The UK Government yesterday introduced a new corporate “failure to prevent fraud” offence into draft legislation, the Economic Crime and Corporate Transparency Bill (“the Bill”).
This is a significant development in UK anti-fraud legislation and in the UK Government’s economic crime agenda of driving corporate culture to prevent fraud. It can also be seen as putting an end to speculation that either further reform of corporate criminal liability principles, or a more general offence of failure to prevent economic crime, are immediately forthcoming.
Under this new offence, a corporate will be guilty of a crime if it fails to prevent fraud by an employee or agent, unless that corporate can prove that it had reasonable procedures in place to prevent fraud. There will be no need to prove that the “directing mind and will” of the corporate was involved in the wrongdoing.
This new offence strengthens the hand of UK fraud prosecutors. It will allow for easier prosecution of corporates that commit fraud, even if the fraud was not known about at senior management level.
As well as making prosecution easier for the SFO and other prosecuting authorities, the new offence may also increase the likelihood that victims of fraud or activist investors will bring private prosecutions against corporates.
Who Will Be Affected?
This new offence will apply to all large corporates and partnerships in the UK. “Large” is defined (using the standard Companies Act 2006 definition) as organizations meeting two out of three of the following criteria:
- more than 250 employees;
- more than £36 million (US $45M) turnover; and
- more than £18 million (US $22M) balance sheet total.
Corporates that are convicted under the new offence will be subject to an unlimited fine. The offence will apply to corporates only, not individual employees or directors. Individuals will remain subject to prosecution for committing, encouraging or assisting fraud, but will not be affected by this new offence.
What Should Corporates Do Now?
The Bill is currently at committee stage in the House of Lords. While it is making its way through the legislative process, large corporates in the UK should take steps to ensure that they are ready for the new offence becoming law. Even after the Bill is enacted, the offence will not come into force until after the UK Government has published guidance on what reasonable fraud prevention measures will look like, meaning that corporates have some time to prepare.
Most large corporates will already have in place sophisticated policies, procedures, controls, and monitoring systems designed to detect and prevent fraud. Corporates should now take the time to commence a phased review of existing anti-fraud compliance frameworks. Incorporating the core tenets of the new offence into scheduled risk assessments is likely to be a proportionate response at this stage. A more extensive review and testing of a corporate’s compliance framework may be best left until the UK Government’s guidance has been issued.
