‘Failure to prevent’ fraud offence to apply in UK to large organisations

The new offence is to be introduced via the Economic Crime and Corporate Transparency Bill that is currently progressing through the House of Lords – amendments to that effect (31-page / 170KB PDF) were tabled by Lord Sharpe of Epsom, the parliamentary undersecretary of state in the Home Office, on Tuesday.

The move comes at a time when fraud has been calculated to account for 41% of all recorded crimes in the UK.

“These proposals will level the playing field for businesses that already take fraud prevention seriously, by penalising unscrupulous operators,” the Home Office said in a factsheet. “Businesses, including small and medium enterprises (SMEs), are often the victims of fraud by other corporations and will benefit from greater protection.”

“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 and support economic growth. We have streamlined the offence by limiting it to fraud and false accounting, keeping money laundering responsibilities contained under the existing regulatory regime. Government will be under a statutory duty to publish guidance to set out what would be considered reasonable fraud prevention procedures, clarifying the expectations on business,” it said.

Andrew Sackey of Pinsent Masons, who specialises in running internal investigations and advising businesses relating to suspicions of bribery, money laundering, and tax and white collar frauds, said: “Importantly, the new corporate failure to prevent fraud offence will only apply to a large organisation where employees commit frauds for the benefit of the organisation. That means that the new corporate criminal liability will not be triggered by the conduct of individuals who are secretly intent on their own self-enrichment or, as is not uncommon, where the corporate itself is a victim.”

“Large organisations” from across UK sectors would be within scope of the new offence. An organisation would be considered large for the purposes of the new offence if it satisfies at least two of three listed conditions: its annual turnover is more than £36 million; its balance sheet worth is more than £18m; it has more than 250 employees. 

Fiona Cameron of Pinsent Masons said: “There will be disappointment from some commentators that the new offence is limited in this way, with particular concern that it risks introducing unnecessary complication and uncertainty, especially given that there is no similar exemption in the failure to prevent bribery or tax evasion offences. However, this will be kept under review and there is power to expand the scope in future.”

Under the proposals, liability for the offence would arise if a person associated with the large organisation, such as an employee or agent, commits a “fraud offence” intending to benefit either that organisation or another person that they provide services to on behalf of the organisation – though the organisation would not be liable for the latter offence if the organisation was, or was intended to be, a victim of the offence.

Large organisations would have a defence against liability for the offence if they could prove that, at the time the fraud offence was committed, they had reasonable procedures in place to prevent a fraud offence being committed or that it was not reasonable in all the circumstances to expect them to have any prevention procedures in place.

David Hamilton of Pinsent Masons said: “The ‘reasonable procedures’ defence mirrors that found in relation to tax evasion in the 2017 Criminal Finances Act, as opposed to the ‘adequate procedures’ required to defend failure to prevent bribery offences. There have been concerns that ‘adequate’ may be interpreted too strictly, particularly when judged with the benefit of hindsight, so that a company which had in place procedures which were reasonable in all the circumstances but did not in fact prevent the offence taking place might be unable to avail itself of the defence.”

A fraud offence for the purposes of the proposals is one of many of the listed common law or statutory offences listed in a proposed new schedule to the Bill. The list includes various offences of fraud under the Fraud Act 2006 and the offence of false accounting under the Theft Act 1968. The government would have the power to add further offences to those classed as fraud offences via regulations – including, potentially, money laundering offences.

Organisations guilty of a failure to prevent fraud offence would be liable for a potentially unlimited fine.

The Home Office said large organisations based overseas, as well as those in the UK, could be held liable for the new offence.

“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,” it said.

Sackey said: “We will continue to monitor the evolution of this Bill to understand its impacts and how it will be implemented. There are certainly some differences between the information shared via the government’s factsheet and the wording in the clauses added to the Bill – hopefully there will be some clarity in relation to this as the provisions are scrutinised in the Lords, but for now businesses are well-advised to plan on the basis of the wording in the amendments.”

“The amendments have been drafted in such a way that the new failure to prevent fraud offence cannot be enforced until statutory guidance is published. It is to be hoped that this guidance will provide the deduplication promised in the factsheet. Regulated financial organisations are already required to have systems and controls to counter the risk that they might be used to further fraud and money laundering,” he said.

Lisa Osofsky, director of the Serious Fraud Office in the UK, said: “This new offence would be a game-changer for law enforcement – bringing the law on fraud in line with bribery.” She added that it would help the SFO “crack down on fraudulent enterprises, compensate their victims and ultimately protect the integrity of our economy”.

Cameron said: “Previous amendments to the Economic Crime and Corporate Transparency Bill have also sought to expand the so called ‘identification doctrine’ to make it easier to establish liability in corporate prosecutions, where, in general culpability on the part of the directing mind of the organisation must be established for conviction. For larger, more complex organisations this can be difficult, resulting in fewer prosecutions of what can be seen as some of the most egregious offences. Suggested reforms would have made it easier to identify that directing mind, those in control, to prosecute the organisation. The government has so far resisted including such amendment, which again will be seen by some as an opportunity missed.”