By Helen Gregory, Forensic Director
A new Failure to Prevent Fraud offence is being introduced by the Government to encourage businesses to do more to deter offending in order to protect themselves, consumers and other businesses.
The new legislation, which is likely to come into force by the end of 2024, will make it an offence if companies fail to prevent fraud by an employee or agent unless it can prove there are adequate fraud prevention procedures in place. The aim is to prevent companies from turning a blind eye to fraud.
Larger organisations in the firing line
The new legislation, being introduced in the Economic Crime and Corporate Transparency Bill, is only applicable to large businesses but does include not-for-profit organisations such as charities and incorporated public bodies.
A large organisation is defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three following criteria:
- more than 250 employees
- more than £36 million turnover
- more than £18 million in total assets
Adequate fraud prevention procedures
The legislation is similar to the Bribery Act 2010 in that it refers to the “failure to prevent”. The defence will be that the organisation has a robust set of procedures that the employee or agent circumvented.
It is important to note that what may be considered to be “adequate” in one scenario may not be considered to be “adequate” in another.
It will be necessary to ensure that the policies and procedures in place are not only suitable to deter and prevent fraud when implemented but that these are tested regularly and updated as the business environment changes.
It is not adequate to either apply “off the shelf” policies and procedures or to draft some but not audit their ongoing suitability.
It is also key that there is top-level commitment. It will not be sufficient for senior management to pay lip service to this legislation, they will need to comply with their own policies.
Potential penalties
The business could receive an unlimited fine if it is found to not have reasonable fraud prevention procedures in place in an attempt to encourage businesses to clamp down on fraudulent activities within their organisation.
However, the larger and more significant impact is likely to be the adverse press coverage that would follow any litigation in this area, regardless of whether the prosecution was successful.
What you need to do
If your business falls within the scope of this legislation, then it is necessary to ensure you have robust fraud prevention measures in place which are relevant to your particular situation.
If your business falls below the thresholds mentioned above, it may be worth reviewing your policies and procedures to check they are adequate for your purposes.
Get in touch with your usual Milsted Langdon contact if you need help with fraud prevention or advice on the new legislation.