UK to make ‘failure to prevent fraud’ a criminal offence
Published on 27th Jan 2023
Recently proposed amendments will see the biggest change in corporate criminal enforcement since the enactment of the Bribery Act in 2010
A new and hard-hitting regime for corporate criminal liability now seems likely to be expedited by the government, following calls for new offences to form part of the Economic Crime and Corporate Transparency Bill 2022, currently progressing through Parliament. In a debate in the House of Commons on 25 January 2023, a number of new clauses were tabled for inclusion in draft legislation.
The changes have been in large part championed by former justice secretary, Robert Buckland and currently enjoy cross-party support. Of most potential significance are new clauses (NC) 4, 5 and 6:
NC4 Offence of failure to prevent fraud, false accounting or money laundering
(1) A relevant commercial organisation (“C”) is guilty of an offence under this section where—
(a) a person (“A”) associated with C commits a fraud, false accounting or an act of money laundering, or aids and abets a fraud, false accounting or act of money laundering, intending—
(i) to confer a business advantage on C, or
(ii) to confer a benefit on a person to whom A provides services on behalf of C, and
(b) fails to prevent the activity set out in paragraph (a).
(2) C does not commit an offence where C can prove that the conduct detailed in subsection (1)(a) was intended to cause harm to C.
(3) It is a defence for C to prove that, at the relevant time, C had in place procedures that were reasonable in all the circumstances and which were designed to prevent persons associated with C from undertaking the conduct detailed in subsection (1)(a).
NC5 Identification doctrine
(1) A body corporate commits an offence of fraud, money laundering, false accounting, bribery and tax evasion where the offence is committed with the consent, connivance or neglect of a senior manager.
(2) An individual is a “senior manager” of an entity if the individual—
(a) plays a significant role in—
(i) the making of decisions about how the entity’s relevant
activities are to be managed or organised, or
(ii) the managing or organising of the entity’s relevant activities, or
(b) is the Chief Executive or Chief Financial Officer of the body corporate.
NC6 Failure to prevent fraud, false accounting or money laundering individual liability
(1) A person (“S”) commits an offence if—
(a) at a time when S is a senior manager or corporate officer of a corporate body (“C”), S—
(i) takes, or agrees to the taking of, a decision by or on behalf of the corporate body as to the way in which the business of the corporate body is conducted, and
(ii) fails to take any steps that S could take to prevent such a decision being taken
The government's belief is that these new clauses will make it easier to prosecute commercial organisations both for participating in underlying fraudulent activity and for failing to prevent such wrongdoing by others if it occurs on their watch, even when they are not directly involved in its commission. As with the existing corporate failure to prevent bribery offence, there will be a defence available of having reasonable procedures in place to prevent third parties acting improperly on behalf of the business.
Osborne Clarke comment
Fraud, money laundering and false accounting are broad offences, which prosecutors often prefer to deploy as they are considered to be easier to secure convictions on. The offences are now being brought more widely into the corporate sphere and the new law is plainly intended to make it easier to prosecute, and convict, businesses that breach these provisions.
While the timetable for the enactment of the bill is still unknown, after many years of seemingly being uninterested in extending the ambit of corporate criminal liability, there is now a sense that the government is likely to move forward at some speed.
In our view the new law will be likely to see the biggest change in corporate criminal enforcement since the enactment of the Bribery Act in 2010.
As with that legislation, prudent businesses will want to get well ahead of the curve in having robust policies and procedures in place to ensure that they do not fall foul of this law. The alternative could involve conviction, significant financial penalties and potentially terminal reputational damage.