Failure to prevent fraud confirmed

An organisation will be liable where a specified fraud or false accounting 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. There will be no need to demonstrate company bosses ordered or knew about the fraud.

If found guilty, the organisation may be liable for unlimited fines. However, individuals within the organisation will not be prosecuted.

The offence will apply to large partnerships and bodies corporate including charities with two of the following criteria: more than 250 employees, more than £36m turnover; and more than £18m in total assets. Its scope can be amended at a later date through secondary legislation. Government guidance on what constitutes ‘reasonable procedures’ will be published at a later date.

Aziz Rahman, senior partner at Rahman Ravelli, said the offence, if enacted, ‘looks set to be a game changer.

‘It gives the SFO a new line of attack—and corporates have to ensure they do all they can to ensure they have an adequate defence. For the SFO, the arrival of such an offence could have a similar impact as when the Bribery Act passed into law.

‘Corporates need to view this as a compliance alarm call. If and when this offence becomes a reality, they will need to thoroughly assess their internal compliance and fraud prevention procedures to ensure they are fit for purpose. A failure to do so may mean they cannot rely on the reasonable measures defence that will be available to the offence—which could prove costly.’

Louise Hodges, partner at Kingsley Napley, said: ‘Although the proposed failure to prevent offence is narrower in scope than the wide-ranging economic crime offence that many had campaigned for, it is still a significant step which broadens criminal liability and increases the risk of unlimited fines against large corporates that benefit from fraud committed by employees. 

‘Companies that have in place appropriate compliance and fraud deterrence measures will have a defence—ultimately the goal is to drive a cultural shift for companies to clean up their act and root out misconduct in their own organisations and punish those that turn a blind eye.

‘SMEs are currently carved out of the proposals, although this is likely to be subject to challenge as the legislation passes through Parliament with many seeing smaller businesses as particularly vulnerable to becoming vehicles of fraud.’