In our alert called “Criminal Investigations in the UK: What to Watch for the UK and the EU in 2023”, we predicted the introduction of a new “failure to prevent” offence. We predicted that such a new offence would likely have far-reaching, and potentially seismic, consequences on organizations both (i) in having to ensure that the procedures that they have in place to prevent fraud are reasonable, but also (ii) on the (higher) success rate of law enforcement to prosecute a large organization if an employee commits fraud for the organization’s benefit.
On April 11, 2023, the UK Home Office tabled an amendment to the Economic Crime and Corporate Transparency Bill, introducing a “failure to prevent fraud” offence. Whilst such an offence has not yet received Royal Assent, it is thought likely that it will shortly be passed into law. If passed into law, we expect that there will be a period of several months before the law comes into effect, to allow the government to draft and publish guidance.
According to the fact sheet published by the UK Home Office on April 11, 2023, the new offence will make an organization liable where a specified fraud offence is committed by an employee or agent, for the organization’s benefit, and the organization did not have reasonable procedures in place. It also provides the following additional detail:
- Scope. The offence will apply to all large bodies corporate and partnerships, and to all sectors. However, to ensure the burden on organizations is proportionate, only large organizations will be in scope. This is likely to be defined as including organizations meeting two out of three of the following criteria: (i) more than 250 employees, (ii) more than £36 million turnover and (iii) more than £18 million in total assets.
- Offences in Scope. Fraud and false accounting offences will be in scope including 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) and cheating the public revenue (common law). Money laundering offences are unlikely to be included because relevant organizations are already required by law to have anti money laundering procedures in place. The government will have the power to add further offences to those offences within the scope of the new legislation.
- Potential Defenses. Organizations will be able to avoid prosecution if they have, and can demonstrate that they have, reasonable procedures in place to deter the offending. The factsheet provides that the government will publish guidance providing organizations with more information about what constitutes reasonable procedures before the new offence comes into force. The offence will not be enforced until the guidance is published.
- Penalty. An organization will be liable to receive an unlimited fine.
- Individual Accountability. There will be no individual liability for failure to prevent fraud, because individuals within companies can already be prosecuted for committing, encouraging or assisting fraud.
- Extra territoriality. If an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organization (and the employee) are based overseas.
Whether the new offence results in a higher number of convictions is yet to be seen but, as with the existing failure to prevent bribery and failure to prevent facilitation of tax evasion offences, the introduction of the new legislation is intended to drive better corporate behaviors. Organizations likely to be caught by the new offence would be well advised to start to consider the adequacy or otherwise of their fraud prevention procedures.