As part of the Economic Crime and Corporate Transparency Bill, the government is creating a new offence of failure to prevent fraud, to hold organisations to account if they profit from fraud committed by their employees.
The stated intention is to improve fraud prevention and protect victims. While there are existing powers to fine and prosecute organisations and their employees for fraud, the new offence will strengthen these, aiming to close loopholes that have allowed organisations to avoid prosecution in the past.
Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and it did not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that company bosses ordered or knew about the fraud.
Fraud is the most common offence in this country, amounting to 41% of all crime in the year ending September 2022. Employees of companies and other organisations can commit fraud in a wide variety of ways – for example, by dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets. Individuals, other businesses, or the taxpayer may end up defrauded as a result. The government aims to accomplish two key goals to help to protect victims, including businesses, and cut crime by:
- driving a culture change towards improved fraud prevention procedures in organisations; and
- holding organisations to account through prosecutions if they profit from the fraudulent actions of their employees.
The offence applies to all large bodies, corporates and partnerships. This means that in addition to businesses, large not-for-profit organisations such as charities are also in scope, as well as incorporated public bodies.
The offence applies to companies in all sectors. However, at the current time only large organisations are in scope. These are defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three of the following criteria:
- more than 250 employees;
- more than £36m turnover; and
- more than £18m in total assets.
The impact of the offence will be kept under review and the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.
Based upon initial indications from the government, organisations will be able to avoid prosecution if they have reasonable procedures in place to prevent fraud. The government has committed to publishing guidance providing organisations with more information about reasonable procedures before the new offence comes into force.
Once the Economic Crime and Corporate Transparency Bill has been approved by Parliament and received Royal Assent, the government will need to publish guidance on reasonable fraud prevention procedures before the offence comes into force. The specific fraud prevention measures outlined in the future guidance will be critical.
ICAEW has engaged with the government and other stakeholders as the process of introducing this new offence has been underway. Given challenges in Parliament, including the attempted addition of amendments in both Houses, there has been a lack of clarity around the final wording of the offence, which should gain Royal Assent soon.
The standard of the aforementioned guidance and the application of the measures outlined in this offence in a proportional manner will be key to the success or failure of the offence going forward. ICAEW advises that all firms have anti-fraud policies, procedures and measures in place. Once this offence comes into effect following the publication of the guidance, being able to demonstrate that said policies to counter fraud are in place will be critical.
The final Parliamentary decision on the bill is still subject to ‘ping pong’ between the two Houses. This is due to a raft of amendments that were introduced by the House of Lords, including extending the offence to cover companies of all sizes. However, this was subsequently removed by the government on its return to the Commons. ICAEW will continue to work with the government to ensure that the accountancy sector is represented in the practical implementation of the offence, particularly the issuance of guidance which will determine, in reality, the requirements of compliance and the potential consequences of non-compliance.
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