Failure to prevent fraud – a new criminal offence announced by UK Government

Large organizations in the UK will be held criminally liable if they fail to put in place adequate procedures to prevent fraud.

Fraud has become the most prevalent crime type in the UK, accounting for around 40% portion of all crime in England and Wales alone. The emphasis on fraud prevention underlines its growing prevalence and impact on the UK economy. This increase in fraud has prompted the UK government to take stringent measures, such as the introduction of the new corporate legislation which aims to combat this pervasive threat more effectively.

Earlier this month, the UK Government has published guidance on the new corporate offence of failure to prevent fraud. New legislation will come into force on September 1, 2025. This offence is introduced by the Economic Crime and Corporate Transparency Act (ECCTA 2023) and aims to hold large organizations accountable for fraud committed by their employees or agents if they fail to put in place adequate procedures to prevent fraud.

This offence, which applies to large and medium-sized organisations, makes businesses criminally liable if they fail to prevent fraud committed by their employees, agents, or subcontractors for the organisation's benefit.

This means that if an employee or agent commits fraud for the benefit of the organization, the organization itself can be prosecuted.

Who Does It Applies To:

The offence applies to Companies, Partnerships, and certain other entities in the UK. It specifically targets large and medium-sized organisations (using size thresholds similar to those as identified in the Companies Act 2006). Small organisations are exempt.

Offence Triggers:

The offence occurs when a company fails to prevent fraud by an employee, agent, or subcontractor intended to benefit the organisation.

Examples of fraud include false accounting, dishonest tax evasion facilitation, or obtaining financial advantage through deception.

Defence of Reasonable Procedures:

Organisations can avoid liability if they can demonstrate they had reasonable procedures in place to prevent fraud. Reasonableness is assessed based on the size, nature, and risk exposure of the organisation. The guidance also provides detailed advice on how organizations can implement reasonable procedures to prevent fraud.

To mitigate this risk, organizations should review their existing fraud prevention procedures and ensure they are robust and effective. This includes:

Risk assessment: Identifying and assessing the risks of fraud within the organization.

Due Diligence: Conduct background checks and ongoing assessments of employees, agents, and contractors.

Policies and procedures: Developing clear policies and procedures to prevent, detect, and report fraud.

Proportionality: Measures should be proportionate to the size, complexity, and operational risks of the organisation.

Top-Level Commitment: Senior management must demonstrate a culture of integrity and accountability in combating fraud.

Training, Communication and awareness: Providing training to employees to raise awareness of fraud risks and how to report suspicious activity.

Monitoring and review: Regularly monitoring and reviewing fraud prevention measures to ensure they are effective.

By taking proactive steps to prevent fraud, organizations can protect themselves from criminal liability and reputational damage.

Penalties:

An organisation found guilty of failing to prevent fraud could face unlimited fines and reputational damage. Personal liability may also arise for directors or senior officers if their actions (or inactions) contribute to the offence.

Implementation Recommendations:

The guidance also provides examples of good practice and case studies to illustrate the principles, and although there’s still some time to go until the legislation will come into force on September 1, 2025, it's important for organizations don’t delay and start acting now to review the guidance carefully and take steps to implement appropriate fraud prevention measures. Failure to do so could result in criminal liability.

Therefore, organisations are advised to:

✔Immediately review and enhance existing fraud prevention systems.

✔Document fraud risk assessments and the steps taken to mitigate them.

✔Ensure board-level oversight of compliance measures.

By holding large organizations accountable for fraudulent activities committed by their employees or agents, the government aims to deter such behavior and protect businesses and individuals from falling victim to fraud.

The new legislation is aimed at encouraging organisations for building a more robust anti-fraud culture, exactly in the same way as it was done with the introduction in 2010 of the legislation for failure to prevent bribery that helped to make a significant shift in corporate culture since its introduction.

It's crucial for businesses to stay informed about these changes and take proactive steps to prevent fraud. By implementing robust fraud prevention measures, organizations can safeguard their assets and reputation.

These changes are expected to address some long-standing issues and foster a more dynamic in the competitive business landscape of the UK.

If you are interested in Registering your Limited Company in the UK, but require more information or guidance, why not call us on +44 (0) 207 935 5171 to discuss your questions or to Apply for a Consultation. Our experienced and highly professional business support team is here to help!