CM October 2023

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FRAUD PREVENTION WITHOUT FAIL Understanding the proposed ‘failure to prevent fraud’ offence. AUTHOR – Annie Birch THE Government intends to introduce a new ‘failure to prevent fraud’ offence as an amendment to its Economic Crime and Corporate Transparency Bill. In April 2023, the Home Office published a fact sheet, which was updated in June (2023), and tabled an amendment to introduce the offence, which is supported by the Serious Fraud Office and the Crown Prosecution Service. The new offence is likely to come into force by the end of 2024 and will form part of broader reforms of UK corporate criminal liability. These also include proposed changes to replace the ‘directing mind and will’ test for corporate criminal liability with a new ‘senior managers’ test which, if introduced, could make prosecuting organisations for criminal offences much easier more generally. Recent proposed amendments have also introduced a failure to prevent money laundering offence, although it remains to be seen whether this will be included in the final legislation. Coupled with the renewed focus of the Serious Fraud Office, Financial Conduct Authority and other authorities on the prevention of fraud, this will significantly shift the landscape for organisations carrying on a business in the UK, in a similar way to the impact of the Bribery Act (BA) more than a decade ago. In particular, it will shift the focus from organisations as victims of fraud (inward fraud) to make it easier for organisations to be prosecuted for fraud committed by employees or third parties (outward fraud). It will also require many organisations to make significant changes to fraud compliance programmes in order to prevent a wide range of fraud offences. Framing the offence The new offence will make an organisation liable if it fails to prevent a specified fraud offence from being committed where an employee or agent commits the fraud, and the fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation. Importantly, the offence will have a defence of ‘reasonable procedures’ to prevent fraud. This means it will effectively require organisations to review and enhance their anti-fraud systems ‘Reasonable procedures’ to prevent fraud. This means it will effectively require organisations to review and enhance their antifraud systems and controls to cover fraud committed for their benefit by employees or agents. and controls to cover fraud committed for their benefit by employees or agents. That said, the Government has stated that there may be circumstances where it is reasonable for an organisation to have no fraud prevention procedures in place. The offence was initially drafted to apply to all ‘large organisations’, with such a threshold being met where an organisation satisfied two or more of the following conditions in the financial year preceding the year of the offence: more than 250 employees, more than £36m turnover, and/or assets of more than £18m. However, recently agreed amendments have resulted in this requirement being removed, meaning that the offence is likely to apply to all organisations, regardless of their size. Although the exact jurisdictional scope remains unclear, the new offence will also apply to organisations and employees who are based overseas where an employee or agent commits a fraud offence under UK law or which targets UK victims. This appears to be slightly different from the jurisdictional scope of the BA which focuses on organisations carrying on a business in the UK. Types of fraud There has been continuing debate as to which types of fraud offence should be included in the ‘failure to prevent’ fraud offence. The proposed offence captures the fraud and false accounting offences which the Government considers are most likely to be relevant to large corporations. These 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) Brave | Curious | Resilient / www.cicm.com / October 2023 / PAGE 16
Although the exact jurisdictional scope remains unclear, the new offence will also apply to organisations and employees who are based overseas where an employee or agent commits a fraud offence under UK law or which targets UK victims. The types of conduct that could be caught are broad. Offences could arise out of warranties and representations made in transaction documents, prospectuses, annual reports, and insurance claims. Crucially, there would have to be dishonest intent for an offence to be committed. According to Home Office guidance conduct caught will include ‘dishonest sales practices, false accounting and hiding important information from consumers or investors’ and ‘dishonest practices in financial markets.’ The cheating the public revenue element of this new offence may also cross over with organisations’ existing obligations under the failure to prevent tax evasion offences introduced under the Criminal Finances Act 2017. It may be possible for organisations to build on existing procedures already in place in this regard. Failure to prevent Recent proposed amendments have also suggested expanding the failure to prevent fraud offence to include moneylaundering offences. Whilst the precise form of these – and whether they will actually be included – is still to be determined, it is expected that five money laundering offences will be caught by the new provision: • Concealing, disguising, converting, transferring or removing criminal property (section 327, Proceeds of Crime Act 2002 (PoCA)) • Arrangements facilitating the acquisition, retention, use or control of criminal property (section 328, PoCA) • Acquisition, use and possession of criminal property (section 329, PoCA) • Failing to disclose knowledge or suspicion of money laundering (section 330, PoCA) • Tipping off (section 333a, PoCA) It remains to be seen how this would interact with the existing money laundering legislative framework. Impact of the new offence The ‘failure to prevent’ model will make it easier to prosecute organisations compared to the current position in which an organisation will only be held liable for fraud where a ‘directing mind and will’ has been directly involved. In practice, it has been very difficult to attribute liability for fraud to organisations, particularly large global groups. The move towards a failure to prevent offence will increase the chance of prosecutions against organisations. This includes an increased risk of private prosecutions being brought by individuals who are victims of fraud. It is also envisaged that there will be an increase in the number of organisations entering into deferred prosecution agreements (DPAs) in relation to failure to prevent fraud, effectively settling the case without any formal requirement to admit criminal liability. Once the offence is in force, organisations which identify conduct covered by the new offence will have to carefully consider the risks and benefits of a DPA, particularly given the risk of parallel civil claims. Simple steps The Government has announced that it will produce specific guidance providing organisations with information about what reasonable procedures will look like in due course – akin to the BA adequate procedures guidance. Whilst the precise form of the new guidance is unclear, it is hoped that it will be detailed and tailored to sectors so as to highlight particular fraud risks that may be faced in each sector with detailed examples of red flags. This will considerably assist organisations in conducting their risk assessments and tailoring their policies and procedures. The Government will also likely need to clarify how, for regulated firms, this will interact with existing financial crime processes required. Pending guidance being published, and as a first step, organisations should consider whether any existing fraud risk assessment covers outward fraud in sufficient detail or otherwise needs to be revised. The risk assessment should be reviewed by reference to fraud issues the organisation and/or its peers have encountered. Brave | Curious | Resilient / www.cicm.com / October 2023 / PAGE 17 continues on page 18 >
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