UK Introduction of the corporate FAILURE TO PREVENT [FTP] FRAUD offence.

Baker McKenzie has published a blog on the Introduction of the UKs corporate failure to prevent fraud offence.

The blog In brief

On 11 April 2023, the UK government announced in a Factsheet the introduction of a new criminal offence of failure to prevent fraud for organisations profiting from fraud committed by their employees or agents acting on their behalf.

• Factsheet: failure to prevent fraud offence - GOV.UK (www.gov.uk) https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/factsheet-failure-to-prevent-fraud-offence

Violations can result in unlimited fines for organisations involved.

Introduced as an amendment to the Economic Crime and Corporate Transparency Bill 2022, the new offence will come into force on the day the Act is passed.

The offence is applicable to all large corporations and partnerships operating across all sectors, wherever incorporated or formed.

In addition to businesses, this includes large not-for-profit organisations such as charities, and incorporated public bodies.

“Large organisations” is defined as satisfying two or more of the following conditions in the financial year preceding the year of the fraud offence:-

1. Turnover of more than GBP 36 million;
2. Balance sheet total of more than GBP 18 million; and
3. Number of employees more than 250.

A defence to the offence is either:-

1. Having in place prevention procedures as it was reasonable in all the circumstances to expect the body to have in place, or
2. To demonstrate that it was not reasonable in all the circumstances to expect the body to have any prevention procedures in place. In scope businesses should undertake the necessary risk assessments to ensure that they have reasonable prevention procedures in place.

Background

The new offence follows on from recommendations made by the Law Commission’s review of corporate criminal liability in June 2022. Fraud accounts for a significant 41% of crime in the UK as of the year ending September 2022. In a bid to clamp down on financial crime, the UK government is introducing this offence as part of a set of measures to protect victims and drive a corporate cultural shift towards better fraud prevention. Its introduction is backed by the Serious Fraud Office and the Crown Prosecution Service. The Economic Crime and Corporate Transparency Bill 2022 has the overarching aims to combat economic crime and improve transparency over corporate entities.

See a Baker-McKenzie alert on the topic here.

• 30 September 2022 - UK Government Targets Money Laundering with a New Economic Crime Bill - Significant Proposals Tabled to Reform Companies House and Improve Transparency of Ownership
• https://www.bakermckenzie.com/en/insight/publications/2022/09/uk-govt-targets-money-laundering

Applicable fraud offences

The specific fraud offences in the draft legislation are included in Schedule 10 of the Economic Crime and Corporate Transparency Bill 2022.

The offence captures the following fraud and false accounting offences:

• Fraud by false representation
• Fraud by failing to disclose information
• Fraud by abuse of position
• Obtaining services dishonestly
• Participation in a fraudulent business
• False statements by company directors
• False accounting
• Fraudulent trading
• Cheating the public revenue.

In Scotland, the following common law offences would also apply:

• Fraud,
• Uttering;
• Embezzlement.

The specified offences list will be reviewed after the offence comes into force and may be updated in the future.

The Schedule listing the offences may be amended to add or remove an offence.

For an offence to be added, it must be

• An offence of dishonesty,
• An offence that is otherwise of a similar character to those listed, or
• A relevant money laundering offence (i.e., an offence under ss. 327 (concealing), 328 (arrangements), or 329 (acquisition, use and possession)).

An organisation’s benefit.

• A corporation will only be liable under this offence if a specified fraud offence is committed for its benefit.
• The government has not yet released guidance on how a benefit will be defined and whether there will be separate offences for each benefit an organisation gain. It may be the case that this is left undefined under the offence and open to interpretation.
• Reasonable fraud prevention procedures
• Whilst lack of knowledge will not be a defence, a reasonable procedures defence can be raised. The government will publish guidance on what constitutes reasonable procedures. In this regard it is useful to recall the government guidance issued for the other corporate criminal offences in the past (please see below).

Recommended actions

• What constitutes “reasonable procedure” is not defined by the draft legislation. However, this is similar to the other ‘failure to prevent’ offences, as follows.
• HMRC has published some guidance on what constitutes “reasonable procedures” in the context of the FAILURE TO PREVENT THE FACILITATION OF TAX EVASION known as the CORPORATE CRIMINAL OFFENCE (CCO)
  • (link available here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/672231/Tackling-tax-evasion-corporate-offences.pdf]
• This largely followed guidance issued by the UK Ministry of Justice on THE FAILURE TO PREVENT BRIBERY (the “Section 7 Offence“)in relation to “adequate procedures” in respect of the UK Bribery Act 2010.
  • (link available here https://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf )
• The same six guiding principles of corporate compliance, which are relevant to the CCO and Section 7 Offence, are highly likely to also be applicable to the failure to prevent fraud offence:
  • Risk assessment
  • Proportionality
  • Top level commitment
  • Due Diligence
  • Communication (including training)
  • Monitoring and review.

CCO investigations

• As noted in A Baker-McKenzie alert, as of January 2023 the UK had
  1. Nine live CCO investigations and
  2. Another 26 investigation opportunities under review, covering businesses sectors such as software providers, labour provision, transport, accountancy and legal services.
• See a Baker-McKenzie alert on the topic
  1. https://insightplus.bakermckenzie.com/bm/dispute-resolution/united-kingdom-tax-agency-opens-9-new-investigations-for-failure-to-prevent-tax-evasion-and-announces-a-further-26-opportunities-for-investigation-under-review/

conclusion

• Large organisations can prepare for the increase in corporate liability by undertaking risk assessments to ensure reasonable prevention procedures are in place.

SOURCE

https://www.globalcompliancenews.com/2023/06/01/https-insightplus-bakermckenzie-com-bm-international-commercial-trade-united-kingdom-introduction-of-corporate-failure-to-prevent-fraud-offence_05252023/