Failure To Prevent Fraud Offence is Looming: Are you prepared?
Corporate crime is big business and no organisations is immune. Business organisations will soon be expected to implement anti-fraud measures to prevent corporate fraud or risk prosecution for failing to prevent fraud. The UK government has just published long-anticipated guidance for large organisations on the 'failure to prevent fraud offence' (created by s199 Economic Crime and Corporate Transparency Act 2023 (ECCTA)).
Though small organisations will not be caught by the new offence, the guidance says the principles set out may be helpful for smaller organisations.
The Home Office document was published in November and runs to 46 pages. It details the procedures ‘relevant bodies’ can put in place to prevent associated persons from committing fraud offences. It helpfully includes several illustrative examples to help organisations in preventing illegality - and to promptly identify when it is occurring.
‘Relevant bodies’ means large organisations: specifically, corporations and partnerships which meet at least two of the following criteria:
· More than 250 employees
· A turnover of £36m or more
· Assets of at least £18m
While the offence does not come into effect until 1 September 2025, it is imperative for larger business organisations to develop and implement appropriate fraud prevention procedures. Note that the offence has extra-territorial reach.
The guidance describes the general principles for organisations in developing or enhancing procedures to prevent fraud, along with examples of good practice.
What is this offence?
The new offence will impose liability on a relevant body where a fraud offence is committed by an ‘associated’ person (ie an employee, agent or subsidiary) where it intended the organisation to profit from it. On conviction, an organisation faces an unlimited fine (and, of course, the risk of potentially severe reputational damage).
Several specific fraud offences will be within scope of the new corporate offence, ranging from fraud by false representation and false accounting; to tax evasion and false statements by company directors.
The offence will not extend to personal liability for individuals within the organisations who may have failed to prevent the fraudulent behaviour. However, an employee or agent who committed the base fraud, or anyone who encouraged or assisted them, could still face prosecution for their illegality.
Defences
The new guidance sets out key considerations for relevant organisations when developing their fraud prevention procedures. The organisation should put in place fraud prevention measures
designed with organisation’s structure and the territoriality of the offence in mind, including where it has subsidiaries.
An organisation that can demonstrate they had reasonable fraud prevention procedures in place may have a defence. It is also a defence to show it was not reasonable in the circumstances to have reasonable fraud prevention procedures in place (ss 199(4) and (5)).
If defending a prosecution, it will be for the organisation to prove on balance that it had reasonable procedures in place to prevent fraud at the time it was committed.
Where the organisations defends a charge on the basis it was not reasonable to introduce fraud prevention measures, the guidance indicates that a risk assessment should at least have been expected to be carried out. Any decision made not to implement procedures to prevent a specific risk should be properly documented.
What should we do?
Businesses should carefully note the guidance, but be aware it is advisory and businesses should be familiar with the primary legislation.
The guidance also notes that individual sectors may (or will) have sector-specific guidance. However, where there is a conflict between sector-specific guidance and the government guidance - the government guidance will take priority.
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