The NCA recently identified fraud as the UK's "most commonly experienced crime" and the Office for National Statistics reported a 17% increase in fraud from the previous reporting year.
This escalation in offending has prompted an increased focus on fraud with the SFO committing to expand 'failure to prevent offences' to fraud in its 2022-25 Strategic Plan. Likewise, the FCA's business plan emphasised its commitment to enhancing fraud prevention measures.
Other organisations are also increasingly focused on fraud, such as the Wolfsberg Group which recently added a new section on fraud to its Correspondent Banking Due Diligence Questionnaire.
How will the Offence work?
The Home Office has published a helpful factsheet which outlines how the Offence will operate.
The proposed corporate Offence will be largely similar in form and function to existing 'failure to prevent' offences, such as the failure to prevent bribery offence in Section 7 of the UK Bribery Act 2010 ("UKBA") and the failure to prevent facilitation of UK tax evasion offence in Sections 45 and 46 of the Criminal Finances Act 2017.
A relevant body will be guilty of the Offence where:
- an employee, agent or another person who perform services for or on its behalf commits a specified fraud offence (see below); and
- the fraud is intended to benefit (whether directly or indirectly) the relevant body.
The relevant body will have a defence where:
- it had in place such prevention procedures as it was reasonable in all the circumstances to expect it to have in place, or
- it was not reasonable in all the circumstances to expect it to have any prevention procedures in place.
The penalty for this Offence will be an unlimited fine, mirroring the approach taken in the existing failure to prevent offences.
Who will the Offence apply to?
The Offence will apply to large bodies corporate and partnerships (including charities), referred to as "relevant bodies" in the Bill. Individuals will not fall within the scope of the Offence.
To be in scope, a relevant body must meet two of the following three criteria:
- more than 250 employees;
- more than £36 million turnover; and
- more than £18 million in total assets.
Unlike other 'failure to prevent' offences, which cover all organisations regardless of size, medium and small businesses fall outside the scope of the Offence. The Home Office made this exclusion to prevent smaller businesses being "disproportionately burdened" by the Offence. In contrast, commentators have expressed a view that the exclusion may create a “liability gap” causing small and medium companies to neglect fraud prevention.
Like the other failure to prevent offences, overseas organisations may be caught by the Offence where the fraud occurs under UK law, or targets UK victims.
Which fraud offences are covered by the Offence?
The Offence will cover the fraud and false accounting offences that the government views as most likely to be relevant to corporations. They are:
- 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 will also include aiding or abetting the commission of any of the above.
The shift to 'reasonable procedures'
We discussed in another insights article the implications of moving from 'adequate' to 'reasonable' procedures as a defence. In short, 'reasonable procedures' better reflects the standard expected from organisations and explicitly contemplates that it may, in some circumstances, be reasonable for organisations to have limited or no prevention procedures in place (which is in contrast to the UKBA).
When will the Offence come into force?
The Bill is currently at the committee stage in the House of Lords.
Its progress can be monitored here.
No definitive timeline has yet been provided for when the Offence will come into force. Indeed, the Government has to publish guidance on reasonable fraud prevention procedures before the Offence can come into force.
In line with other 'failure to prevent' offences, we anticipate at it will be at least a year between the Bill receiving royal assent and coming into force, making it unlikely to be any earlier than Q3 of 2024.
What impact will this have for organisations?
The Home Office's published impact assessment (the "Impact Assessment") for the Offence states the main benefits of this legislation will be the creation of:
- An anti-fraud culture in business;
- A deterrent effect where increased awareness and corporate liability may deter would-be fraudsters; and
- A threat of criminal liability that will encourage organisations to put fraud prevention measures in place.
An estimated 24,900 relevant bodies will fall within the scope of the Offence resulting in a combined 'set up' and 'ongoing' costs of £847.7 million over the first 10 years.
The Offence opens up another avenue for corporate prosecutions for enforcement agencies, avoiding the need to prosecute the primary offences, thereby avoiding the inherent difficulties in demonstrating that the ‘directing mind and will’ of the company was involved in the fraud, a major obstacle in complex frauds involving large corporate groups.
It will be interesting to see if the introduction of the offence will lead to enforcement, and if so when; there have been few corporate prosecutions for failing to prevent bribery and none for failure to prevent the facilitation of tax evasion nearly six years after that offence was introduced.
Commentators suggest that unless public enforcement bodies are given further recources to fight fraud, the Offence may lead to an increase in fraud related private prosecutions by fraud victims.
Indeed, given the current public funding climate, private prosecutions are likely to increase and this new Offence provides a further tool to such prosecutions. If you are unfamiliar with private prosecutions, check out our recent insights article; Private Prosecutions – An alternative avenue to justice
What actions should organisations consider?
Specific guidance on the Offence will have to be published before it comes into force and we anticipate, that guidance will be generic and high level, resembling guidance issued for the failure to prevent bribery and tax evasion offences. The Guidance is likely to be principle based, focused on organisations conducting risk assessments to determine what is reasonable in light of an organisation's size and sector.
Many of the organisations in scope for the Offence will already have comprehensive policies addressing fraud prevention but organisations may wish to take the Bill as a gentle reminder to that as a minimum, they:
- Ensure fraud prevention is on boards' agendas and that compliance functions have the authority and resources to effectively manage fraud risks.
- Review their existing fraud risk assessments;
- Assess their anti-fraud policies, systems and controls; and
- Deliver tailored fraud training to employees, including members of senior management.
Conclusion
This proposed Offence is a major new development in the enforcement of fraud.
The SFO Director Lisa Osofsky has reportedly stated that "this new Offence would be a game changer for law enforcement".
It will broaden corporate criminal liability and there is no doubt that it will drive change in fraud prevention.
However, the key to the impact of the Offence lies in active enforcement by the relevant authorities; it is one thing to have the power to prosecute, another to use it.
It will, therefore, be interesting to see if those enforcement authorities will have the appetite, funding and resources to enforce successfully against large corporates with deep pockets and large defence teams.
