After over a decade of calls for reform to corporate criminal liability, on 11 April 2023 the Government finally announced its intention to create a new "failure to prevent fraud" offence. Under the proposed legislation, organisations can be prosecuted where an employee or agent commits a fraud for the organisation's benefit, and reasonable fraud prevention procedures were not in place.
The offence will be introduced as an amendment to the Economic Crime and Corporate Transparency Bill, which is currently passing through the House of Lords.
The stated objective of the amendment is to discourage large organisations from turning a blind eye to fraud committed by their employees and to hold companies to account if they profit as a result.
The offence
Currently, "failure to prevent" offences exist in the UK in respect of bribery and the facilitation of tax evasion. However, there has been argument for this list of corporate crime offences to be expanded to cover fraud specifically, given that fraud is the most common criminal offence in the UK.
The move towards a "failure to prevent" structure will significantly change the way in which organisations could be held accountable for the fraudulent acts of those that they employ and make it easier for criminal prosecutions to be brought against the company. Those in control of the organisation do not need to have had knowledge of the fraud for the organisation to be criminally liable.
This is in contrast to the current position where an organisation will only be liable for fraud where a senior person representing the company's "directing mind and will" has been directly involved, reducing the likelihood of a successful prosecution particularly in large, global organisations with complex organisational structures. The Government is hopeful that the departure from this approach will encourage more companies to implement and improve their fraud prevention procedures.
The offence covers key fraud and false accounting offences under the Fraud Act 2006 and the Theft Act 1968, as well as fraudulent trading under the Companies Act 2006 and the common law offence of cheating the public revenue.
Who is it applicable to?
The offence will only apply to large bodies corporate and partnerships that meet 2 out of 3 of the following criteria:
- more than 250 employees;
- more than £36 million turnover; and
- more than £18 million in total assets.
This includes not just companies and businesses but also large incorporated public bodies, not-for-profit organisations and charities. The Government has stated that the offence will only apply to large organisations to avoid disproportionate administrative burdens on small and medium enterprises and support economic growth.
While the Government has not specified the exact jurisdictional reach of the offence, it appears that it will apply to organisations and employees based outside of the UK where their conduct amounts to a fraud offence in the UK or targets UK victims.
Defence and consequences
Organisations will be able to avoid prosecution if they can demonstrate that they have "reasonable procedures" in place to prevent fraud. The Government is yet to provide detail on what reasonable fraud prevention could look like, but we expect the procedures to look similar to those relating to bribery and the facilitation of tax evasion, and Government guidance will be provided in due course.
If convicted, an organisation can receive an unlimited fine.
It may be the case that the authorities will look to use deferred prosecution agreements (DPAs) to hold large organisations accountable for failures to prevent fraud, which allow for a settlement resolution to a case without any admission of guilt by the organisation. We have seen in recent years an increase in the use of DPAs by the Serious Fraud Office in bribery cases and would expect their use to continue to grow with the addition of a failure to prevent fraud offence.
Timeline and next steps
It is difficult to speculate when exactly this offence will come into force given that once the Bill receives Royal Assent, the Government will need time to publish detailed guidance on the reasonable procedures defence before the offence is effectively enforceable. It is also likely that there will be a consultation period on the guidance before it is finalised.
In the meantime, large organisations should start giving thought to whether their fraud risk policies ought to be reassessed and identify where their anti-fraud systems and controls could go further to mitigate the additional risks that the new offence gives rise to.
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