On 11 April 2023, the UK Government announced the introduction of a failure to prevent fraud offence. This predicted development has the potential to create a significant impact on how businesses manage fraud risk and markedly increases the threat of criminal prosecution. A factsheet published by the Home Office provides further details on the proposed offence which we summarise in this blog.
Scope of the Offence
The offence will expose companies to the risk of investigation and prosecution if they benefit from fraud committed by their employees and agents where the organisation did not have “reasonable fraud prevention procedures” in place to prevent the misconduct. The specified fraud offences are widely defined and include:
- fraud by false representation, by failing to disclose information and by abuse of position;
- participation in a fraudulent business;
- false statements by company directors
- false accounting;
- cheating the public revenue (i.e. tax fraud); and
- fraudulent trading.
Money laundering offences are not included. As such, there will be no duplication of the current money laundering regime, which will be welcome news to financial institutions worried about having to deal with parallel AML regimes.
However, it is worth flagging that the new offence builds upon the existing corporate offence of failure to prevent the facilitation of tax evasion (which is broadly targeted at organisations facilitating others in committing tax fraud) to tackle tax fraud committed by those organisations themselves. Businesses that are within scope of both offences will therefore need to consider the interaction between the two and the reasonable prevention procedures that are required in each case.
Currently, an individual who constitutes the ‘directing mind and will’ of the corporate, usually at the board of directors or equivalent level, must have been complicit in the fraud for the company to be held criminally liable for fraud. That option, of charging the company with an underlying fraud offence, will still remain open to prosecutors where the relevant test is met. But this proposal introduces a new offence (of failing to prevent fraud), which will be easier to pursue given there is no requirement to show that the company’s senior management ordered or knew about the fraud, or about the failure to prevent it.
This will be a major change, making it easier for UK prosecutors to investigate and prosecute large companies for acts of fraud that benefit them. While the offence does not go as far as some politicians were proposing (for example, in that it is limited to acts that benefit the company rather than a broader formulation extending to acts that the company or its resources simply facilitate, akin to that adopted for the offence of failure to prevent the facilitation of tax evasion), it will still significantly change the corporate criminal enforcement dynamic.
For example, a company within the scope of the provisions that makes what materialises to be fraudulent statements about its products, which consumers purchase on the basis of those fraudulent statements could, potentially, face criminal liability, even in circumstances where only very junior employees were aware that the statements were dishonest. We will need to await further clarification and expected guidance on whether this and other factual situations may result in criminal liability. This is just one example and companies across sectors will need to consider how this development impacts their risk assessment.
Application
The offence applies across 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.
The offence applies to all large bodies corporate and partnerships (large non-profit organisations such as charities and incorporated bodies will be included) and across all sectors. However, to ensure burdens on business are proportionate, only large organisations meeting two out of three of the following criteria will be in scope:
- more than 250 employees;
- more than £36 million turnover; and
- more than £18 million in total assets.
This is a corporate offence, so it does not create liability for individuals within companies for failing to prevent fraud. There are, nonetheless, existing criminal law provisions that can lead to prosecution of individuals (and the company itself if the directing mind and will test is met) for committing, encouraging, or assisting any underlying fraud itself.
Penalty
An organisation can receive an unlimited fine – considering all the circumstances in deciding the appropriate level for a particular case. Prosecution would also clearly have broader reputational implications for the organisation involved.
The UK Government’s Objectives
The UK Government claims the objective is to discourage organisations from “turning a blind eye to fraud by employees which may benefit them” and “encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud”.
Next Steps
Once the Economic Crime and Corporate Transparency Bill has been approved, the Government will need to publish guidance on reasonable fraud prevention procedures – then the offence will come into force. The offence will not be enforced until the guidance is published. The offence list can be updated through secondary legislation in future, although any new offences added would be limited to economic crime.
It remains to be seen how actively UK prosecutors such as the Serious Fraud Office, Crown Prosecution Service (and potentially others like HM Revenue & Customs) will pursue cases using these new provisions. However, given many within the enforcement agencies have been lobbying for this change for some time, we can expect the lead prosecutors will tightly enforce these measures. The outgoing Director of the Serious Fraud Office, Lisa Osofsky, has described the proposed new offence as “a game-changer for law enforcement”.
An immediate step businesses should follow is to review risk assessments and update relevant personnel across the business of the upcoming reforms with a view to streamlining procedures. We also recommend that businesses monitor developments closely and consider if existing safeguards should be reviewed and updated in light of the changing enforcement risk.
Once the guidance on reasonable fraud prevention procedures has been published, we would also encourage businesses to review and refresh their internal procedures to reflect their revised risk assessments. This creates opportunities for those tasked with protecting companies and their stakeholders from harm e.g., to reinforce existing measures and garner senior level attention on ongoing efforts to prevent and weed out wrongdoing.
We will be providing further insight on preparing for the measures as the provisions progress through Parliament.
If you would like to discuss this development further, please get in touch with your usual Freshfields contact or one of our London corporate crime or tax investigations colleagues.
