Fraud is now the most common criminal offence in the UK. It accounts for 41% of all crimes committed and costs us an estimated £7 billion per year (based on statistics for 2019-2020). Comparison of figures for the years ending March 2022 with March 2020 show a 25% increase in the number of fraud offences committed over that period. Of the 4.6 million people affected by fraud each year (one in 15 adults in the year ending December 2022), 700,000 are deemed to be highly vulnerable and to experience serious harm as a result of fraud.
By Verity Quaite, criminal barrister at Fieldfisher LLP and self-employed at 18 St John Street Chambers
On 3 May 2023, the government published its Fraud Strategy: Stopping Scams and Protecting the Public. The strategy aims to reduce fraud by 10% by the end of 2024. It cites estimates by the City of London Police that over 70% of fraud originates abroad or has an international element, and that the adoption of new online technology, such as online shopping and internet banking, is one of the main drivers for recent increases in the number of frauds being committed.
One strand of the government’s response is to commission an independent review of existing fraud offences under the Fraud Act 2006 to determine whether the existing legislation (and penalties) remain fit for purpose. Another is the planned introduction of a new criminal offence: failure to prevent fraud, which has been under consideration since a government consultation in 2017 followed by a Law Commission report in June 2022.
What will the new offence look like?
The proposed legislation, which would be introduced as an amendment to the Economic Crime and Corporate Transparency Bill, is currently being debated in the House of Lords. Although the final form of the legislation is to be determined, the new offence is modelled on the failure to prevent bribery offence which was introduced by section 7 Bribery Act 2010 (‘UKBA’) which, in conjunction with the use of Deferred Prosecution Agreements, arguably transformed enforcement against corporates in that area. There are, however, notable differences.
As currently drafted, the new offence would make organisations liable for specified fraudulent offences committed by an associate of the organisation with the intention of benefitting the organisation, without there being any need for bosses to have been aware of the fraud.
‘Associate’ is broadly drafted, including employees, agents, persons providing services for or on behalf of the organisation and subsidiaries.
The frauds falling within scope are:
- Fraud by false representation – s.2 Fraud Act 2006;
- Fraud by failure to disclose information – s.3 Fraud Act 2006;
- Fraud by abuse of position – s. 4 Fraud Act 2006;
- Obtaining services dishonestly – s. 11 Fraud Act 2006;
- Participating in a fraudulent business- s. 9 Fraud Act 2006;
- False statements by company directors – s. 19 Theft Act 1968;
- False accounting – s. 17 Theft Act 1986;
- Fraudulent trading – s. 993 Companies Act 2006; and
- Cheating the public revenue (common law).
It would be a defence for the organisation to show that it had ‘reasonable’ procedures in place to prevent fraud or that it was not reasonable to have any such procedures in all the circumstances. This differs from the wording of the s. 7 UKBA defence of ‘adequate procedures’ and guidance will be required for the differences between the two tests to be fully understood.
Unlike the failure to prevent bribery offence, the failure to prevent fraud offence will only apply to large organisations i.e. those that satisfy the Companies Act 2006 definition of meeting two of the three conditions of:
- A turnover of more than £36 million turnover;
- Total assets worth more than £18 million; or
- More than 250 employees. in total assets or (iii) more than 250 employees.
The government’s intention is to avoid a disproportionate burden on SMEs, but the rationale for limiting the application of the new offence to large organisations may be flawed. As drafted, the defence of ‘reasonable procedures’ requires all of the circumstances to be taken into consideration, which would presumably necessarily include consideration of the proportionality of any procedures implemented taking into account the size of the organisation, the resources available to it and the level of risk of an associate committing fraud.
What will this mean for large organisations?
Organisations falling within scope of the new offence will have time to implement procedures to prevent fraud, as the Bill is yet to receive Royal Assent and it is anticipated that the government will publish guidance on what it considered to be ‘reasonable’ procedures to prevent fraud. It is currently unclear what shape that guidance will take, but it seems likely that those organisations that have already designed adequate procedures to prevent bribery may be able to adapt, rather than reinvent, their compliance programmes. All organisations that meet the definition of a large company, above, would be well advised to begin to undertake a risk assessment to identify their exposure to risk of an associate committing fraud to benefit the company.
Will the new offence be effective in bringing offenders to justice and reducing crime?
Whilst no doubt a positive step towards addressing the prevalence of fraud in the UK, the government’s strategy on fraud published on 3 May 2023 does not suggest that the majority of frauds in the UK are being committed by large organisations, which calls into further question the wisdom of exempting SMEs from this legislation.
The efficacy of the new legislation will be limited by the resources that are devoted to investigation and prosecution of fraud. Law enforcement in the UK is currently notoriously under-resourced and, as a result, struggles to effectively investigate and prosecute the existing fraud offences. Although fraud accounts for over 40% of crime committed, it receives less than 1% of police resource. Without a significant financial commitment from the government, the new law will be redundant. Whilst the government has announced in its fraud strategy its intention to create 400 new roles within a new ‘National Fraud Squad’ led by the National Crime Agency and City of London Police, it remains to be seen whether this is a sufficient number of investigators to deal with the scale of the problem. There are also a large number of existing law enforcement agencies with responsibility for investigating fraud (e.g. local police forces, the National Crime Agency, the SFO) so it may be that centralisation of efforts may be more effective than the creation of a new organisation.
The government has also pledged a £30 million investment into a new reporting centre, which will replace Action Fraud, the online centralised fraud reporting service. Given the number of frauds already reported each year, it seems that the issue is the bottleneck at investigation stage, rather than difficulty in reporting, that results in so many offences going unprosecuted and unpunished. Victims will report crimes if they are confident that they will be taken seriously and that their allegations will be investigated and prosecuted efficiently and effectively. The £30 million investment may, therefore, be better spent on the investigation and prosecution of fraud.
What is positive, given the statistics available on the origin of frauds committed in the UK, is that the new offence will apply to organisations and associates based overseas if the associated commits fraud under UK law or targets UK victims.
Verity Quaite is a criminal barrister at Fieldfisher LLP and also works on a self-employed basis at 18 St John Street Chambers