UK GOV - The failure to prevent [FTP] FRAUD OFFENCE is ready to go.

INTRODUCTION

1. The UK government is creating a new failure to prevent fraud offences to hold organisations to account if they profit from fraud committed by their employees.
2. Whilst there are some existing powers to fine and prosecute organisations and their employees for fraud, the new offence will strengthen these, closing loopholes that have allowed organisations to avoid prosecution in the past.
3. Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place.  It does not need to be demonstrated that company bosses ordered or knew about the fraud.
4. This will discourage organisations from turning a blind eye to employee fraud, which may benefit them.
5. The offence will encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud.

SMALL FIRMS

As expected, small and medium-sized companies are exempt, and the defence will be styled as ‘reasonable procedures’ as in the CCO.

UK LAW

• The offence will apply if fraud is committed under UK law or targets UK victims, even if the fraudster or company is overseas. The penalty will be an unlimited fine.

How does the offence apply outside the UK?

• If an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organisation (and the employee) are based overseas.

Guidance will follow in due course!

• https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-failure-to-prevent-fraud-offence

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What is the government doing and why?

The government is creating a new failure to prevent fraud offence to hold organisations to account if they profit from fraud committed by their employees. This will improve fraud prevention and protect victims. Whilst there are some existing powers to fine and prosecute organisations and their employees for fraud, the new offence will strengthen these, closing loopholes that have allowed organisations to avoid prosecution in the past.

Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that company bosses ordered or knew about the fraud.

This will discourage organisations from turning a blind eye to fraud by employees which may benefit them. The offence will encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud.

How will this help fraud victims?

Fraud is the most common offence in this country, amounting to 41% of all crime in the year ending September 2022. Employees of companies and other organisations can commit fraud in a wide variety of ways – for example, by dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets. Individuals, other businesses, or the taxpayer may end up defrauded and out of pocket as a result. The new offence will help to protect victims, including where they are businesses, and cut crime by:

• Driving a culture change towards improved fraud prevention procedures in organisations
• Holding organisations to account through prosecutions if they profit from the fraudulent actions of their employees
• How will this impact businesses?
• Having effective fraud prevention procedures is good for business. These proposals will level the playing field for businesses that already take fraud prevention seriously, by penalising unscrupulous operators. Businesses, including small and medium enterprises (SMEs), are often the victims of fraud by other corporations and will benefit from greater protection.
• The offence has been designed to drive change and facilitate prosecutions without duplicating existing legislation or policy or placing unnecessary burden on legitimate business. For example, the offence will only apply to large companies, to avoid disproportionate burdens on SMEs and support economic growth. We have streamlined the offence by limiting it to fraud and false accounting, keeping money laundering responsibilities contained under the existing regulatory regime. Government will be under a statutory duty to publish guidance to set out what would be considered reasonable fraud prevention procedures, clarifying the expectations on business.

Which organisations will be in scope?

• The offence applies to all large bodies corporate and partnerships. This means that in addition to businesses, large not-for-profit organisations such as charities are also in scope, as well as incorporated public bodies.
• The offence applies to all sectors. However, to ensure burdens on business are proportionate, only large organisations are in scope – defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three of the following criteria: more than 250 employees, more than £36 million turnover and more than £18 million in total assets. The impact of the offence will be kept under review and the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.

What will organisations need to do to avoid prosecution?

• Organisations will be able to avoid prosecution if they have reasonable procedures in place to prevent fraud. There may also be circumstances where it is reasonable to have no fraud prevention procedures in place (for example, organisations where the risk is extremely low). The government will publish guidance providing organisations with more information about reasonable procedures before the new offence comes into force.

What is the penalty if convicted?

An organisation can receive an unlimited fine. Courts will take account of all the circumstances in deciding the appropriate level for a particular case.

Could company bosses be held individually liable and prosecuted for failure to prevent fraud?

No. Individuals within companies can already be prosecuted for committing, encouraging or assisting fraud but we will not be introducing individual liability for failure to prevent. Government does not see it as proportionate to prosecute an individual where they did not consent or know of the offence happening.

When will the new offence come into force?

• Once the Economic Crime and Corporate Transparency Bill has been approved by Parliament (received Royal Assent), the government will need to publish guidance on reasonable fraud prevention procedures. Only then will the offence come into force.

What offences are in scope?

• The failure to prevent fraud offence captures the fraud and false accounting offences 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 offence list can be updated through secondary legislation in future, although any new offences added would be limited to economic crime.

Money laundering offences are not included because relevant organisations are already required by law to have anti money laundering procedures in place and be regulated by the Financial Conduct Authority, who can order large fines against companies that fail to do so.

Will the offence apply across the UK?

Yes. Equivalent offences in Scotland and Northern Ireland will be included in the base offence list, with a power for the relevant Minister in Scotland or Northern Ireland to amend the list with regards to offences they are responsible for (devolved offences).

How does the offence apply outside the UK?

If an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organisation (and the employee) are based overseas.