Corporate Failure To Prevent Fraud
Larger businesses need to review and tighten their procedures ahead of a new corporate offence of failing to prevent fraud. The new offence has been set out in a draft amendment to the Economic Crime and Corporate Transparency Bill, which is expected to come into force sometime this spring.
The intention is to improve fraud prevention and strengthen existing powers to prosecute organisations for fraud. The new offence applies to certain entities in the UK as well as outside the UK, if certain thresholds are satisfied. We understand it is to be modelled on the failure to prevent bribery offence under the Bribery Act.
What is the new offence?
A company or other ‘relevant body’, such a partnership, will automatically commit an offence if someone associated with it commits fraud, intending to benefit the relevant body or one of its customers/clients. If the company or relevant body itself is the intended target of the fraud, it will not have committed an offence.
An ‘associate’ will include employees, agents, subsidiaries, consultants – indeed, anyone else providing services on behalf of the company/relevant body. On conviction, the company faces an unlimited fine – which should prompt companies to take appropriate protective steps within the organisation.
Individuals themselves will not be prosecuted under the new ‘failure to prevent fraud’ offence; however, they can already be prosecuted under separate legislation.
It will be a defence if reasonable prevention procedures were shown to be in place. The draft legislation defines procedures as those “designed to prevent [the associate] from committing fraud offences”. On the other hand, if it was not reasonable to have such measures in place – the company will have a defence to rely on.
Are there any exemptions?
Yes, a business that does not reach certain thresholds cannot be prosecuted for failure to prevent fraud under the new offence. SMEs, for example will not fall within the legislation.
An organisation in any sector may be caught by the new offence if it satisfies at least two of the following conditions in its financial year before that in which the fraud offence occurred: it had a turnover of more than £36m; a balance sheet total of more than £18m; and more than 250 employees.
Businesses outside of these thresholds will not be subjected to what might otherwise be an onerous, potentially disproportionate burden of taking further measures to protect themselves from a failure to prevent offence.
How should businesses react?
Robust fraud prevention measures are vital. Preparation is key for any company or relevant body that is likely to satisfy the thresholds and who could be at risk of prosecution for a failure to prevent offence. Effective risk assessments should be carried out with a particular focus on any potential weaknesses in the entity’s existing preventative measures.
Companies should look out for guidance on the new offence which will be published before the new offence comes into effect.
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