Failure To Prevent Fraud Offence: What Does This Mean for Your Company?

What is the Failure to Prevent Fraud offence?

On 11 April 2023, the UK government announced an offence of “failure to prevent fraud” with the intention of holding companies criminally liable for fraud committed by their employees.

Previous legislation fell short of adequately achieving its aim of preventing the occurrence of fraud which accounted for over 40% of all crime in England and Wales in the year ending September 2022. In response, the offence comes as an amendment to the upcoming Economic Crime Bill, in an effort to strengthen existing mechanisms to prosecute organisations and protect victims.

Who is affected?

The failure to prevent fraud clause will hold large body corporates and partnerships criminally liable where an employee or agent commits a specified fraud offence with the intention to benefit the organisation, or any person who receives services from the organisation. Large companies are those which are defined under the Companies Act 2006 as meeting two out of the following three requirements:

• A turnover of more than £36 million;
• A balance sheet total of more than £18 million; or
• More than 250 employees.

So long as the fraud was committed under UK law or targeted UK victims, the offending organisation can be prosecuted, even if based overseas.

What fraud offences are covered?

Whilst there may be future updates to the list of offences covered, the following fraud and false accounting offences are currently addressed:

• Fraud by false representation (section 2 Fraud Act 2006);
• Fraud by failing to disclose information (section 3 Fraud Act 2006);
• Fraud by abuse of position (section 4 Fraud Act 2006);
• Obtaining services dishonestly (section 11 Fraud Act 2006);
• Participation in a fraudulent business (section 9, Fraud Act 2006);
• False statements by company directors (Section 19, Theft Act 1968);
• False accounting (section 17 Theft Act 1968);
• Fraudulent trading (section 993 Companies Act 2006); and
• Cheating the public revenue (common law).

What can affected companies do?

The defence under the amendment is to prove that, when the offence was committed, (a) the body corporate had reasonable procedures in place to prevent fraud, or (b) it was not reasonable in the circumstances for the organisation to have any prevention procedures in place. At present there is no definitive list for what constitutes reasonable procedures. The government intends to publish guidance with more information on such procedures once the Economic Crime Bill comes into force by Summer 2023.

In the meantime, companies that fall under the scope of this offence can act pre-emptively by aligning themselves with related best practices such as the Ministry of Justice’s Bribery Act 2010 Guidance and the US Department of Justice’s ‘Evaluation of Corporate Compliance Programs’. Governance, risk and compliance teams should work quickly to evaluate whether their organizations are appropriately prepared to prevent fraud.

In our experience, the following actions should be front of mind in order to get ahead of the curve:

• Conduct a detailed Fraud Risk Assessment and ensure financial and non-financial internal controls are designed according to the company’s risk profile
• Review and ensure anti-fraud policies are clear and acknowledged by all employees
• Ensure your company’s Tone from the Top and decision-making processes fosters an anti-fraud culture
• Incorporate anti-fraud elements in mandatory training for all employees
• Establish ongoing monitoring and reporting procedures

Whilst the government is yet to publish further guidance, the announcement states that convicted organisations can receive an unlimited fine, although individual circumstances will be taken into account when deciding the appropriate amount. Preparing and acting in advance may prove crucial in avoiding financial and reputational damages in the not-so-distant future.