Offence of Failure to Prevent Fraud – Economic Crime and Corporate Transparency Act 2023

The Economic Crime and Corporate Transparency Act 2023 (‘the Act’) received Royal Assent last year. The new offence of ‘Failure to Prevent Fraud’ has been introduced under Section 199 of the Act, however it is not clear exactly when the new offence will come into force.

Failure to Prevent Fraud

Under this new offence, an organisation will be liable where certain fraud offences are committed by an employee or agent if the offence was for the organisation’s benefit and they did not have reasonable fraud prevention procedures in place. There will not be a need to show that the company’s directors were aware about the offence.

What organisations does it apply to?

The offence only applies to ‘large’ bodies corporate, subsidiaries and partnerships in all sectors.

The definition of ‘large’ uses the standard Companies Act 2006 definition meaning an organisation which meets two out of the three following criteria:

1. More than 250 employees
2. More than £36 million turnover and
3. More than £18 million in total assets.

This applies both to parent companies and their subsidiaries, if resources are held across both which meet the size threshold. Liability can be attached to the individual entity within the group or alternatively to the parent company.

This offence does not include individual liability – therefore individuals within companies cannot be prosecuted for this offence. Although there are specific offences for which individuals can already be prosecuted for. 

Geographical scope

If an employee commits fraud under UK law, or in relation to UK victims, employers could be prosecuted even if the organisation are based overseas.

What fraud offences does it cover?

The failure to prevent fraud offence only covers a specific set of ‘fraud’ offences.

This includes:

• 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)

Penalty

The maximum penalty for this offence is an unlimited fine. As with every offence, courts will take into account all of the circumstances in the case.

Defence

If organisations have reasonable procedures in place to prevent fraud, they may be able to avoid prosecution.

Guidance is to be issued by the government with regards to what procedures organisations should have in place to prevent someone associated with them from committing fraud offences. Whilst such matters will evolve and be refined over time, the key is to adopt a risk based approach which introduces and effectively implements appropriate and proportionate policies and procedures that demonstrate a commitment to fraud prevention across the entire organization from top to bottom. People should be aware of their obligations through appropriate training and everyone should be aware of the consequences of non-compliance. Organisations should ensure that people are encouraged to and know how to raise any concerns.

How can Olliers help

The introduction of the new offences is likely to have a major effect on organisations, and they must consider their compliance procedures currently in place.

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.