New law: Smaller firms may be affected by ‘failure to prevent fraud’ offence

A large organisation will commit the new offence if it fails to prevent commission of specified fraud offences by associated persons, if the intention behind the fraud is to benefit that organisation or a person to whom services are provided on that organisation’s behalf.

An organisation is ‘large’ for these purposes if it satisfies at least two of the following:

• turnover of more than £36 million;
• balance sheet total of more than £18 million;
• more than 250 employees.

As well as employees and subsidiaries, associated persons can include agents, sales agents, brokers, professional advisers and advertisers acting for the organisation.

However, it is a complete defence if the organisation can show it had reasonable anti-fraud procedures when the offence was allegedly committed.

It is not yet clear which procedures will be treated as reasonable for these purposes, but the government has promised to issue guidance before the new offence is introduced. It is anticipated that organisations will need to show they have imposed contractual controls on associated businesses to avoid being found guilty of the offence, in the same way that they do to avoid being found guilty of similar offences under anti-bribery and criminal finance law.

A smaller business which is an associated person of an organisation in scope may well find itself subject to contractual controls imposed by the larger organisation to reduce its risk of committing the new failure to prevent fraud offence.

The new guidance is expected to be issued during the first three months of 2024, with the introduction of the new offence to follow after that.

Operative date

• To be announced

Recommendation

• Smaller businesses working with an organisation in scope should ask for early warning of any new obligations to be imposed on them by the organisation - such as compliance with revised anti-fraud policies.