What does the proposed new corporate offence of failing to prevent fraud mean for employers?

The Economic Crime and Corporate Transparency Bill is currently (May 2023) making its way through the House of Lords. If passed, the Bill would create a new corporate offence of failing to prevent fraud, similar to other corporate offences already in existence such as failing to prevent tax evasion and failing to prevent bribery. The purpose of the new offence is to “hold organisations to account if they profit from fraud committed by their employees” and close “loopholes that have allowed organisations to avoid prosecution in the past.” This article explains how, in the Bill’s current form, the offence would be made out and what it means for employers.

Who will the new offence apply to?

The offence will apply to incorporated companies and partnerships which meet the definition of a “large organisation”. A large organisation is one which meets two or more of the following criteria:

• more than 250 employees;
• annual turnover of more than £36 million; or
• more than £18 million in total assets.

How is the offence committed?

A company will be guilty of failing to prevent fraud where an employee or agent of the company commits a fraud offence with the intention to benefit the company. It will not be necessary to show that senior personnel in the company ordered or knew about the fraud. Fraud offences which may result in liability for the company include:

• many of the offences specified in the Fraud Act 2006, such as fraud by false representation, failing to disclose information, and abuse of position;
• false statements by company directors;
• fraudulent trading; and
• cheating the public revenue.

If convicted of the offence, a company may receive an unlimited fine. The new offence only applies to organisations; individuals within the organisation will not themselves be liable for failing to prevent the fraud (though they may still be prosecuted for committing, encouraging or assisting fraud).

An organisation may be prosecuted where the employee commits fraud under UK law or targets UK victims, even if the organisation and the employee are based overseas.

What defences will be available?

A company may have a defence to the offence if it can show that at the time the offence was committed, either:

• it had in place reasonable procedures in place to prevent fraud; or
• it was not reasonable for the company to have any measures in place to prevent fraud.

The burden of proof will be on the company to show that in the circumstances, its fraud prevention measures were reasonable, or that it was not reasonable to expect the company to have such measures.

When will the new offence come into force?

We do not know exactly when the new offence will come into force. Once the Bill has passed through the House of Lords and received Royal Assent, the Government has indicated that it will publish guidance on reasonable fraud prevention procedures. This guidance should help employers develop reasonable fraud prevention measures for their organisation. The offence will come into force after the guidance has been published.

Our Employment team can help answer questions you may have about your current obligations as an employer to prevent certain types of behaviour. We can also assist you in drafting an anti-fraud policy, or a policy that deals with the other types of corporate offences such as tax evasion and corruption. The Employment Team can be reached at employment@warnergoodman.co.uk or by calling 023 8071 7717.