Failure to prevent fraud – a new offence?

Quick read

In April 2023, the UK government published a factsheet outlining proposals to introduce a new offence of failure to prevent fraud as part of the upcoming Economic Crime and Corporate Transparency Bill. With a number of amendments having been tabled recently, we discuss this new offence and its implications below.

The Economic Crime and Corporate Transparency Bill is the most significant overhaul to corporate criminal liability for half a century and designed to hold corporations liable in their own right for economic crime. It proposes, among other things, an addition to the growing roster of corporate "failure to prevent…" offences (like those relating to bribery and tax evasion), with the proposal of a failure to prevent fraud offence and the recently proposed addition of a failure to prevent money laundering offence.

Another highly notable proposed reform is the recent amendment to the Bill to widen the identification doctrine - the legal test for deciding whether the actions and mind of a natural person can be regarded as those of a company. The reform would replace the common law legal test of the "directing mind and will" of a corporation and be expanded to include senior managers, designed to reflect modern day company structures.

The proposed fraud offence will mean that bodies corporate and partnerships may face criminal liability and an unlimited fine for failing to prevent an employee or agent from committing a fraud offence for its benefit. The fraud offences likely to be caught under the new 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).
Participation in a fraudulent business (section 9 Fraud Act 2006).
Obtaining services dishonestly (section 11 Fraud Act 2006).
False accounting (section 17 Theft Act 1968).
False statements by company directors (section 19 Theft Act 1968).
Fraudulent trading (section 993 Companies Act 2006).
Cheating the public revenue (common law).

The failure to prevent fraud offence will also apply to overseas organisations and employees, provided the employee has committed fraud under UK law or has targeted a victim based in the UK.

To avoid liability, organisations will need to ensure that reasonable procedures are in place to prevent the commission of fraud by employees and agents. While the details of such procedures are to be outlined in future government guidance, it is clear that what is "reasonable" will vary depending on the nature and size of the organisation in question.

These proposed changes reflect the UK government's appetite to increase organisational responsibility for fraud and hold corporate criminals to account.

If the legislation is passed, it is likely to come into effect in late 2024. In the interim, organisations should be advised to review the adequacy of their current anti-fraud procedures and prepare for the inevitable increase in fraud prosecution, corporate criminal liability, and likely greater utilisation of deferred prosecution agreements.

执业领域和服务团队纠纷和调查