The UK government is set to introduce new laws that will make “failure to prevent fraud” a criminal offence for large businesses. This will be the most significant change in UK corporate criminal enforcement in more than a decade. According to the government’s policy paper, it is one of many proposed reforms designed to tackle economic crime and improve transparency over corporate entities.
Commercial Litigation legal director Francesca Berry and paralegal James Boissier look at the impact these changes will likely have on businesses, the potential consequences of non-compliance and what businesses can do to prepare.
The new law is to form part of The Economic Crime and Corporate Transparency Bill 2022 (the “Bill”), which is currently in the committee stage of the House of Lords.
Current bill and previous legislation
A “failure to prevent” offence is a familiar concept in corporate and finance law. The Bribery Act 2010 makes it a criminal offence for a “failure to prevent bribery”, and the Criminal Finances Act 2017 introduced two “failure to prevent the facilitation of tax evasion” offences. With these offences, it only needs to be proved that an organisation lacked “reasonable” or “adequate” controls to prevent the unlawful activity. Until now, there has been no similar requirement for businesses in relation to fraud.
The original objective of the Bill, among other things, was to introduce reforms to Companies House to give businesses more confidence to share information in order to tackle money laundering and other economic crime. However, there has been growing support for creating a new offence relating to fraud from parties such as the Serious Fraud Office, Crown Prosecution Services and the Law Commission, which published its ‘Options Paper’ in 2022 setting out its advocation for a new offence.
What changes are suggested by the government?
On 11 April 2023, the Home Office published a fact sheet detailing changes to the Bill. This includes a new offence that will make an organisation liable “where a specific fraud offence is committed by an employee or agent for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place”.
This is a clear shift away from organisations being seen as victims of fraud. The government has announced it will, in due course, provide specific guidance to organisations on what “reasonable” fraud procedures will look like.
The government has 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).
The types of conduct that could cause companies to fall foul of this offence are broad, and the government has said these frauds can be committed in various ways. It is likely that “dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets” could all be included under the new law.
What impact will this have on businesses?
The government has confirmed that the offence will only target large corporations and partnerships. This will likely include large not-for-profit organisations such as charities and public bodies. The definition of a “large corporation” is drawn from the relevant provisions of the Companies Act 2006, which defines it as an organisation meeting two out of three of the following conditions:
- more than 250 employees
- more than £36m turnover, and
- more than £18m in total assets.
The reason for restricting this offence to larger organisations is to ensure the administrative burden of implementing policies to prevent fraud is proportionate. Furthermore, smaller companies that might be the victims of fraud by larger corporations will benefit from the greater protection this offence provides.
It is important to note the offence will not apply to individuals or senior management at large corporations. However, companies could face an unlimited fine if convicted, so planning and preparation are essential to avoid such penalties.
What can businesses do to prepare?
This new legislation is not expected to come into force until late 2024, and further changes to the wording of the offence may occur. For example, some commentators have correctly noted slight differences in the wording of the fact sheet and the proposed amendments currently in the House of Lords. The government will also be required to publish guidance on “reasonable prevention procedures” before the offence takes effect. However, there are steps that companies and businesses can take at this stage to ensure they are well prepared for the upcoming changes.
Large organisations will undoubtedly already have procedures and policies in place to detect and prevent fraud. But consideration of whether these existing measures are sufficient and robust enough to cover the new offence and manage the risks of fraud will be essential. Ways in which companies can prepare include:
- ensuring compliance training is administered to all relevant staff and covers all anti-fraud procedures
- considering whether the reporting systems for fraud are sufficient to detect and alert fraud, and
- assessing the risk and likelihood of fraud in their business. Companies such as financial institutions, law firms, casinos and crypto companies are more likely to be exposed to fraud.
The new “failure to prevent fraud” offence will make it easier for large organisations to be prosecuted for fraud committed by employees or third parties that benefits the organisation where its internal prevention procedures are inadequate. As a result, there is an increased likelihood of future follow-on claims and litigation being brought against these companies and the potential for severe reputational damage.
Taking early legal advice and ensuring anti-fraud mechanisms and compliance programmes are fit for purpose will be paramount for larger businesses in the coming years.
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