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Failure to Prevent Offence – What will the impact be?

The UK government have announced they are planning to introduce a potentially game-changing new law that will create a ‘failure to prevent’ offence in respect of fraud, false accounting and money laundering.

Whilst all the details are not yet completely clear (for example whether only regulated or all businesses will be captured), the new offence will make it much easier to prosecute organisations with a much simpler identification doctrine proposed.

The defence available to corporates, as for the UK Bribery Act (UKBA) and Criminal Finances Act (CFA), is one of having adequate procedures in place to prevent parties acting improperly on behalf of the organisation.

Broader context

These proposals sit well with the government’s fight against fraud and economic crime more broadly. The reform of Companies House, the transformation of Action Fraud, the establishment of the Public Sector Fraud Authority (PSFA), and the soon to be published, and much anticipated 10 year fraud strategy, all demonstrate a significant focus by government on tackling these issues. Similarly, recent enhancements to corporate governance will also increase fraud risk mitigation obligations of Public Interest Entities and the proposals in the Online Safety Bill will place duties relating to fraud prevention onto social media platforms and providers. These are exciting times in the hugely challenging fight against fraud that has become such a blight on our society and economy.

What can we expect?

These proposals should make it easier to prosecute commercial organisations for being both involved in fraud or for failing to prevent an offence carried out by others. Given that risk, I would expect to see organisations sit up and ensure that they have robust governance, systems and controls in place to mitigate their risks. However, if we look back to a decade ago when the UKBA was being implemented, there was a general lack of corporate activity to upgrade bribery and corruption risk mitigation processes and controls, generated perhaps by a perception that the risk of scrutiny and prosecution was low, unless the organisation operated in a particularly high risk environment.

I think this time around, we can expect to see a different response from organisations. The focus and scrutiny on fraud from government and broader society is only increasing and therefore the criminal and reputational risk is too great. As I have explained above, there is huge government focus on the fight against fraud and I believe there will be similar prosecutor desire to hold organisations to account. Scandals such as COVID loan fraud, corporate collapses such as Patisserie Valerie, Wirecard and FTX and the scale and common occurrence of investment frauds and other scams have reduced society’s tolerance for fraud. The risk of a conviction, financial penalty or reputational damage is surely becoming too great, particularly at a time when Environmental, Social and Governance (ESG) is so high on the corporate agenda.

Government is likely to move at pace to bring these proposals into law as part of the Economic Crime and Corporate Transparency Bill. Over the coming months therefore I expect to see organisations starting to take action to ensure they are in a position to demonstrate proportionate procedures. They will need to understand and assess the risks they face and ensure appropriate governance and risk-based systems and controls are in place and underpinned by monitoring and assurance activity, clear accountability and a strong ethical culture that is led from the top.

Whilst the introduction of “failure to prevent” will no doubt cause some upheaval for organisations as they determine the actions they need to take to address any potential vulnerabilities, this new legislative change should present a real opportunity for all parts of the economy to play a bigger role in preventing, disrupting and detecting fraud.

Please do get in touch if you would like to discuss this topic further. You may also find our recent fraud reports of interest.

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