Proposed Failure to Prevent Fraud Offence set to apply to some, but not all.

The UK Government’s new Fraud Strategy 2023: “Stopping Scams and Protecting the Public,” introduces several initiatives to combat fraud. Among them is the Economic Crime and Corporate Transparency Bill[1] currently progressing through the House of Lords. The Bill aims to strengthen anti-money laundering measures and enable better information sharing on suspected economic crimes, including fraud[2].

A notable amendment to the Bill is the proposed ‘failure to prevent fraud’ offence. The Home Office anticipates that this offence will enhance fraud prevention, protect victims, and address loopholes in current prosecution powers. Its focus is on holding companies accountable when their employees commit fraud for the organisation’s benefit. Examples of such fraudulent activities include dishonest sales practices, concealing vital information from consumers or investors, or engaging in deceptive financial practices that harm the public.

Under the proposed legislation, liability for the offence arises when an associated person, such as an employee or agent, commits fraud with the intention of benefiting the organisation or another party the organisation serves. However, the organisation would not be liable if it was, or was intended to be, a victim of the fraud. To defend against liability, a company must demonstrate that it had reasonable procedures in place to prevent fraud or that it was unreasonable, given the circumstances, to expect such prevention measures. Failure to meet these requirements may result in an unlimited fine. The offence cannot be enforced until statutory guidance outlining business obligations is published.

The draft bill sets specific criteria to determine which businesses will be subject to the new offence. It will apply only to larger companies and partnerships meeting at least two of the following criteria (in accordance with the Companies Act 2006):

  1. Annual turnover exceeding £36 million
  2. Total assets surpassing £18 million
  3. More than 250 employees

Notably, the offence extends to large not-for-profit organizations, including charities, as well as incorporated public bodies. Even overseas organizations can be prosecuted if an employee commits fraud under UK law or targets UK victims, despite the organisation being based overseas[3].

Small and medium-sized enterprises (SMEs) will be exempt from this legislation. The Home Office has advised that the exemption is to avoid imposing disproportionate burdens on small businesses (with limited resources and capacity for robust fraud prevention measures), as well as to support economic growth. While the rationale is understandable, it will create a gap in corporate criminal liability, which offenders could exploit by structuring their operations as small businesses. Moreover, it may result in an uneven playing field and lower compliance standards for small businesses, leaving them more susceptible to fraudulent activities.

The Home Office assures that the impact of the offence on businesses will be continuously evaluated, allowing for amendments to the exclusion threshold if necessary. However, it will be critical for the statutory guidance to emphasise the importance of robust fraud prevention measures for all businesses, irrespective of size, to ensure consistent fraud prevention standards across the board.

As time progresses, the true effectiveness of the proposed offence will be revealed. Careful monitoring and periodic reviews will be essential to assess its impact and determine if further measures, such as including small businesses in its scope, are necessary.

The Bill does not restrict the prosecution of the offence to state prosecution bodies, or require the consent of the DPP to prosecute privately.