"Preparing "reasonable procedures" is now essential for businesses to mitigate risk under the new offence - proactive steps today will safeguard against costly consequences tomorrow."
Hotly anticipated Government guidance has been released on the new corporate offence of "failure to prevent fraud" under the Economic Crime and Corporate Transparency Act 2023, the newest addition to the suite of "failure to prevent" offences set down in legislation.
The guidance is merely advisory, but failure to comply with it is likely to make establishing a defence difficult.
Business leaders will be pleased to know that the offence will not come into force until 1 September 2025, giving ample time to prepare. Conversely, it is unlikely that much leniency will be shown by prosecutors (the Crown Prosecution Service or Serious Fraud Office) where organisations fail to make the most of that time.
We will be offering training and practical assistance to our clients to help them avoid possible prosecution, but here are the headline points:
How is the offence committed?
The offence arises where an employee, agent, subsidiary or "associated person" of an organisation commits a fraud that is intended to benefit that organisation or its clients. It is not necessary for the directors of a company to have been directly involved in the fraud.
Is my organisation affected?
It depends.
The obligations attach to "large organisations" which satisfy two of the following three requirements:
- more than 250 employees;
- more than £36 million turnover;
- assets of more than £18 million.
Group entities will be aggregated and so smaller subsidiaries may find themselves being subject to the obligations despite themselves being a far smaller entity.
What constitutes fraud?
For the purpose of this offence, fraud includes:
- Fraud by false representation (s.2 Fraud Act 2006)
- Fraud by failing to disclose information (s.3 Fraud Act 2006)
- Fraud by abuse of position (s.4 Fraud Act 2006)
- Participation in a fraudulent business (s.9 Fraud Act 2006)
- Obtaining services dishonestly (s.11 Fraud Act 2006)
- Cheating the public revenue (common law)
- False accounting (s.17 Theft Act 1968)
- False statements by company directors (s.19 Theft Act 1968)
- Fraudulent trading (s.993 Companies Act 2006)
Are there any defences?
It will be a defence to show that the organisation had "reasonable procedures" in place to prevent fraud or that, in all the circumstances, it was not reasonable for the organisation to have any prevention procedures in place.
What those reasonable procedures look like is going to vary drastically between organisations and the sectors they operate in.
What if the organisation is found guilty?
In theory, Courts will have the power to levy an unlimited fine. In practice, fines will be issued in accordance with the Sentencing Council's General Guideline: Overarching Principles, and any specific sentencing guidelines published in due course.
What next?
Now is the time to risk assess and put in place robust procedures across your organisation so that you have a defence should the worst happen. Preparing "reasonable procedures" is now essential for businesses to mitigate risk under the new offence - proactive steps today will safeguard against costly consequences tomorrow.
Our litigation Partners are all experts in fraud prevention and recovery, and can guide you through the process so that, by 1 September 2025, you have in place all the procedures necessary to protect your organisation against the financial, regulatory and publicity cost of a prosecution.
Speak with us today to get that process moving.
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.
