Failure to Prevent Fraud & Corporate Accountability

The Economic Crime and Corporate Transparency Act 2023 (‘the Act’) aims to tackle economic crime by creating a new offence of Failure to Prevent Fraud (‘the new offence’). It will enhance corporate transparency, impacting companies, limited partnerships and other kinds of corporate entities. It also includes detailed provisions controlling the registration of overseas entities.

The new offence, which is expected to be implemented on the 1st of September 2025, will hold a large organisation criminally liable for any fraud committed, that benefits the organisation in circumstances where reasonable fraud prevention measures were not in place.

The offence may be committed by an employee, agent, subsidiary or other ‘associated person’ and may also cover circumstances where the offence is committed to benefit a client of the organisation.

As it will not be necessary to show that directors or senior managers were involved or knew about the fraud, it will be easier to hold organisations accountable for fraud committed by employees, or other associated persons.

The creation of the offence is intended to impose a substantial change in corporate procedure by encouraging organisations to implement or improve, and maintain, fraud prevention procedures.

John Veale of KANGS outlines details of the Act in so far as it creates the new offence.

The New Legislation

The Act provides as follows:

S. 199 Failure to prevent fraud

A relevant body, which is a large organisation, is guilty of an offence if, in the relevant financial year, a person with the body commits a fraud offence intending to benefit, whether directly or indirectly:

• the relevant body, or

• any person or subsidiary undertaking receiving services on behalf of the relevant body.

A relevant body is also guilty of an offence if:

• an employee commits a fraud offence intending to benefit, whether directly or indirectly, the relevant body,

• the fraud offence is committed in a relevant financial year of a parent undertaking, of which the relevant body is a subsidiary undertaking and

• the parent undertaking is a relevant body which is a large organisation.

The new offence is only committed if the person committing it is acting in a capacity associated with a large organisation, such as an employee or an agent. A fraud conducted outside of that capacity, such as by an employee in private life, does not amount to corporate liability.

However, a large organisation is not guilty of an offence if it was, or was intended to be, a victim of the fraud.

What is a Large Organisation?

Section 201 of the Act stipulates that a relevant body shall be considered a large organisation if it satisfies at least two of the following conditions in the relevant financial year:

• it employs at least 250 employees,

• the turnover is more than £36 million,

• it shows a balance sheet total of more than £18 million.

Although small organisations do not fall within the definitions provided in the Act, they may be regarded as 'associated persons' when providing services for or on behalf of a large organisation.

Relevant Fraud

Certain frauds covered by the new offence are listed in Schedule 13 of the Act. Additionally, the new offence also covers aiding, abetting, counselling or procuring the commission of such an offence.

However, this list can be extensively extended through secondary legislation to cover numerous other fraud offences such as under:

Fraud Act 2006:

• s.2 fraud by false representation,

• s.3 fraud by failing to disclose information,

• s.4 fraud by abuse of position,

• s.9 participation in a fraudulent business,

Theft Act 1968

• s17 false accounting,

• s19 false statements by company directors.

Common law

• Cheating the public revenue

Companies Act 2006

• Fraudulent trading.

Potential Defence for Failure to Prevent Fraud

Section 199 of the Act establishes a defence for a relevant organisation in cases where a fraud offence has been committed. A relevant organisation can defend itself by demonstrating either that it had implemented prevention procedures that were reasonable given the circumstances, or that it was not reasonable to expect them to have any prevention procedures in place in all circumstances at the time of the offence.

In the event of court proceedings, the relevant organisation would have to demonstrate it had established and maintained reasonable procedures to prevent fraud, taking into account all the circumstances of the case.

Public sector organisations are already required to have regard to the following principles:

• top level commitment,

• risk assessment,

• proportionate risk -based prevention procedures,

• due diligence,

• communication and training,

• ongoing monitoring and review.

Consequences for Breach of the Act

Should a prosecution occur, failure to prove the existence of reasonable prevention measures, leading to a relevant organisation being found guilty of an offence, will result in the imposition of heavy fines.

Additionally, a convicted relevant organisation may well face civil proceedings seeking damages, in addition to reputational damage.

Whilst the Act only targets corporate bodies which fail to prevent fraud, as opposed to any individual liability, there remains a substantial volume of both common law and statutory offences which will be charged against individuals for such offences as encouraging or assisting fraud.

Official Comment

Lord David Hanson, Minister with Responsibility for Fraud, said:

“Fraud is a pernicious crime, and we are determined to root it out wherever it takes place. This guidance marks the first steps towards a corporate culture shift around fraud prevention.”

Nick Ephgrave QPM, Director of the Serious Fraud Office stated:

“Corporate fraud significantly damages confidence in UK companies and ultimately costs the taxpayer.”

How Can We Help?

Although the new offence applies only to large organisations, it may well be prudent for smaller organisations to ensure they adopt good fraud prevention practices in the anticipation that the Act will be extended at some point in the future.

As explained in this article, large organisations will now be held legally liable for fraud committed by employees or agents where reasonable fraud prevention procedures are not in force, monitored and maintained.

The potential for prosecution and financial liability are quite clear and the need for preventative action is overwhelming. KANGS is highly regarded nationwide, for its work on behalf of clients in financial crime.

The team at KANGS regularly advises clients, both individual and corporate, in civil fraud disputes and criminal fraud investigations.

If we can be of assistance, our team would be delighted to hear from you. Contact us using the details below for a confidential consultation with our skilled solicitors:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

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