The failure to prevent fraud offence at a glance what do companies need to know

On 11 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 2022Options Paperon Corporate Criminal Liability.

The offence was tabled as an修正案to the Economic Crime and Corporate Transparency Bill which is currently progressing through the House of Lords, having been introduced first in September 2022.

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.

What is the scope of the offence?

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 afactsheetwhich 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.

Will it apply to companies of all sizes?

No. The failure to prevent fraud offence differs from its predecessors in that it only applies to "large organisations." The government justifies this limitation by its wish to ensure that burdens on businesses are proportionate. To qualify as "large", an organisation must have satisfied two of the following criteria in the financial year prior to the year in which the offence took place:

• more than £36 million in turnover;
• more than £18 million in total assets; and
• more than 250 employees.

These criteria are drawn from the medium sized company threshold in the Companies Act 2006 and the £36 million turnover requirement mirrors the threshold above which companies must produce a modern slavery statement under the Modern Slavery Act 2015.

同时为小企业这将是受欢迎的消息es, the limitation to large organisations is a disappointing development. The prevalence of fraud is not dictated by organisation size – indeed large businesses will argue that their existing procedures are likely to be more sophisticated and effective at preventing fraud. Excluding smaller organisations from the offence may limit the utility of government guidance on effective risk mitigation and compliance measures. A difficult precedent is set if financial crime risk appears to apply to big business, alone – and this places the new fraud offence at odds with the failure to prevent bribery and tax evasion facilitation, which are applicable to organisations of any size.

But this does not appear to be a permanent differentiation: 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.

What fraud offences are captured?

The fraud offences cover existing common law and statutory fraud, in addition to offences related to false accounting:

• 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)
• cheating the public revenue (common law)

Previous proposals also included money laundering in the scope of the failure to prevent offence. 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 Reporthere. 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 activityhere.

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.

How do companies need to respond?

犯罪活动的广度被关闭ence 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.

Is there a defence available?

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.

What impact will the new offence have?

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; Anthony Asindi, Associate