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13 Apr 2023

New UK "failure to prevent fraud" offence

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On 11 April 2023, the UK Government announced that it intends to create a new and broad corporate offence of failing to prevent fraud. While there are some existing "failure to prevent" offences on the UK statute book in relation to, for example, bribery and facilitating tax evasion, this new offence, which is to be included in the Economic Crime and Corporate Transparency Bill (the Bill), is far broader in scope. While limited to corporates/partnerships above a certain size, and ordinarily only applicable if the offence is intended to benefit that entity, it promises to be a potential game changer.

The proposed offence applies to a "relevant body" (companies or partnerships, wherever incorporated) falling within the definition of a "large organisation" (the size criteria that are proposed include meeting two or more of the following; annual turnover exceeding £36 million, a balance sheet total of more than £18 million or having more than 250 employees) (a Relevant Body).

Such a Relevant Body will be guilty of the new offence if a person who is associated with the Relevant Body (this includes employees, agents or others who perform services for or on its behalf) commits a "fraud offence" intending to benefit (whether directly or indirectly) the Relevant Body or certain defined connected parties.

The specified fraud offences 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 accounting and false statements by company directors (sections 17 and 19, Theft Act 1968)
  • fraudulent trading (section 993, Companies Act 2006)
  • cheating the public revenue (at common law)

It also includes aiding, abetting, counselling or procuring the commission of any of those offences. Other offences can be added through secondary legislation, although they are limited to economic crime.

There is a key defence where the Relevant Body can prove that, at the time the fraud offence was committed—

(a) it had in place such prevention procedures as it was reasonable in all the circumstances to expect the Relevant Body to have in place, or

(b) it was not reasonable in all the circumstances to expect the Relevant Body to have any prevention procedures in place.

Therefore, the burden of proof in relation to, for example, the reasonableness of its fraud prevention procedures, will fall on the Relevant Body.

The offence can be punished by way of an unlimited fine imposed upon the Relevant Body. Individuals within a Relevant Body cannot be prosecuted in respect of the failure to prevent fraud offence (although they can already be prosecuted for committing, encouraging or assisting fraud).

Significantly, anti-money laundering offences are not included. This is said to be because relevant organisations are already required by law to have anti-money laundering procedures in place and be regulated by the FCA, and can be fined for failure to do so.

As regards jurisdiction, if the "associated" individual commits a fraud offence under UK law, their employer could be prosecuted, even if the organisation (and the employee) are based overseas.

The proposed offence will likely make life easier for prosecutors wishing to pursue corporates, avoiding the difficulties of the "identification doctrine" – establishing that someone who can be said to be the “directing mind and will” of a company commits the offence. At the same time, the "large organisation" size criteria and the requirement that the offence must ordinarily be intended to benefit the Relevant Body will serve to limit its scope.

That said, in January of this year, SFO Director Lisa Osofsky is reported to have said Government plans to introduce a failure to prevent offence for fraud had the “potential to transform prosecution” of the crime.

Implications for Relevant Bodies

Even after the Bill becomes law, the new offence will not take effect until the Government has issued guidance on reasonable fraud prevention procedures (the Guidance). It is the Guidance that will enable Relevant Bodies to determine the extent to which additional fraud prevention policies and procedures are necessary to enable the Body to avail itself of the "reasonable prevention procedures" defence in the event that an employee or other "associated person" commits a fraud offence.

The timing for the publication of the Guidance is unclear. After the Bribery Act received Royal Assent in April 2010, Ministry of Justice Guidance followed in March 2011. 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.

Authors: David Capps and Alan Ward

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