UK government confirms new corporate criminal offence of failure to prevent fraud
Published on 17th Apr 2023
Significant development for corporate criminal liability
As anticipated in our earlier Insight, on 11 April 2023 the government introduced a new offence into the draft Economic Crime and Corporate Transparency Bill to provide for a corporate “failure to prevent fraud” offence.
This is likely to be the most significant development in UK corporate criminal enforcement since the Bribery Act 2010 and it reflects the government's current agenda of driving corporate culture to prevent fraud. The outgoing Director of the Serious Fraud Office, Lisa Osofsky commented:
"This new offence would be a game changer for law enforcement – bringing the law on fraud in line with bribery.
As the UK’s top economic crime prosecutors, this would help us crack down on fraudulent enterprises, compensate their victims and ultimately protect the integrity of our economy."
The proposed new offence
As currently drafted, a relevant body will be guilty of a crime if it fails to prevent fraud by an employee or agent, unless that entity can prove that it had reasonable procedures in place to prevent fraud. As with the Bribery Act offence, absent this defence being available, the offence will effectively be one of strict liability.
The offence will only apply to corporate bodies, not individuals such as directors or senior managers (who could still be prosecuted for any underlying offences). Entities convicted of the new offence would face an unlimited fine and confiscation of profits. Whether the offence will be a trigger for debarment from public contracts remains to be seen.
What is a relevant body?
A relevant body is further defined as a large organisation, which threshold will be met if the organisation meets two out of three following criteria:
- more than 250 employees;
- more than £36 million (US $45m) turnover; and
- more than £18 million (US $22m) balance sheet total.
This new offence is intended to make it easier to prosecute corporates that commit fraud, even if the fraud was unknown to senior management level.
What does business need to do?
The draft legislation is still at committee stage in the House of Lords, and its commencement date is presently unknown. Once it is enacted, the offence will still not come into force until the government has published guidance on what reasonable fraud prevention measures will look like, meaning that corporates have some time to prepare. It is likely to reflect the guidance published in respect of the Bribery Act.
Most large organisations may already have robust policies and procedures in place to mitigate against the risk of fraud, and to detect and prevent fraud. All relevant businesses should however now review their existing anti-fraud compliance frameworks, and in particular consider whether their risk assessments need to be updated to take account of the new offence.
Looking further ahead, once it is published, the government's guidance will need to be carefully considered to ensure that all policies, procedures and controls will be sufficient to enable the organisation to establish the reasonable procedures defence should that ever become necessary.
Osborne Clarke comment
As with the Bribery Act, there can be little doubt that the intention of this offence is to make it easier to prosecute large businesses for fraudulent activity that occurs on its watch. This in turn may increase their exposure to severe reputational damage and follow-on civil claims and, as with the bribery (and tax evasion-related) offence, it will be critical to ensure that effective and proportionate communication, policies, training and monitoring are in place to avoid these risks arising.
We nevertheless observe that the legislation, at least for now, seems to have put an end to the possibility of broader reform to the corporate criminal liability regime or of further offences targeting economic crime more generally. In our view, this is a missed opportunity.