Reminder – The new Failure to Prevent Fraud Offence is on its way

Key points

Corporate liability for fraud

The Failure to Prevent Fraud offence means a large organisation can be held criminally liable if its employee, agent or other ‘associated person’ commits fraud for its benefit and it failed to have appropriate preventative measures in place.

Closing the accountability gap

The offence will close a legal loophole as organisations can be held to account even if their senior managers were unaware of the fraud being committed. The burden of proof is on the organisation to demonstrate that it had ‘reasonable procedures’ in place to prevent fraud which, if it can do so, will provide a defence. Another possible defence is being able to prove that it was not reasonable in the circumstances to expect such preventative procedures to be adopted.

Scope

The offence will affect any ‘large’ company or organisation that conducts business in the UK, regardless of where the company is based.

A ‘large’ company or organisation is defined in section 201 of the ECCTA as being one that fulfils two or more of the following conditions:

• 250 employees or more;
• £36m turnover or more; or
• £18m in total assets or more.

Depending on how legislation develops, smaller businesses may eventually fall into scope.

Guidance

The UK Government has published guidance to help organisations prepare ahead of 1 September. This is advisory instead of prescriptive so compliance may not guarantee a defence. It will be assessed on a case-by-case basis and outcomes will depend on the organisation’s unique circumstances.

Action

With the offence coming into effect in the next couple of weeks, large organisations are encouraged to:

• Conduct or update fraud risk assessments;
• Review and enhance internal controls and procedures;
• Train staff and associated persons on fraud prevention; and
• Document decisions and rationale regarding risk mitigation strategies.

Failure to act could expose entities to the possibility of unlimited fines and damage to reputation.  

Comment

The offence represents a significant shift in the UK’s corporate criminal liability framework and is intended to drive a cultural change in how organisations approach fraud prevention.

Additional Resources

To see how this new offence relates to the sports industry, read our article:

• ‍Tackling the new Failure to Prevent Fraud Offence: What the Sport Industry Needs to Know

To read more about the ECCTA 2023, please read our other articles:

• Introduction to Proposed Companies House Reforms
• Identity Verification Reform
• Proposed civil and criminal sanctions for breach of the Companies Act
• Proposed introduction of discrepancy reporting requirements for all businesses
• Expanding the role of the Registrar
• The Economic Crime and Corporate Transparency Act 2023 receives Royal Assent