to introduce a new “failure to prevent” fraud offence.

The proposal has been introduced in the form of an amendment to the Economic Crime and Corporate Transparency Bill, in a move that has garnered support from both the Serious Fraud Office and the Crown Prosecution Service.

According to the new law:

(1) if a specified fraud offence occurs as a result of any employee or agent for the benefit of the organisation, or to the benefit of another person that they provide services to on behalf of the organisation and;

(2) the organisation does not have reasonable fraud prevention policies in place

that organisation will be held accountable. It will not be necessary to show that the business owners or directors authorised or were aware of the deception or offending behaviour.

A crucial defence for the offence will be the use of “reasonable procedures” to stop fraud. The government has acknowledged that there may be situations where it is reasonable for an organisation to not have fraud prevention procedures in place, but this effectively means that organisations will be required to review and improve their anti-fraud systems and controls to cover fraud committed for their benefit by employees or agents. In the absence of such procedures, the offence essentially becomes one of strict liability.

While it applies to all sectors, the offence will only apply to all “large” bodies corporate including partnerships. To come under the definition (as in the Companies Act 2006), and thus scope for the new offence, an organisation needs to meet two out of the three following criteria:

  • more than 250 employees;
  • more than £36 million turnover and;
  • more than £18 million in total assets.

This suggests that along with businesses, incorporated public bodies and significant not-for-profit organisations (including charities) will be covered by the law. By borrowing from the already established definition in the Companies Act, and limiting matters to large companies, the government’s aim is to ensure that the administrative cost of implementing appropriate policies and procedures is borne solely by those that can realistically meet them. Medium and small business will not be unfairly burdened. Indeed the government’s overt aim is to provide greater protection to them, given that they are often the victims of fraud by other corporations themselves.

Helpfully, the government has further confirmed that the new ‘failure to prevent’ fraud offence will apply in relation to the following fraud and false accounting offences:

  • fraud by false representation (section 2 Fraud Act 2006)
  • fraud by failing to disclose information (section 3 Fraud Act 2006)
  • fraud by abuse of position (section 4 Fraud Act 2006)
  • obtaining services dishonestly (section 11 Fraud Act 2006)
  • participation in a fraudulent business (section 9, Fraud Act 2006)
  • false statements by company directors (Section 19, Theft Act 1968)
  • false accounting (section 17 Theft Act 1968)
  • fraudulent trading (section 993 Companies Act 2006), and
  • cheating the public revenue (common law).

Such conduct will place companies within scope of the new offence, but the government are clear that the scope may yet widen still, with new types of offending behaviour and further offences potentially being added to the list in due course.

Importantly, criminal liability will not be triggered by individuals under these proposals, in an effort to avoid duplicating the offences that are already in force to cover such circumstances. Companies could, however, face an unlimited fine for each failure to prevent offence. Examples of recent financial penalties that should be noted include the NatWest conviction in respect of money laundering control failures, which resulted in a £264 million penalty[2] and the failure to prevent bribery conviction of Petrofac which resulted in a fine of £47 million[3].

There can be little illusion that through the introduction of this offence, the government’s objective, as with the Bribery Act, is to make it simpler to prosecute big organisations for fraudulent behaviour that takes place under their supervision. As with the bribery (and tax evasion-related) offence, it will be crucial to ensure that effective and proportionate policies, training, and monitoring are in place. Anything less than this could increase exposure to severe reputational damage and subsequent civil claims, as well as the instigation of private prosecutions and individual criminal liability.

The creation of this new offence naturally invites speculation, and will raise important questions about what – in reality – additional controls and safeguards are required for organisations. This is particularly pertinent where there are those that are already subject to regulation and authorization by the Financial Conduct Authority (“FCA”), Prudential Regulation Authority, or are otherwise registered with HMRC under the Money Laundering Regulations.

However, in practise, the regulatory burden will likely be minimal for these organisations as they already have the necessary measures in place – or ought to. The government have nevertheless confirmed that specific guidance will be forthcoming as to what ‘reasonable procedures’ will look like, and so to that extent any concerns may be premature.

The new offence is likely to come into force by the end of 2024 and will form part of broader reforms of UK corporate criminal liability. Only at that stage will further clarification become apparent, and large businesses have the guidance necessary to implement appropriate change.

 

Connor Stuart, Barrister at Wilberforce Chambers

 

[1] https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-failure-to-prevent-fraud-offence#what-is-the-government-doing-and-why

[2] FCA press release: NatWest fined £264.8 million for anti-money laundering failures https://www.fca.org.uk/news/press-releases/natwest-fined-264.8million-anti-money-laundering-failures

 

[3] SFO press release https://www.sfo.gov.uk/2021/10/04/serious-fraud-office-secures-third-set-of-petrofac-bribery-convictions/

 

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