‘Game changing’ crackdown on corporate fraud — the new offence of failure to prevent fraud

On 11 April 2023 a new offence of ‘failing to prevent fraud’ was tabled by the Government as an amendment to the Economic Crime and Corporate Transparency Bill which is progressing through the House of Lords. 

The Government’s intention is to make it easier to prosecute large organisations where an employee or agent commits one or more of a specified group of criminal offences for the benefit of the business. This new measure is unsurprising for a number of reasons, particularly as it complements the existing failure to prevent offences in relation to bribery and failure to prevent tax evasion, and is consistent with the Government’s desire to reform corporate criminal liability in the UK.

In this article, Dan Stowers looks at the new offence of failure to prevent fraud which has been tabled by the Home Office.

UK prosecutors are delighted

Lisa Osofsky, Director of the Serious Fraud Office hails the new proposed offence as a “game changer for law enforcement – bringing the law on fraud in line with bribery,” and would help them “crack down on fraudulent enterprises.”  

Andrew Penhale, Chief Crown Prosecutor for the CPS said: “The scale of fraud in the UK — now comprising 41% of all criminal activity — is so significant that extra measures to help prevent it and protect people from falling victim to this crime is welcome…. The new corporate offence of failing to prevent fraud is another important measure to drive better corporate behaviours and will complement existing measures for prosecutors…. Larger corporate enterprises, which fail to put in place reasonable measures to prevent fraud being committed by their employees, may be held criminally liable for that failure.”

Why the need for a new offence?

Companies are seen in law as non-natural legal persons and as such are capable of committing criminal offences in a number of different ways.

For those offences requiring a particular mental state, for example fraud offences require the offender to have acted ‘dishonestly’, the prosecution will seek to rely on the identification principle which requires the prosecution to prove that a person who can be identified as the ‘controlling mind and will’ of the company had the requisite state of mind required to commit the offence. Depending on the offence charged, the state of mind required will vary from dishonesty to recklessness.

Where it is alleged that offences have been committed by senior management for the benefit of the company the identification principle has posed a number of problems for prosecutors. They have often complained that it is difficult to identify the controlling mind and will of a company in circumstances where the business is large, has devolved its management function and/or has a complex subsidiary structure with different levels of management. In smaller companies (a large proportion of SMEs) where the management structure is flatter and simpler the issue has been less of a problem. The Government sees this new offence as ‘levelling the playing field for businesses.’

A brief history of corporate criminal liability review

In 2017 the Government announced a call for evidence in respect of corporate criminal liability and sought to understand how effective the criminal law was in holding organisations to account for criminal offences and the case for reform of the law on corporate liability for economic crime. This call for evidence went largely under the radar with only 62 responses and very little progress was made.

Then in November 2020 the Law Commission, a statutory independent body which keeps the law in England and Wales under review, was invited to examine the issue and publish a paper with various options for reform. In May 2021 a discussion paper was published and a consultation on corporate criminal liability opened in June 2021. This asked a number of questions about the reform of corporate criminal liability and related questions concerning, amongst other things, the liability of corporates for economic crime.

The results of this review were published by the Law Commission in an options paper in June 2022. It set out the principles which the Commission felt the law should reflect and a number of options for change, including various failure to prevent offences. It included the proposed offence of failing to prevent fraud by an associated person.

Accompanying Tuesday’s proposed amendment the Government has released a factsheet providing more detail regarding the offence.

Key features of the new offence

The Offence

• A relevant organisation will be liable where a specified fraud offence is committed by an associated person (including employee, agent, subsidiary or any person who performs services for the relevant organisation) for the organisations benefit and
• The organisation did not have reasonable fraud prevention procedures in place to prevent the fraud (the defence).
• It is important to note:
  • that an offence is committed even where the company’s management did not order or know about the fraud.
  • that the proceeds of any fraud (that is the criminal property derived from it) are also very likely to engage other criminal provisions in relation to money laundering.
  • that in common with the corporate offence in the Bribery Act 2010 this new offence is one that may be subject to a deferred prosecution agreement.

The offences presently proposed to be in scope for the new failing to prevent offence 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)

Application

• Where an organisation, in the financial year of the organisation preceding the fraud offence, meets two of the three following criteria they will be caught by the new failing to prevent fraud offence:
  • More than 250 employees;
  • More than £36 million turnover;
  • More than £18 million in total assets
• Importantly, the impact of the offence will be kept under review and these thresholds can be amended through secondary legislation if required.

Application in the UK and abroad

• The offence will apply across the UK with equivalent offences in Scotland and Northern Ireland.
• The offence will have extraterritorial reach and will 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.

Penalties

• A company convicted of this offence may receive an unlimited fine.
• Although not explicitly stated, and whilst fraught with difficulties, we also anticipate that following any conviction the company may be subject to confiscation proceedings.
• The proposed amendments to the bill also envisage companies receiving, in appropriate circumstances, a Serious Crime Prevention Order. These are civil orders designed to prevent and disrupt serious and organised crime and can be imposed stand alone in the High Court. However, they have mostly been obtained following conviction in the Crown Court.

Personal liability — ‘company bosses’

• The new offence, as proposed, cannot be committed by an individual, it does not introduce individual liability. 
• The existing criminal law will be used to prosecute those individuals who committed, encouraged or facilitated the commission of a fraud.

When will this offence come into force?

Currently the Act is passing through Parliament. The Government recognises that once the Act is in force it will need to publish guidance on what amounts to ‘reasonable fraud prevention procedures.’  This may require further consultation but, in any event, only after this guidance is published will the offence be enforced.

Impact on business and your compliance programme

Whilst the Government suggests that the ‘offence has been designed to drive change and facilitate prosecutions without duplicating existing legislation or policy or placing unnecessary burden on legitimate business’ it will undoubtedly mean that those businesses caught by the offence will need to look very closely at the ‘reasonable fraud prevention procedure’ guidance when published. They will also need to ensure that the necessary controls, policies and procedures are implemented as part of their financial crime prevention systems.

Regardless of whether your business is large or small there is never a bad time to review your financial crime compliance programme to ensure that it is fit for purpose and appropriately deals with money laundering, sanctions, tax evasion, bribery, modern slavery and, in due course, failure to prevent fraud.

Current guidance issued by the Serious Fraud Office in relation to Corporate Prosecutions identifies a number of public interest factors in favour of a prosecution including if the offence was committed when ‘the company had an ineffective corporate compliance programme’. Conversely it is a public interest factor ‘against’ prosecution where there exists a ‘genuinely proactive and effective corporate compliance programme’.

There is therefore no doubt that when it comes to your compliance programme ‘prevention is always better than cure’.