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A bone of contention - The SME exemption in the new proposed failure to prevent fraud offence

19 September 2023

The House of Lords and House of Commons have been wrangling over the scope of the new proposed failure to prevent fraud offence ("FTPF") following the refusal of MPs in the Commons to extend the offence to small and medium-sized enterprises ("SMEs"). 

On 11 September 2023 the House of Lords further considered the Economic Crime and Corporate Transparency Bill ("the Bill").

The proposed exemption from the FTPF offence for SME's has been a point of great contention, perhaps even tension during the passage of the Bill.

The House of Lords wanted the Bill to apply to companies of all sizes, but the U-turn by the House of Commons to exempt SME's would result in the new offence applying to around only 0.5% of UK firms; in effect only large corporates. 

Under the proposed FTPF offence, companies would have a defence if they have reasonable procedures in place to prevent fraud, broadly similar to that of the Bribery Act 2010 which has a defence of adequate procedures but with "reasonable" being an easier hurdle to overcome than "adequate". In some circumstances, an organisation might argue its risk of fraud is such that it might be reasonable for that organisation to have no procedures in place to prevent fraud.

The reasoning given by the Government in the House of Commons for the proposed exemption for SME's is to protect SME's from the cost burdens that the introduction of the new offence might place on them.

However, in the House of Lords, Lord Garnier stated, "Let us be clear: there is no SME exemption in the Bribery Act or in the Criminal Finances Act, and Parliament did not think there should be. The criminal law applies to all and if the defence of adequate or reasonable procedures is available, there is no conviction—and often no prosecution. What other criminal offence defines liability based on the size of the defendant? A small thief is every bit as much a thief as a tall one, and as liable under the law if the evidence and the public interest in their prosecution are made out. The public interest in requiring a company with a small turnover and only a few employees to prevent its associates committing fraud for its benefit is no lesser than in a far larger company. To limit the failure to prevent fraud offence to corporates that have at least £36 million in turnover, £18 million in assets and more than 250 employees is both absurd and incoherent."

In attempting to find some middle ground, Lord Garnier went on to propose that the exemption should apply only to "micro-businesses" which would cover only the very smallest and newest commercial organisations.

However, this amendment by the Lords was not accepted by the Commons on 13 September 2023, with the prevailing view being that to include them in the Bill would be unnecessarily burdensome on SMEs who would have to incur significant costs if within the scope of the proposed legislation.

In its current form, the new offence will capture only large corporates which meet at least two of the three criteria:

  • more than 250 employees
  • more than £36 million pounds turnover
  • more than £18 million in total assets.

The Bill will now return to the House of Lords on the 18 October 2023 to see if agreement can be reached.

It is expected that the Bill will receive Royal Assent by the end of the year with the Government being under a statutory duty to publish guidance on ‘reasonable procedures’ before the FTPF offence comes into force.

We will continue to update on further developments on this significant piece of legislation but in the meantime if you would like advice on what the new FTPF offence may mean for your business, please contact our team of experts.

Further Reading