Failure to Prevent Fraud Offence

The UK Government recently published a draft ‘failure to prevent fraud’ corporate criminal offence to be included in the Economic Crime and Corporate Transparency Bill. The Bill is currently going through Parliament. The new failure to prevent fraud offence is being introduced to make it easier to prosecute larger companies (organisations) if they profit where an associated person (employee/agent) commits one of a specified group of criminal offences for the benefit of the business and the organisation did not have reasonable fraud prevention procedures in place. It need not be demonstrated that company bosses ordered or knew about the fraud. The new offence is intended to strengthen the current powers to fine and prosecute organisations and employees for fraud.

Reform corporate criminal liability in the UK

The UK Government wants to expand the scope of corporate criminal liability in the UK. The new offence is designed to protect victims by driving a change in company culture by introducing fraud prevention procedures that hold companies to account if they profit from the criminal actions of their employees The new offence is intended to deter organisations from overlooking fraud by employees which may benefit them. The offence will encourage more companies to implement or improve prevention procedures and will hold organisations to account should the profit from fraudulent conduct by their employees. The new proposed offence will likely facilitate more straightforward prosecutions of organisations. At present prosecutors often encounter the difficulties of the “identification principle” in which an organisation will only be held liable for fraud where it can be established that an individual “directing mind and will” of the organisation has been directly involved. This has proven very difficult to attribute liability for fraud to organisations. There is increased risk of prosecutions being brought against organisations through private prosecutions, as victims may seek redress via the criminal courts. The new offence does not appear to change the position of individuals (such as directors) who can still be prosecuted for any criminal offence they have committed.

New offence to apply to larger entities only

The new offence applies to all large bodies corporate and partnerships. In smaller companies and medium the individuals responsible for making decisions sufficient to bind the company are usually apparent. As a result, the identification principle has not caused similar problems as in larger organisations. Only large organisations meeting two out of three of the following criteria will fall under the scope:

• More than 250 employees
• More than £36 million turnover
• More than £18 million in total assets

The impact of the offence will be kept under review and the threshold at which companies are to be excluded can be amended through secondary legislation if required.

Defences

The only defence is having the reasonable compliance procedures in place to prevent fraudulent actions by associated parties. Therefore, the new offence will effectively require organisations to assess and augment their anti-fraud compliance systems to account for fraud committed for their benefit by associated parties. There may also be circumstances where it is reasonable to have no fraud prevention procedures in place but in general, organisations will need to have reasonable procedures in place to prevent fraud. However, in practice, the majority of large companies will require reasonable procedures and the Government will publish guidance on this.

Penalties

A company convicted of this offence may receive an unlimited fine. The Courts will consider of all the circumstances in determining the appropriate level for a particular case. A company convicted under the new offence, could also be liable, under the current draft of the Bill, to a Serious Crime Prevent Order under the Serious Crime Act 2007. Consistent with the other failure to prevent offences, this new offence will be possible for a company to agree to as part of a deferred prosecution agreement (‘DPA’) under Schedule 17 to the Crime and Courts Act 2013.

Could individuals liable and prosecuted for failure to prevent fraud?

Individuals within companies can already be prosecuted for committing, encouraging or assisting fraud but individual liability for failure to prevent fraud will not be introduced.

What offences are in scope?

A large organisation that fails to prevent fraud by an employee/agent would commit an offence as long as the fraud was committed with the intention of benefitting the organisation. The offences presently proposed in the draft Bill and factsheet that will be in scope for failing to prevent include:

• 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)

Notably, anti-money laundering offences are not included in the new offence. Relevant organisations are already required by law to have anti-money laundering procedures in place and be regulated by the FCA, who can have the power to order large fines.

Will the offence apply across the UK?

The new offence will apply across the UK with equivalent offences in Scotland and Northern Ireland. With regards to jurisdiction, if the “associated” individual commits a fraud offence under UK law, their employer could be prosecuted. This applies even if the organisation (and the employee) are based overseas.

How does the offence apply outside the UK?

The offence can be committed by an overseas organisation (and the employee if overseas) where the employee commits a relevant fraud offence under UK law or targets UK victims.

When will the new offence come into force?

The new offence will not take effect until the Government has issued guidance on reasonable fraud prevention procedures. The timing for the publication of the Guidance is not yet clear. The new offence will come into force when the Economic Crime and Corporate Bill receives Royal Assent. However, even before the publication of the Guidance, Relevant Bodies can take steps to consider the extent and efficacy of current anti-fraud procedures, and factor the entry into force of the new offence into any audits or reviews of the same.

How can we help?

At Olliers, we have a team of specialist lawyers to assist you if you are facing an allegation in relation to fraud, please contact us by telephone on 0161 834 1515, by email to info@olliers.com or complete the form below.