New Failing to Prevent Fraud Offence

Background

The Economic Crime and Corporate Transparency Bill is currently making its way through Parliament. On 11 April 2023, the Government circulated a fact sheet, and a new offence was inserted by Lord Sharpe into the draft Bill to provide for a corporate ‘failure to prevent fraud’ offence.

The fact sheet gives some background to the proposed new offence and explains some of the rationale behind it. It sets out that the offence has been drafted to both prevent fraud, and to protect victims of fraud. It explains that fraud is the most common offence, representing 41% of all crime in the year ending September 2022; indeed, the crime rate recorded by the Office for National Statistics nearly doubled overnight when fraud and computer misuse offences were first included in 2016. The fact sheet highlights that there are so many ways for employees of companies to commit fraud from dishonest sales practices to hiding important information from investors or consumers.

The aim is to cut crime by ‘driving a culture change toward improved fraud prevention procedures in organisations’ and ‘holding organisations to account through prosecutions if they profit from the fraudulent actions of their employees’.

This new amendment puts Fraud offences onto a similar footing to Bribery offences introduced by the Bribery Act 2010. It will not only shift the focus to fraudulent offences but means that there will be a wholesale shift change of fraud compliance programmes within those organisations which would be responsible under the new Act.

Given that the equivalent offence in the Bribery Act – ‘failure to prevent bribery’ under section 7 – has only resulted in a handful of convictions, it remains to be seen whether this introduction will be a success.

What does the new offence entail?

This new offence introduces a corporate liability offence. The offence would be committed by a large corporate organisation (see below for definition of ‘large’) if a person associated with the body commits a fraud offence intending to benefit (either directly or indirectly) the organisation, or any person to whom the employee provides services on behalf of the organisation.

The organisation must be able to demonstrate that they had reasonable procedures in place to deter offending (a defence), or to show that it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place. If these procedures are not in place, the organisation can receive a considerable unlimited fine. As to what ‘reasonable’ procedures might be, no guidance has been given. However, at a minimum, an organisation might consider taking steps such as ensuring all staff receive compliance training, that this training is properly recorded, and that it is renewed at periodic intervals. Other steps might include undertaking due diligence on employees, particularly those with financial responsibility.

The offence is only targeted at ‘large organisations’ so that smaller/mid-size organisations do not feel a disproportionate burden. A ‘large organisation’ is classified as such if two or more of the following conditions in the financial year of the body that precedes the year of the fraud offence are met:

• A turnover of more than £36 million
• Balance sheet total of more than £18 million
• More than 250 employees.

The proposed offence is triable either way: in either the Magistrates’ or Crown Courts. As the offence is one of corporate liability, the penalty on conviction in either Court is a fine.

What offences are captured?

The Bill lists a number of fraud offences which would, it proposes, be captured by the Act. These are all fraud/accounting offences that are most likely to be relevant to corporations:

• 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)
• cheating the public revenue (common law)

The legislation will allow the list to be updated through secondary legislation in future but will be still restricted to economic crime.

Conclusion

This proposed offence indicates a fresh willingness on the part of the Government to take visible steps to tackle the ongoing problems of fraud. What is not clear however is what success, if any, there will be in enforcing it. Cynical practitioners might refer to the analogous corporate offences under the Bribery Act and note the low number of prosecutions. If enacted and used, it would represent a significant shift in the way that fraud offences are prosecuted in England and Wales.