Understanding the New Failure to Prevent Fraud Offence

Posted on: 9 May 2023

Written by: Abou Bangoura

The UK government is introducing a new failure to prevent fraud offence aimed at holding organisations accountable if they benefit from fraud committed by their employees. This new offence will strengthen existing powers to fine and prosecute organisations and their employees for fraud, closing loopholes that have allowed organisations to avoid prosecution in the past. Under the new failure to prevent fraud offence, organisations will be liable if a specified fraud offence is committed by an employee or agent for the organisation's benefit, and the organisation did not have reasonable fraud prevention procedures in place. This will discourage organisations from turning a blind eye to fraud by employees and encourage them to implement or improve prevention procedures, driving a shift in corporate culture to help reduce fraud.

This initiative by the UK authorities is not dissimilar to the corporate criminal liability for bribery under the Bribery Act 2010 and is an example of the UK's increased focus on fraud, as recently exhibited by the extension of the confirmation of payee coverage.

In addition, the FCA’s increased focus on fraud has been made clear in its Business Plan for 2023/4 where it says that it will “Build on our approach for effectively supervising the anti-fraud systems and controls of regulated firms through undertaking further assessments to evaluate how they are protecting consumers from fraud and that firms are not being used as enablers of fraud”. Payments firms, who are particularly vulnerable to fraud, have been told by the FCA in the March 2023 Dear CEO portfolio letter to treat fraud prevention as a priority.

The new offence is aimed at driving a culture change towards improved fraud prevention procedures in organisations, protecting fraud victims (including businesses), and reducing crime. It is expected to level the playing field for businesses that already have effective fraud prevention measures in place and penalise organisations with inadequate organisational arrangements. The penalty for organisations convicted under the new offence is an unlimited fine.

The new offence is designed to apply to large organisations to avoid placing disproportionate burdens on SMEs. However, the government has stated the impact of the offence will be monitored and so the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.

‘Large organisations’ are defined using the standard Companies Act 2006 definition as organisations meeting two out of three of the following criteria:

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

However, smaller organisations may still be indirectly affected as they may need to demonstrate reasonable fraud prevention procedures when dealing with larger organisations or as part of their supply chain requirements.

The new offence will come into force once the Economic Crime and Corporate Transparency Bill has been approved by Parliament and the government has published guidance on reasonable fraud prevention procedures. The bill is expected to come into force in spring 2023.

What should you do to prepare?

  • Conduct a thorough review of your current fraud prevention procedures and assess your effectiveness in preventing fraud. The starting point would be to perform a risk assessment and commission an independent assurance review to identify any gaps or weaknesses and take steps to address them.
  • Establish reasonable fraud prevention procedures and this may include (but is not limited to) implementing internal controls, conducting regular risk assessments, providing training to employees, and establishing (or improving) reporting mechanisms for suspected fraud.
  • Promote a culture of fraud prevention within your organisation, from top management down to all employees. This may involve setting clear expectations, providing regular training, and incentivising employees for identifying and reporting suspected fraud.
  • Seek specialist advice if you have any questions or concerns about the new offence and its implications for your business. Compliance experts can guide you on requirements and help you develop robust fraud prevention strategies.

This new government measure is part of various initiatives and efforts by the UK authorities to address fraud, which is a significant issue in the UK, and promote accountability and transparency in organisations. The effectiveness of the policy will ultimately depend on its implementation and enforcement. That said, FCA-authorised firms can count on the regulator’s willingness to enforce such requirements.

Our specialist teams in Payments, Capital Markets and Financial Crime can help you assess where you stand now in relation to the new failure to prevent fraud offence and support you in addressing any shortcomings.

If your firm needs support, please do get in contact; we would be happy to help.

CONTACT US

Abou B

Abou Bangoura

Abou Bangoura is a consultant within our Payment Services team.

Contact Abou

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