Failing to prevent is preparing to fail - the new "failure to prevent" fraud criminal offence
Assuming it makes it onto the statute book, the Economic Crime and Corporate Transparency Bill 2022-2023 (the "Bill") is set to be one of the biggest changes to laws tackling economic crime in over a decade. Businesses faced with issues of money laundering and fraud would do well to keep an eye on its progress and start planning now for its entry into force.
It is making its way through Parliament and is scheduled to reach committee stage this month on 27 March 2023. It could receive royal assent later in 2023 and come into force by 2024.
One of a raft of proposed reforms is a new criminal offence for corporate entities for the failure to prevent fraud and, potentially, false accounting and money laundering activity. That is set to be a significant expansion to the suite of economic crime offences.
The Bill is part of wider UK legislative reforms to tackle fraud, money laundering and corruption, with a particular focus on corporate entities. The government says it is "committed to bring forward this further bill to deliver a suite of wider-ranging reforms to tackle economic crime and improve transparency over corporate entities".
It follows the Economic Crime (Transparency and Enforcement) Act 2022. That Act was in response to Russia's invasion of Ukraine and assisted the UK government with the imposition of sanctions, created the Register of Overseas Entities and sought to strengthen the Unexplained Wealth Order regime.
The Bill seeks to introduce a number of reforms to assist with the prevention and detection of economic crime. As well as the failure to prevent offences, the proposals include Companies House reforms, increased transparency for limited partnerships, strengthening the powers of the Solicitors Regulatory Authority and the Law Society, and expanding the Serious Fraud Office's pre-investigation powers.
There has been significant parliamentary debate about the Bill, including as to the scope, formulation and application of the offences, and how it interacts with existing laws tackling economic crime. However, it gives a clear indication of the government's direction in tackling corporate criminal liability in the context of economic crime.
Failure to prevent fraud offence
The government has indicated that a new failure to prevent fraud offence would form part of the Bill. It may also include offences for the failure to prevent false accounting and money laundering activity.
Based on previously proposed amendments, the Bill would encompass the following:
- A "relevant commercial organisation" is guilty of an offence where a person associated with that organisation commits (or, aids and abets) fraud, false accounting or an act of money laundering, and the commercial organisation fails to prevent the offence. These proposed offences are similar to that found in the Bribery Act 2010, a now tried and tested offence where a company may be guilty of a crime for failing to prevent bribery by someone associated with the company.
- It will apply to entities doing business in the UK and those working for it. A "relevant commercial organisation" is likely to be a body based or doing business in the UK and a "person associated with the commercial organisation" is likely to be construed widely to include employees, agents and subsidiaries.
- Commercial organisations will have a defence if they can prove at the relevant time that they had in place reasonable procedures in all the circumstances designed to prevent fraud, false accounting and money laundering offences. Again, this is based on the defence available to the equivalent “failure to prevent” offence in the Bribery Act 2010.
- It would further increase the scope of criminal offences which can be committed by a company which do not require application of the identification principle. Currently for a company to be liable for most offences, prosecutors have to show that a directing mind and will of the company intended to commit the offence. Failure to prevent offences mean that prosecutors only have to show a lack of reasonable procedures in place to prevent the offences – there is no need to identify a particular individual or individuals who intended not to put in place reasonable procedures designed to prevent the fraud, false accounting or money laundering.
However, recent reports seem to suggest that the failure to prevent offence might only cover fraud and not false accounting or money laundering activity. Further, it seems that Ministers may be planning to exclude small businesses from being captured by the legislation. So, the full impact of this new law is not yet clear. But, it seems that a failure to prevent offence in some form will become law and that will further change the landscape for commercial organisations as regards economic crime.
New failure to prevent offences would make it easier to prosecute commercial organisations doing business in the UK which do not have adequate procedures in place to prevent fraud and other offences within its organisation. The Bill therefore represents more work for compliance and legal teams within corporates. Managing risk is, or should be, a top priority for commercial organisations. It would be sensible for commercial organisations from all sectors to start preparing for these changes now.
Some ways in which commercial organisations can prepare include the following:
- Assessing and managing risk. Commercial organisations in all sectors should consider the risk to their organisation of fraudulent, false accounting and money laundering activity. This is a potential risk to all businesses but obviously some sectors are more exposed than others. The amendments have specifically listed certain types of commercial organisations which will be captured by the new law including credit and financial institutions, professional services firms, casinos, crypto asset exchanges and custodian wallet providers.
- Putting in place fraud prevention measures. Commercial organisations should consider compliance training for staff and review any relevant policies, procedures, and protocols aimed at bribery, corruption and crime – do these adequately address wider forms of economic crime?
- Putting in place fraud detection measures. Commercial organisations should consider if they have appropriate anti-fraud controls and reporting mechanisms in place and should consider appointing a compliance officer (if it does not already have one).
- Preparing (and testing) a response plan/strategy if fraudulent activity is identified within the commercial organisation. That should include considering who is on the internal team to deal with such matters, setting out a protocol and the parameters for internal investigations, and appointing a team of external advisors who can assist.