Failure to prevent fraud offence: what you need to know to be prepared

In recent years, regulatory scrutiny around fraud prevention has intensified globally, prompting jurisdictions like the UK to introduce new procedures. The UK’s government’s new “Failure to Prevent Fraud” offence represents a significant shift in corporate liability, mandating organizations to safeguard against fraudulent activities within their operations proactively. For organizations, understanding and preparing for this legislation is not merely a compliance issue but a strategic imperative to protect assets, maintain reputation, and ensure sustained operational integrity.

What is the “Failure to Prevent Fraud” Offence?

The new “Failure to Prevent Fraud” offence, introduced in the Economic Crime and Corporate Transparency Act 2023 (The ACT) by the UK’s government, imposes a legal obligation on organizations that did not have reasonable fraud prevention procedures to prevent fraud offences perpetrated by employees or agents acting on their behalf. Unlike traditional fraud laws that focus on individual culpability, this offence holds organizations accountable for failing to implement adequate procedures to deter fraudulent activities within their sphere of operations.
The offence requires organizations to demonstrate they have implemented reasonable and proportionate measures to prevent fraud offences. This encompasses establishing robust internal controls, conducting thorough risk assessments, and fostering a culture of transparency and accountability throughout the organization. By imposing a strict new liability regime, the law emphasizes the importance of proactive fraud prevention rather than reactive remediation in place.

What is the Economic Crime and Corporate Transparency Act 2023 (The ACT) ?

The Economic Crime and Corporate Transparency Act 2023 (The ACT) is a new significant legislative initiative by the UK’s government aimed at combating economic crime and enhancing corporate transparency. This Act forms a crucial part of the UK’s broader fraud strategy, focusing on reducing fraud offences and tackling various forms of economic crime. It introduces stringent procedures to strengthen regulatory oversight, enhance corporate accountability, and improve transparency in financial transactions. By imposing robust compliance requirements on organizations and financial institutions such as service providers, the ACT aims to safeguard against fraudulent activities and promote a more secure and resilient economic environment in the UK.

Who Does the Offence Apply To?

The “Failure to Prevent Fraud” offence applies broadly to organizations and other business entities and service providers operating within the jurisdiction of the United Kingdom. Specifically, it targets companies registered in the UK, as well as foreign entities conducting business or providing services through a UK-based branch or subsidiary. This expansive scope ensures that all organizations, regardless of their geographical origin, are held accountable for preventing fraudulent activities carried out by their employees, agents, or associated persons.

Entities Covered by the Legislation:

All companies incorporated under UK law, including private limited companies, public limited companies, partnerships, and limited liability partnerships (LLPs), are subject to the provisions of the “Failure to Prevent Fraud” offence.

Foreign entities that have a physical presence in the UK through branches, subsidiaries, or representative offices fall within the purview of the legislation. This includes multinational corporations with significant operations or business interests in the UK.

The economic crimes targeted by this offence:

  • 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)

Good to know: The Fraud Act 2006 is a UK law put in place to combat fraud by clearly defining and criminalizing fraudulent activities. It establishes three main offenses:

  • Fraud by False Representation: Dishonestly making a false representation to gain or cause loss.

  • Fraud by Failing to Disclose Information: Not disclosing information when legally required, with the intent to gain or cause loss.

  • Fraud by Abuse of Position: Abusing a position of trust to gain advantage or cause loss.

Understanding the Risks and Consequences

The “Failure to Prevent Fraud” offence carries substantial risks and consequences for businesses that fail to comply with its requirements. Understanding these repercussions is crucial for companies aiming to safeguard their operations and reputation in the competitive business environment.

  • Financial Penalties: Non-compliance with the “Failure to Prevent Fraud” offence can result in significant financial penalties. These penalties are often calculated based on the severity of the offence, the financial benefits accrued from the fraudulent activities, and the mitigating factors considered during legal procedures. In some cases, fines can amount to millions of pounds, impacting the financial stability and profitability of the organization.

  • Reputational Damage: The fallout from a conviction or public disclosure of non-compliance can tarnish a company’s reputation irreparably. Stakeholders, including customers, investors, and business partners, may lose trust in the organization’s integrity and governance practices. Rebuilding trust and restoring reputation can be a long and challenging process, affecting market standing and brand value.

  • Legal Ramifications: Beyond financial penalties and reputational damage, non-compliance with the legislation may lead to legal repercussions. This can include civil lawsuits from affected parties seeking damages, regulatory investigations, and enforcement actions by authorities. Directors and senior executives may also face personal liability if found negligent in their oversight duties related to fraud prevention.

Steps to Prepare Your Company

Preparing your company for compliance with the UK’s “Failure to Prevent Fraud” offence involves taking proactive steps and implementing effective fraud prevention strategies:

Conduct a Risk Assessment:

  • Identify and assess fraud offences risks specific to your organization across all operational areas.

  • Pinpoint vulnerabilities like weak internal controls or high-risk transactions.

Implement Robust Prevention Measures:

  • Develop and enforce internal controls tailored to mitigate identified fraud risks.

  • Use technology for proactive detection and monitoring of suspicious activities.

Strengthen Policies and Training:

  • Update anti-fraud policies to align with regulations and educate employees on fraud prevention.

  • Promote a culture of transparency and ethical conduct through regular training sessions.

Establish Reporting Procedures:

  • Provide clear channels for employees to report suspicions confidentially.

  • Ensure prompt investigation and appropriate action on reported incidents.

Monitor and Adapt:

  • Conduct internal audits to evaluate the effectiveness of fraud prevention efforts.

  • Stay informed about regulatory changes and industry standards to adjust your strategies accordingly.

Cifas, the association specialized in fraud prevention in the United Kingdom proposes webinar to help organizations. It also gives access to “Cifas Fraud & Cyber Academy” for sensibilizing employees.

Key Considerations for Non-UK Companies

For international businesses and organisation, compliance with the UK’s “Failure to Prevent Fraud” offence requires careful navigation of cross-border legal frameworks and regulatory expectations.
Operating or having subsidiaries in the UK mandates compliance with local laws on corporate fraud prevention. It’s imperative for these companies to assess their operational footprint thoroughly and implement tailored compliance measures to meet UK-specific requirements.
Adapting to UK legal frameworks, including robust anti-fraud measures and reporting obligations, is essential to mitigate risks effectively. Reviewing and aligning global anti-fraud policies with UK standards, staying updated with evolving legislation, and seeking guidance from UK regulatory bodies and legal experts are crucial steps. Collaboration with local advisors well-versed in UK regulations offers strategic insights to navigate compliance challenges and uphold operational integrity effectively.

Conclusion

Preparing your organisation for compliance with the UK’s “Failure to Prevent Fraud” offence is not just about meeting legal obligations; it’s a strategic imperative for safeguarding your organization’s integrity and reputation. By implementing proactive measures such as conducting comprehensive risk assessments, enhancing internal controls, and educating employees on fraud prevention, businesses can mitigate the risks associated with financial penalties, reputational damage, and legal ramifications.

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