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  • Writer's pictureParametric Global Consulting

Failure to Prevent Fraud Offence

Updated: Mar 20

What Is It About?

In April 2023, the UK Government confirmed the inclusion of a new “Failure to Prevent Fraud” offence in the Economic Crime and Corporate Transparency Bill (“The Bill”). The Bill is moving through the UK Parliament and will next be at the report stage within the House of Lords. The offence’s aims include:

  • Protecting victims (including businesses);

  • Holding organisations to account for profiting from fraud by their employees and/or agents;

  • Encouraging enhanced fraud prevention procedures;

  • Driving both a “major shift in corporate culture to help reduce fraud” and a “culture change towards improved fraud prevention procedures in organisations”.

Currently, the need for proof that an employee represents the organisation’s “directing mind and will” is a significant obstacle for prosecutors seeking to hold corporates to account in large and complex fraud cases. It is difficult to establish the directing mind, especially in large organisations, and has led to limited corporate convictions.

During the Bill’s second reading, it was argued that the concept of the directing mind and will as a basis for corporate criminal liability, is long outdated. Lord Garnier pointed out that modern companies can operate in many different countries, “with national, regional and global boards, and … hundreds of thousands of employees engaging in multijurisdictional trade in goods and services. Locating the directing mind and will of these vast conglomerates is difficult, if not impossible, and the current law does not reflect the reality of modern business life.”

The proposed offence has a lower evidential threshold. An organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, if the organisation did not have reasonable fraud prevention procedures in place. However, there may also be circumstances where it is reasonable for an organisation to have no fraud prevention procedures in place.

The prosecutor does not need to demonstrate that company bosses ordered or knew about the fraud. Organisations convicted of the proposed offence can receive an unlimited fine in addition to a criminal record. The offence will, overall, make it easier to hold organisations accountable for failing to prevent fraud.

Calls For Reform

The “failure to prevent” model was first introduced in the Bribery Act 2010 and followed by a failure to prevent tax evasion offence in the Criminal Finances Act 2017. There have been calls for corporate criminal liability reform in England and Wales for many years, and this offence will be a significant step forward.

In 2020, the Law Commission undertook a review of how the legislative framework could be enhanced to capture and punish corporate criminal offences, focusing on economic crime. One of the strongest options presented in the paper (June 2022), was the creation of a new criminal offence of corporate criminal liability for fraud – a Failure to Prevent Fraud offence.

What Does This Mean For Companies?

  • The proposed offence will broaden corporate criminal liability. It will increase the likelihood of successful criminal prosecutions of companies for fraudulent conduct.

  • The proposed offence applies only to “large bodies corporate and partnerships”; this includes businesses, large not-for-profit organisations such as charities, and incorporated public bodies. “Large” means organisations meet two out of three of the criteria of having more than; 250 employees, £36 million turnover, and £18 million in total assets.

  • However, as the Bill makes its way forward, there are clear indications that many law makers do not agree that smaller companies should be excluded; we may see those companies come within the scope of the offence.

  • There are also concerns about whether the Failure to Prevent model can be successfully deployed in relation to fraud cases, due to the inherent vagueness in aspects of what can be defined as fraud.

  • The proposed offence will have extraterritorial reach; companies operating abroad may find themselves liable if an employee or agent targets victims in the UK or commits fraud.

  • There are nine types of fraud and false accounting offences that will be within the scope of the overarching Failure to Prevent Fraud offence.

  • After the offence becomes law, the government will publish guidance on “reasonable fraud prevention procedures”.

Key Questions For Legal & Compliance:

  • Does your organisation fall within the scope of the offence?

  • What does “reasonable fraud prevention procedures” mean for your organisation?

  • Do your current policies and procedures make specific reference to fraud prevention, detection, and how to respond, as relevant to your operations?

  • Have you undertaken a fraud risk assessment? If so, do you have a clear plan of action for fraud detection and prevention?

  • How should your internal communications be reframed in light of the new incoming obligations?

  • Do your internal controls reflect the elements of the nine fraud offences within the scope of the proposed offence?

  • What, if any, changes are required to your internal reporting and whistleblowing mechanisms?

  • Will additional resources be required to comply with the new law?

  • What additional training is required? Will the approach to training be general, targeted or both?

  • Do you have the capabilities and resources to properly manage and mitigate fraud risks?

  • How will you record and measure the effectiveness of your fraud prevention procedures?

Get in touch with Parametric Global Consulting, and we will be happy to help and support your organisation in preparing for the Failure to Prevent Fraud offence.

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