The government is creating a new failure to prevent fraud offence that will hold organisations to account if they profit from fraud committed by their employees. This is with the aim of improving fraud prevention and protecting victims.
While there are some powers that exist already that have the purpose of fining and prosecuting organisations and their employees for fraud, the new offence will strengthen them. It will do so by closing loopholes that have allowed organisations to avoid prosecution in the past.
Under the new offence, an organisation will be liable where a fraud offence is committed by an employee for the organisation’s benefit when the business in question didn’t have reasonable fraud prevention procedures in place. It doesn’t need to be demonstrated that company bosses ordered or knew about the fraud.
It is hoped that this will discourage organisations from turning a blind eye to employee fraud which may benefit them. The offence will encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to reduce fraud.
How will this help victims of fraud?
Fraud is the most common offence in the UK, amounting to 41% of all crime in 2022. Employees of companies and other organisations can commit fraud in a wide variety of ways, for example, by dishonest sales practices, hiding important information from consumers or investors or dishonest practices in financial markets.
Individuals, other businesses or the taxpayer may end up defrauded and out of pocket as a result. The new offence will help to protect victims and cut crime by:
Driving a culture change towards improved fraud prevention procedures in organisations
Holding organisations to account through prosecutions if they profit from the fraudulent actions of their employees
How will this impact businesses?
Businesses, including SMEs, are often the victims of fraud by other corporations and will benefit from greater protection once effective fraud prevention procedures come into play. These latest proposals will level the playing field for firms that already take fraud prevention seriously, by penalising unscrupulous operators.
The offence has been designed to drive change and facilitate prosecutions without duplicating existing legislation or policy or placing unnecessary burden on legitimate business.
For example, the offence will only apply to large companies, to avoid disproportionate burdens on SMEs, while supporting economic growth.
The offence has been purposefully streamlined by limiting it to fraud and false accounting while keeping money laundering responsibilities contained under the existing regulatory regime. The government will be under a statutory duty to publish guidance to set out what would be considered reasonable fraud prevention procedures, by clarifying the expectations on businesses.
Which organisations will fall under it?
The offence applies to all large bodies, corporations and partnerships. This means that in addition to businesses, substantial not-for-profit organisations such as charities are also in scope, as well as incorporated public bodies.
The offence also applies to all industry sectors. However, to ensure burdens on business are proportionate, only large organisations are in scope – defined using the standard Companies Act 2006 definition as organisations meeting two out of three of the following criteria of more than:
£36 million turnover
£18 million in total assets
The impact of the offence will be kept under review and the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.
How organisations can avoid prosecution
Organisations will be able to avoid prosecution if they have sufficient procedures in place to prevent fraud. There may also be circumstances where it’s reasonable to have no fraud prevention procedures in place, for example in organisations where the risk is extremely low. The government will publish guidance providing organisations with more information about reasonable procedures before the new offence comes into force.
If convicted, what is the penalty?
An organisation can receive an unlimited fine. However, courts will take account of all the circumstances in deciding the appropriate level for a particular case.
Could company bosses be held individually liable and prosecuted for failure to prevent fraud?
Individuals within companies can already be prosecuted for committing, encouraging or assisting fraud so the offence doesn’t encompass individual liability for failure to prevent. This is because the government says that it isn’t proportionate to prosecute an individual if they didn’t consent or know of the offence happening.
When will 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 this point, the offence will come into force.
What offences are in scope?
The failure to prevent fraud offence captures 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, in future, be updated through secondary legislation, although any new offences would be limited to economic crime.
Money laundering offences are not included because relevant organisations are already required by law to have AML procedures in place and be regulated by the Financial Conduct Authority, who can order large fines against companies that fail to do so.