Understanding the "Failure to Prevent Fraud" Offence: Guide for UK Charities.
The Economic Crime and Corporate Transparency Act 2023 introduces a pivotal new legal challenge for large charities operating in the UK from 1 September 2025 — the "failure to prevent fraud" offence. This legislation is part of a broader effort to enhance corporate accountability and enforce proactive fraud prevention across various sectors, including the non-profit sector. The focus is on fraud committed by or on behalf of an organisation (i.e. by employees, agents or associates) to benefit that organisation or to benefit a third party to which services are being provided..
Understanding the scope: Which charities are affected by the new fraud offence?
The provisions are aimed at "large organisations," defined as those organisations which meet any two of the following criteria in the previous financial year:
- employing more than 250 people,
- generating income over £36 million, or
- holding assets above £18 million.
Importantly, the scope of application can extend to groups, increasing the breadth of its reach. Federated structures, branch charities and multi-academy trusts should all therefore take particular note. The financial thresholds are slightly higher where a group is concerned.
Understanding the impact: What the new fraud offence means for charities
Organisations can be held accountable for fraud committed by their employees and other associated persons, even if there was no direct instruction to engage in such activities. Organisations must demonstrate the presence of "reasonable" fraud prevention procedures—a requirement that arguably offers more flexibility compared to the "adequate" procedures mandated by earlier legislation, but which the courts may find harder to define.
Proactive measures: How charities can prevent fraud
The guidance suggests that the following six principles should form the backbone of an effective fraud prevention framework
- Top-level commitment: Leadership must actively support and commit to fraud prevention measures.
- Risk assessment: Continuous evaluation of internal and external risks associated with fraud.
- Proportionate procedures: Development of fraud prevention procedures that reflect the organisation's size and complexity.
- Due diligence: Rigorous checks into the backgrounds of those the organisation does business with.
- Communication and training: Regular dissemination of information and training on fraud risks and prevention strategies.
- Monitoring and review: Regular reviews to ensure that prevention measures are current and effective.
Preparing for the new fraud offence: Steps charities should take now
Larg charities should take steps now, well in advance of the legislation coming into force, to critically assess and enhance their fraud prevention strategies. This may involve updating internal policies, improving financial controls, and embedding a culture of compliance and accountability throughout the organisation.
Although smaller charities may not be caught by the legislation (yet), it is good practice to review financial controls at regular intervals and the renewed focus in this area brought about by legislation means that now is an opportune time.
The Charity Commission updated its guidance on internal financial controls for charities in late 2024. The updated guidance can be found here, and will be a useful starting point for charities undertaking a review of their systems.
The "failure to prevent fraud" offence underscores a significant shift towards increased responsibility for preventing fraudulent activities within organisations. Charities must proactively adapt to these changes by strengthening their fraud prevention protocols to safeguard against potential legal consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
