Fraud is the most common offence in the UK. According to GOV.UK, in the year ending September 2022, it accounted for 41% of all crime.

Businesses can be affected by fraud in a number of ways. Their employees can commit fraud by dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets. This means that both individuals and other businesses may end up defrauded and out of pocket as a result.

 

What the government is doing

This is why the government is creating a new offence of failure to prevent fraud, which is intended to hold organisations to account if they profit from fraud carried out by their employees.

Some powers to fine and prosecute organisations and their employees for fraud already exist, but the new offence will strengthen these powers, as well as closing loopholes that have – on occasion – let organisations avoid prosecution.

What does the new offence cover?

Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. The prosecution will not have to show that company bosses ordered or knew about the fraud.

This will discourage organisations from turning a blind eye to fraud by employees which may benefit them.

It’s hoped that by introducing the new offence, companies and other organisations will be incentivised to adopt, implement, review and improve their fraud prevention procedures, and by doing so, drive a shift in corporate culture that will help to reduce the incidence of fraud.

 

How will this affect businesses?

Having effective fraud prevention procedures is good for business but some organisations aren’t currently bothering to take their responsibilities seriously and this puts them at an unfair advantage compared to those who already operate fraud prevention measures.

Many businesses, particularly small and medium enterprises (SMEs), are often the victims of fraud by other corporations; the greater protection offered by the new offence will benefit them significantly.

The offence will only apply to large companies, to avoid disproportionate burdens on SMEs and support economic growth. The offence will be limited to fraud and false accounting in order to streamline its application.

Money laundering offences are not included because relevant organisations are already required by law to have anti money laundering procedures in place and be regulated by the Financial Conduct Authority, who can order large fines against companies that fail to do so.

As part of the new offence, the government will publish guidance setting out what would be considered reasonable fraud prevention procedures, thereby enabling businesses to know what kinds of precautions they will be expected to put into place.

 

Which organisations will be affected?

The offence applies to all large bodies corporate [an entity which is not an individual or a partnership] and partnerships. This means that in addition to businesses, large not-for-profit organisations such as charities are also covered by the offence, as well as incorporated public bodies.

Although the offence applies to all sectors, only large organisations are covered by it – they are defined as organisations which meet two of the following criteria:

  • more than 250 employees,

  • more than £36 million turnover and

  • more than £18 million in total assets.

The way the new offence operates and the effect it has on companies will be monitored and reviewed, and it may be that the threshold will be changed in future.

 

How can organisations avoid prosecution?

They will need to show that they have reasonable procedures in place to prevent fraud. There may also be circumstances where it is reasonable to have no fraud prevention procedures in place (for example, organisations where the risk is extremely low).

Guidance will be published about what constitutes “reasonable procedures” before the new offence comes into force, so that organisations can gauge best practice and ensure they put measures in place to achieve compliance.

 

Penalties

If convicted, an organisation can receive an unlimited fine. Courts will take account of all the circumstances in deciding the appropriate level for a particular case.

 

Individual liability under the new offence

Individuals within companies can already be prosecuted for committing, encouraging or assisting fraud but the government has no plans to introduce individual liability for failure to prevent fraud.

 

What offences are included?

The failure to prevent fraud offence covers the fraud and false accounting offences most likely to be relevant to corporations:

  • 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)

The offence list can be updated through secondary legislation in future, although any new offences added would be limited to economic crime.

 

Where will the offence apply?

It will apply across the UK. Equivalent offences in Scotland and Northern Ireland will be included in the base offence list, with a power for the relevant Minister in Scotland or Northern Ireland to amend the list with regards to offences for which they are responsible.

 

How does the offence apply outside the UK?

If an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organisation (and the employee) are based overseas.

 

When does the new offence come into force?

Once the Economic Crime and Corporate Transparency Bill has been approved by Parliament and received Royal Assent, the government will need to publish guidance on reasonable fraud prevention procedures. At that point, the offence will come into force. The Bill is currently (June 2023) at the Report Stage in the House of Lords.