Thought for the Week - Succeed by (preventing) fraud
06 November 2023
06 November 2023
When Sophocles coined the phrase "rather fail with honour than succeed by fraud" he was obviously not looking ahead to the new 'failure to prevent fraud' offence contained in the Economic Crime and Corporate Transparency Act, which received Royal Assent on 26 October 2023 (the Act). In a neat twist of Greek wisdom, to fail to prevent fraud is not honourable and to succeed by anti-fraud controls is the goal.
As the Act is likely to come into force in the early part of 2024, firms should begin to prepare now. We have set out a summary of the key points, main practical steps firms should consider and a few takeaways below. For a full summary of the new offence, see our article here.
The new failure to prevent fraud offence creates a standalone criminal office by which an organisation can be liable for failing to prevent fraud committed for the benefit of the organisation, by a person associated with the organisation.
The offence will only apply to "large" organisations - firms that fulfil two or more of the following conditions in a financial year:
The only defence is for a firm to prove that it had reasonable prevention procedures in place at the time the fraud was committed (or that it was reasonable to have none). Firms across all sectors will need to ensure they can demonstrate that they have robust compliance programmes in place, supported by a strong anti-fraud culture driven by senior management.
The Act contains a new statutory basis for the identification doctrine – the principal basis for attributing liability for the criminal acts of individuals to corporates – which has been limited to those representing the 'directing mind and will' of the company. The expansion, which will apply to economic crimes including fraud, covers a 'senior manager'. This is a broad and undefined category of those who play a significant role in decision-making of whole or part of the firm's activities.
Review and reassess your existing fraud risk assessment, starting with an assessment of the broad range of potentially complex fraud offences that are covered in the legislation and how they might occur within the business. Focus on identifying indicators of fraud which benefits the firm, as well as behavioural triggers (financial pressure, opportunity, rationalisation to commit fraud) and map examples of what the fraud offences could look like across different business lines or products.
Existing systems and controls to prevent financial crime will need to be revisited. The new offence bites on the same 'associated person' population as the Bribery Act. Existing ABC procedures can be adapted and augmented to mitigate the risks associated with the new offence. Anti-fraud prevention procedures should be proportionate to the size of the firm and informed by the risks identified in the fraud risk assessment. Procedures must be supported by appropriate training on fraud prevention issues and include appropriate escalation and investigation measures in the event of a breach.
Monitoring and review of the effectiveness of controls is key to demonstrating reasonable prevention procedures. Consider how effective existing controls are for identifying and managing fraud risk and whether improvements can be made, alongside the incorporation of the new offence. Bear in mind recent or planned changes to the risk profile of the business – for example new geographies, products or markets.
Authors: Ruby Hamid, Matthew Russell, and Neil Donovan
As part of our annual Investigations Focus series, we are hosting the Spotlight on fraud event at our London office on 15 November, 08:30-10:00 at our London office (Fruit & Wool Exchange, 1 Duval Square, London E1 6PW) please do join us. Register and view the full series here.
We have an expert panel of Ashurst Legal and Ashurst Risk Advisory specialists sharing their thinking on:
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