Third time's a charm? A new 'failure to prevent' offence for the UK – now, it's all about fraud

Viewpoints
April 14, 2023
5 minutes

Just two weeks after announcing its Economic Crime Plan for 2023-2026, the UK Government has made good on one of its commitments – announcing draft legislation (and related fact sheet) for a new corporate criminal ‘failure to prevent fraud’ (FTPF) offence. 

The new FTPF offence has been shoehorned into the Economic Crime and Corporate Transparency Bill (the Bill) as an amendment. The Bill has been making its way through Parliament since last September and had already reached the committee stage in the House of Lords when the amendment was tabled by the Home Office on 11 April 2023.

The FTPF offence largely follows the Law Commission’s June 2022 options paper on Corporate Criminal Liability, which was commissioned to assess and identify potential reforms or solutions to the particular prosecutorial difficulties in applying the “identification doctrine” to large organisations or those with complex reporting structures. 

The identification doctrine means that a corporate will generally only be liable for the conduct of a person who had the status and authority to constitute the body’s ‘directing mind and will,’ and for many years this has thwarted the prosecution of large organisations (or those with complex reporting/governance structures) for criminal wrongdoing, particularly in relation to economic crime. 

The ‘failure to prevent’ offence formulation has been used to sidestep such difficulties before, in the form of  the ‘failure to prevent bribery’ and ‘failure to prevent the facilitation of tax evasion’ corporate offences (in the UK’s Bribery Act 2010 and Criminal Finances Act 2017 respectively), and there have been widespread calls for a more general ‘failure to prevent economic crime’ offence in recent years.

The new FTPF offence may change as the Bill progresses through the Parliamentary process, but as currently drafted, it will:

  • Render a relevant organisation criminally liable if it fails to prevent a specified fraud offence (noted below) being committed by a person associated with the organisation (e.g. an employee, agent, subsidiary) with the intention of benefitting (whether directly or indirectly): (a) the organisation itself; or (b) any person to whom (or to whose subsidiary) the associate provides services on behalf of the organisation.  It will be a defence for the organisation to demonstrate that it had “reasonable” procedures in place to prevent fraud at the time. The Government has yet to provide any information as to what prevention procedures might suffice and it is required to publish guidance before the FTFP offence can come into force.  An organisation will not be guilty of the offence where it was (or was intended to be) a victim of the relevant fraud offence.
  • Apply only to ‘large’ organisations (including partnerships, NGOs, charities, and public bodies) that satisfy two of the following three conditions in the financial year preceding the fraud offence:
    1. Turnover above £36 million;
    2. Balance sheet total (i.e. total assets) above £18 million; or
    3. More than 250 persons employed under contracts of service.
  • This limited application stands in contrast to the ‘failure to prevent bribery’ offence, for example, which applies to organisations of any size. The Government has offered no rationale for this limitation and – even if the identification doctrine might tend to be slightly less of an obstacle in relation to smaller companies – it seems an odd choice to fetter the ability to prosecute small and medium enterprises (SMEs), which may have complex governance structures despite falling below the threshold criteria, and thereby in effect to remove any incentive to foster an ‘anti-fraud’ culture in such organisations. The current drafting appears to leave the Secretary of State an option to remove the limitation or otherwise alter the meaning of “large organisation” in the future, and this will be worth monitoring.  
  • Have extra-territorial effect (i.e. apply to foreign/non-UK organisations) insofar as the associated person (e.g. employee or agent) commits fraud under a relevant UK law or targets UK victims.
  • Bite only in relation to the fraud offences specified in a new Schedule 10 to the Bill, which may change over time and currently includes a wide range of both common law offences (e.g., cheating the public revenue and the Scots common law offences of fraud, uttering, and embezzlement) and statutory offences (e.g., fraud, false accounting, false statements by directors, fraudulent trading, and obtaining services dishonestly). The FTPF offence will also apply to relevant inchoate offences (i.e., aiding, abetting, counselling, or procuring the commission of a specified fraud offence).
  • Be punishable with an unlimited fine.

The Serious Fraud Office (SFO) and the Crown Prosecution Service (CPS) greeted the news with predictable enthusiasm despite the Government’s impact assessment being rather more conservative as to its potential enforcement trajectory – the impact assessment notes that additional prosecutions “are expected to be low.”  Instead, the Government explained that the strategic objective for the new offence is to “build an anti-fraud culture within organisations, following the failure to prevent bribery offence in driving change in corporate culture. The Government expects a reduction in fraud committed by people within organisations.” 

Much remains to be determined, including (and most significantly) what the ‘reasonable’ procedures defence may entail, and how it might differ from the Bribery Act’s ‘adequate procedures’ defence. The FTPF offence will only come into force after the Secretary of State has published guidance in that regard. The detail and sectoral tailoring of that guidance will be crucial to ensure certainty and enable corporates to update their anti-fraud compliance systems and controls appropriately, particularly given the broad range of fraud offences in scope. It is currently expected that the offence will be in force by the end of 2024.   

This may not be the wide-ranging ‘failure to prevent economic crime’ offence for which many had hoped, but it is a step in the right direction in the UK’s fight against economic crime, and a wide range of fraud-related offences will be caught. The proof (and prosecutorial pudding) may be years down the line, however – there has yet to be a single prosecution under the ‘failure to prevent tax evasion’ offence since its introduction in 2017, so the proverbial jury may be out for some time.

We are monitoring the Bill and we will provide further updates in due course.

If you missed it, our recent post on the new Economic Crime Plan (2023-2026) is here.