The failure to prevent fraud offence at a glance - what do companies need to know
28 September 2023
28 September 2023
In April 2023, the UK Government announced a new "failure to prevent fraud" offence, ten months after the Law Commission first proposed the offence in its June 2022 Options Paper on Corporate Criminal Liability.
The offence was tabled as an amendment to the Economic Crime and Corporate Transparency Bill which is currently progressing through the House of Lords, having been introduced first in September 2022. It is expected to come into force in Q1 2024.
The introduction of the offence marks the first notable expansion of UK corporate criminal liability since the introduction of failure to prevent offences for bribery and the facilitation of tax evasion under the Bribery Act 2010 and Criminal Finances Act 2017.
However, while the introduction of the offence adds another important element to corporate compliance programmes, it remains to be seen if enforcement of the offence creates an effective deterrent which changes behaviour.
Companies will be criminally liable where an "associated person" commits a specified fraud offence, with the intention to benefit the organisation, or any person who receives services from the company. A company will not commit the offence if it is the target or victim of the intended fraud.
The government has published a factsheet which confirms that the offence will apply to conduct which takes place outside the UK where an overseas organisation or employee commits fraud under UK law or targets UK victims. The specific jurisdictional scope is yet to be determined but we note that the proposal scope is wider than the current extraterritorial nature of existing failure to prevent offences.
No, but it will apply to most. Under current proposals, the offence will apply to all "non-micro" organisations, but this is subject to change. A non-micro organisation is a company that fulfils two or more of the following conditions in a financial year:
However, the government has recognised that the threshold at which companies are excluded can be amended through secondary legislation. We should expect the law to be expanded to include all organisations in the future.
The fraud offences cover existing common law and statutory fraud, in addition to offences related to false accounting:
While previous proposals also included money laundering in the scope of the failure to prevent offence, the current proposal excludes money laundering. The government's current view is that money laundering offences and compliance requirements are adequately addressed in the existing regulatory regime.
There is ongoing scrutiny debate of the effectiveness of existing money laundering enforcement in the UK. See our article on the National Crime Agency's Annual Report here. In relation to firms in the regulated sector, the FCA continues increasingly taking enforcement action against regulated firms for anti-money laundering systems and controls failures, even in the absence of evidence that money laundering has occurred. See our article on AML enforcement activity here.
Questions will be asked about the exclusion of money laundering from the amendments to the law, and whether it risks sending the message that the government does not view money laundering as a key priority in the fight against financial crime.
The breadth of criminal activity caught by the offence far outweighs the scope of existing failure to prevent offences. This means that organisations will need to carefully assess the risk of, and their response to, each fraud offence, according to the specific profile and activities of their business. Leveraging existing procedures, and targeting focussed areas to uplift, will be key to ensuring compliance, while minimising the overall burden imposed by the new offence.
Adopting the language in the Criminal Finances Act 2017, it is a defence for a company to prove that it had reasonable prevention procedures in place at the time the fraud was committed or that it was reasonable to not have any procedures in place.
Under the offence, the government must publish guidance on the procedures that organisations can implement to prevent associated persons committing fraud offences. The publication of detailed guidance from the government will make the corporate response to the offence clearer and more manageable. Given the current proposal excludes small organisations, guidance will be required for companies of all sizes, given the breadth of circumstances in which fraud can occur.
Irrespective of the final scope of the offence, it will be important for it to be accompanied by effective enforcement. While the failure to prevent bribery offence has been the basis for a number of the deferred prosecution agreements entered into by the SFO, we are yet to see a prosecution for failure to prevent the facilitation of tax evasion, more than 5 years after the offence was introduced. While the introduction of the new offence is an important step in the fight against fraud (now the most common criminal offence in the UK), the strength of the deterrent will be affected by the likelihood of enforcement.
Authors: Ruby Hamid, Partner; Nathan Willmott, Partner; Anthony Asindi, Associate