Lord Sharpe (Conservative) has put forward a number of amendments to the Economic Crime and Corporate Transparency Bill (amendments 84A to 84G and 86B) to introduce a new corporate offence of failing to prevent various types of fraud. The amendments, for consideration at Lords Committee Stage (scheduled to conclude by 11 May 2023 at the latest) are in line with the UK government’s previous commitment (as confirmed by Tom Tugendhat on 25 January in the House of Commons Report Stage debate).
The new ‘failure to prevent fraud’ provisions would encapsulate various fraud offences (set out in a new schedule to the Bill, and which the UK and devolved governments would be able to update in the future via secondary legislation), including cheating the public revenue, false accounting, false statements by company directors, fraudulent trading and various offences under the Fraud Act 2006 including general fraud, participating in fraudulent business carried on by a sole trader, and obtaining services dishonestly.
The offence would be committed by a large organisation (defined as meeting two or more of the following: turnover exceeding £36m, balance sheet total over £18m and more than 250 employees), where a person who is ‘associated’ with the organisation commits a fraud offence intending to benefit the organisation. This would, for example, apply where an employee commits a specified fraud offence for their employer’s benefit.
The principal defence for the employer is to be able to demonstrate that, at the time the offence was committed by the employee, it had already put ‘reasonable’ prevention measures in place –hence the ‘failure to prevent’ offence. Summarising the rationale and scope of the new offence, a government factsheet emphasises the central point around deterrence and prevention noting: ‘This will discourage organisations from turning a blind eye to fraud by employees which may benefit them. The offence will encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud.’
The proposed legislation would require the government to issue guidance on prevention procedures that organisations can put in place to protect themselves, with the factsheet noting that the offence will only come into force after that guidance has been published.
A recent Home Office press release also underlined the intention behind the legislation – making it easier to prosecute large organisations where an employee commits fraud for the benefit of the organisation, alongside encouraging those businesses to put in place measures to prevent the offending in the first place (or risk a potentially unlimited fine).
The driver behind the new corporate offences is the sheer scale of fraud in the UK, with fraud representing 41% of all criminal activity, according to Andrew Penhale, chief crown prosecutor for the CPS.
Commenting on the changes, Osborne Clarke noted the importance of prevention measures for employers: ‘As with the Bribery Act, there can be little doubt that the intention of this offence is to make it easier to prosecute large businesses for fraudulent activity that occurs on its watch. This in turn may increase their exposure to severe reputational damage and follow-on civil claims and, as with the bribery (and tax evasion-related) offence, it will be critical to ensure that effective and proportionate communication, policies, training and monitoring are in place to avoid these risks arising.
‘We nevertheless observe that the legislation, at least for now, seems to have put an end to the possibility of broader reform to the corporate criminal liability regime or of further offences targeting economic crime more generally. In our view, this is a missed opportunity.’
Freshfields Bruckhaus Deringer similarly observed the new offence has the potential to create a significant impact on how businesses manage fraud risk and markedly increases the threat of criminal prosecution: ‘Currently, an individual who constitutes the “directing mind and will” of the corporate, usually at the board of directors or equivalent level, must have been complicit in the fraud for the company to be held criminally liable for fraud. That option, of charging the company with an underlying fraud offence, will still remain open to prosecutors where the relevant test is met. But this proposal introduces a new offence (of failing to prevent fraud), which will be easier to pursue given there is no requirement to show that the company’s senior management ordered or knew about the fraud, or about the failure to prevent it.
‘This will be a major change, making it easier for UK prosecutors to investigate and prosecute large companies for acts of fraud that benefit them,’ Freshfields said. ‘While the offence does not go as far as some politicians were proposing (for example, in that it is limited to acts that benefit the company rather than a broader formulation extending to acts that the company or its resources simply facilitate, akin to that adopted for the offence of failure to prevent the facilitation of tax evasion), it will still significantly change the corporate criminal enforcement dynamic.’
Andrew Sackey, partner at Pinsent Masons commented: ‘We will continue to monitor the evolution of this Bill to understand its impacts and how it will be implemented. There are certainly some differences between the information shared via the government’s factsheet and the wording in the clauses added to the Bill – hopefully there will be some clarity in relation to this as the provisions are scrutinised in the Lords, but for now businesses are well-advised to plan on the basis of the wording in the amendments’.
Lord Sharpe (Conservative) has put forward a number of amendments to the Economic Crime and Corporate Transparency Bill (amendments 84A to 84G and 86B) to introduce a new corporate offence of failing to prevent various types of fraud. The amendments, for consideration at Lords Committee Stage (scheduled to conclude by 11 May 2023 at the latest) are in line with the UK government’s previous commitment (as confirmed by Tom Tugendhat on 25 January in the House of Commons Report Stage debate).
The new ‘failure to prevent fraud’ provisions would encapsulate various fraud offences (set out in a new schedule to the Bill, and which the UK and devolved governments would be able to update in the future via secondary legislation), including cheating the public revenue, false accounting, false statements by company directors, fraudulent trading and various offences under the Fraud Act 2006 including general fraud, participating in fraudulent business carried on by a sole trader, and obtaining services dishonestly.
The offence would be committed by a large organisation (defined as meeting two or more of the following: turnover exceeding £36m, balance sheet total over £18m and more than 250 employees), where a person who is ‘associated’ with the organisation commits a fraud offence intending to benefit the organisation. This would, for example, apply where an employee commits a specified fraud offence for their employer’s benefit.
The principal defence for the employer is to be able to demonstrate that, at the time the offence was committed by the employee, it had already put ‘reasonable’ prevention measures in place –hence the ‘failure to prevent’ offence. Summarising the rationale and scope of the new offence, a government factsheet emphasises the central point around deterrence and prevention noting: ‘This will discourage organisations from turning a blind eye to fraud by employees which may benefit them. The offence will encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud.’
The proposed legislation would require the government to issue guidance on prevention procedures that organisations can put in place to protect themselves, with the factsheet noting that the offence will only come into force after that guidance has been published.
A recent Home Office press release also underlined the intention behind the legislation – making it easier to prosecute large organisations where an employee commits fraud for the benefit of the organisation, alongside encouraging those businesses to put in place measures to prevent the offending in the first place (or risk a potentially unlimited fine).
The driver behind the new corporate offences is the sheer scale of fraud in the UK, with fraud representing 41% of all criminal activity, according to Andrew Penhale, chief crown prosecutor for the CPS.
Commenting on the changes, Osborne Clarke noted the importance of prevention measures for employers: ‘As with the Bribery Act, there can be little doubt that the intention of this offence is to make it easier to prosecute large businesses for fraudulent activity that occurs on its watch. This in turn may increase their exposure to severe reputational damage and follow-on civil claims and, as with the bribery (and tax evasion-related) offence, it will be critical to ensure that effective and proportionate communication, policies, training and monitoring are in place to avoid these risks arising.
‘We nevertheless observe that the legislation, at least for now, seems to have put an end to the possibility of broader reform to the corporate criminal liability regime or of further offences targeting economic crime more generally. In our view, this is a missed opportunity.’
Freshfields Bruckhaus Deringer similarly observed the new offence has the potential to create a significant impact on how businesses manage fraud risk and markedly increases the threat of criminal prosecution: ‘Currently, an individual who constitutes the “directing mind and will” of the corporate, usually at the board of directors or equivalent level, must have been complicit in the fraud for the company to be held criminally liable for fraud. That option, of charging the company with an underlying fraud offence, will still remain open to prosecutors where the relevant test is met. But this proposal introduces a new offence (of failing to prevent fraud), which will be easier to pursue given there is no requirement to show that the company’s senior management ordered or knew about the fraud, or about the failure to prevent it.
‘This will be a major change, making it easier for UK prosecutors to investigate and prosecute large companies for acts of fraud that benefit them,’ Freshfields said. ‘While the offence does not go as far as some politicians were proposing (for example, in that it is limited to acts that benefit the company rather than a broader formulation extending to acts that the company or its resources simply facilitate, akin to that adopted for the offence of failure to prevent the facilitation of tax evasion), it will still significantly change the corporate criminal enforcement dynamic.’
Andrew Sackey, partner at Pinsent Masons commented: ‘We will continue to monitor the evolution of this Bill to understand its impacts and how it will be implemented. There are certainly some differences between the information shared via the government’s factsheet and the wording in the clauses added to the Bill – hopefully there will be some clarity in relation to this as the provisions are scrutinised in the Lords, but for now businesses are well-advised to plan on the basis of the wording in the amendments’.
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