Crackdown on fraud: UK proposes new fraud offence

August 2023 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

August 2023 Issue

Fraud is omnipresent across the globe, pervading the corporate space like a plague. From country to country, industry to industry and business to business, fraudulent activity is at an all-time high.

In the UK, fraud is certainly rife. According to UK Finance’s Annual Fraud Report, over £1.2bn was stolen by criminals through authorised and unauthorised fraud in 2022, equivalent to over £2300 every minute. Furthermore, KPMG UK’s latest Fraud Barometer reveals that the total value of alleged fraud cases of £100,000 or above heard in UK courts increased by 151 percent from £444.7m in 2021 to £1.12bn in 2022.

In an effort to tackle such activity, the UK government is set to introduce a new law that will make ‘failure to prevent fraud’ a criminal offence for large businesses – one of many proposed reforms to tackle economic crime and improve transparency over corporate entities. The proposal is viewed as the most significant change in UK corporate criminal enforcement in more than a decade.

The proposed reform is housed in the Economic Crime and Corporate Transparency Bill, with the new ‘failure to prevent fraud’ offence designed to make it easier to prosecute a large organisation if an employee commits fraud for the organisation’s benefit.

As outlined in the policy paper, if fraud is committed by an employee of an organisation, the organisation must be able to demonstrate it had reasonable measures in place to deter the offending or risk receiving an unlimited fine. Essentially, the proposed legislation encourages businesses to do more to deter offending, which will help cut crime and protect consumers, investors, other businesses and the taxpayer from fraudulent practices.

“The UK government wants to make it easier to prosecute larger companies operating in the UK which profit from fraudulent activity, irrespective of whether or not senior management were aware of such activity being carried out by employees or agents,” says Alexander Thow, a senior associate at Hill Dickinson LLP. “Prosecuting companies will certainly be made easier if prosecutors do not need to show that the ‘directing minds’ of the company were actually aware of the fraud.

“If fraud is committed by an employee of an organisation, the organisation must be able to demonstrate it had reasonable measures in place to deter the offending or risk receiving an unlimited fine. ”

“There is also a pre-emptive angle,” he continues. “Given that the only available defence against prosecution is to demonstrate that the company had ‘reasonable procedures’ in place to prevent fraud by its employees, the new offence should serve to focus the minds of senior managers and encourage them to audit their company’s existing fraud prevention policies and address any shortcomings.”

Reasonable measures

While large businesses will need to prove under the new law that “reasonable measures” were in place to deter any offence committed by an employee for the organisation’s benefit, government guidance on how best to do this is yet to appear, although it is understood that unlimited fines await businesses that fail to comply.

“Statutory guidance will be published in due course, but it is anticipated that large businesses will need to conduct a risk assessment, examining existing fraud detection and prevention processes against the risks posed to the company and against the legislation,” says Charlie Court, an associate at Farrer & Co. “They will have to be able to demonstrate that their commitment to preventing fraud comes from the very top of the organisation, with regular reviews of the risks they face, and the policies and procedures implemented to tackle those risks.”

So, while businesses await the publication of the government guidance on what will actually constitute ‘reasonable measures’, those with a proactive bent will be reviewing their procedures, with a view to ensuring that existing policies remain applicable at all levels of their organisation.

“Following the release of the guidance, all organisations should carefully audit their fraud detection and prevention policies to ensure that they are of a sufficient standard,” adds Mr Thow. “This will help enable a robust ‘reasonable procedures’ defence to be raised against future prosecution under the new offence. Refresher training for all employees would also be well-advised.”

Significant tool

Once in place, the new offence legislation is expected to be a significant tool in encouraging businesses to do more to deter offending and reduce the potential for fraudulent practices – a mechanism that may also help facilitate appropriate prevention measures, including financial and accounting controls and whistleblowing.

“The introduction of the new offence is undoubtedly a step in the right direction on tackling corporate fraud in the UK,” says Mr Thow. “The scope for ‘unlimited fines’ to be levied against businesses prosecuted under the new offence is certainly eye-catching.

“As ever though, the question is how it is enforced,” he continues. “For example, will the Serious Fraud Office (SFO) focus on ‘statement’ prosecutions – those in the public procurement or public market spheres – or will its budget allow it to prosecute more widely?”

Adding to the uncertainty is the caveats that exist in the proposed legislation. “While the draft Bill provides for circumstances where it is reasonable to have no fraud prevention procedures in place, it is hard to imagine how this might apply to larger businesses,” observes Mr Court. “The reputational implications of prosecution – coupled with the potential for severe fines – should provide a meaningful deterrent, although it remains to be seen how actively cases will be pursued in practice.”

Fraser Tennant