Guidance on the Offence of Failure to Prevent Fraud
Nov 08 2024
White Collar Crime
Guidance on the new offence of failure to prevent fraud was released on 6 November 2024 by the UK government in accordance with the Economic Crime and Corporate Transparency Act 2023 (“ECCTA”). The newly defined offence holds large organisations liable for failing to prevent fraud committed by employees, agents, subsidiaries or other associated persons who provide services for or on behalf of the organisations and where the fraud benefits the organisation (or, in some cases, their clients).
A key takeaway is that an organisation can now be prosecuted even if senior managers or directors did not know about or direct the fraudulent act. The offence is set out in sections 199-206 and Schedule 13 of ECCTA.
1. When does the offence come into force?
1 September 2025
2. How does this offence apply to me or my organisation?
The offence applies only to large organisations[1] that meet at least two of the following criteria:
- more than 250 employees
- more than £36 million in turnover
- more than £18 million in total assets.
The offence applies to organisations regardless of the form or means of their incorporation. The offence also applies to bodies and partnerships, whether formed in the UK or abroad, but with a UK nexus.
Please note that even if your organisation is not classified as “large”, it would, nevertheless, be good practice to implement this guidance.
3. What Types of Fraud Does the Offence Cover?
The offence covers a range of specific fraud offences, including:
- Fraud offences under section 1 of the Fraud Act 2006 (“FA”) including:
- fraud by false representation (s.2 FA)
- fraud by failing to disclose information (s.3 FA)
- fraud by abuse of position (s.4 FA)
- participation in a fraudulent business (s.9 FA)
- obtaining services dishonestly (s.11 FA)
- cheating the public revenue (common law)
- fraud by false accounting (s.17 Theft Act 1968)
- false statements by company directors (s.19 Theft Act 1968)
- fraudulent trading (s.993 Companies Act 2006)
It also includes aiding, abetting or procuring these crimes.
4. Who Commits the Fraud for the Company to Risk Facing Prosecution?
Associated Persons: These include employees, agents, subsidiaries and others providing services for or on behalf of the organisation. The fraud must be committed by an associated person in the course of their duties (e.g., a sales agent acting on behalf of the company).
5. What does “intending to benefit” mean?
The fraud does not need to directly benefit an organisation for the offence to apply; it suffices if the organisation was intended to be the beneficiary. For example, an employee mis-selling a product to earn commission would benefit both themselves and the company, making the company liable.
Intent to benefit the relevant body is to be judged according to the position of the associated person at the time they commit the fraud offence.
6. Does my organisation have a defence?
Organisations will have a defence if they can prove they had reasonable procedures to prevent fraud[2] in place at the time the fraud was committed. This can include training, monitoring, audits and reporting systems designed to prevent fraud within the organisation.
It is up to the organisation to demonstrate that it has implemented reasonable procedures to prevent fraud or that it was unreasonable to expect the organisation to have such procedures in place. The court will decide based on the specific facts of the case and on a balance of probabilities.
Strict adherence to the guidance is not required, but a reasonable approach to fraud prevention must be shown.
7. Does this offence apply to UK organisations only?
The offence applies if the fraud has a UK nexus, meaning the fraud must involve an act that occurs in the UK or result in a gain or loss in the UK. This includes fraud committed in the UK by an associated person or employee of an overseas organisation.
8. Penalties and Sanctions
Penalties may include a fine.[3]
9. What should we do?
It is important to note that organisations must assess and implement reasonable measures to prevent fraud, and failure to do so could result in your company getting fine.
A framework should be introduced by relevant organisations and should be informed by the following six principles:
- top level commitment
- risk assessment
- proportionate risk-based prevention procedures
- due diligence
- communication (including training)
- monitoring and review.
These six principles mirror those found in the UK government’s guidance on preventing bribery (under the Bribery Act 2010) and are intended to be outcome-focused and should be proportionate to the level of risk.
10. How can Gherson help?
At Gherson Solicitors LLP we assist and advise organisations on implementing policies, controls and procedures that comply with all relevant legislation. We have advised both FCA-regulated firms and non-FCA-regulated firms on implementing adequate anti-money laundering, anti-bribery and corruption and sanctions policies, controls and procedures.
If you need further advice on how to comply with and understand what the new offence of failure to prevent fraud means for your organisation, please do not hesitate to contact Thomas Cattee or Sara Thomas Arano at Gherson Solicitors LLP.
The article was published on 08/11/2024
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.
©Gherson 2024
[1] Section 201 of ECCTA
[2] Section199(4) and (5) ECCTA
[3] Section 199(12) ECCTA
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