Companies Act reform series: Failure to prevent fraud may be relevant to all organisations

In the final of our Companies House reform series, we are exploring one of the proposed amendments to the Economic Crime and Corporate Transparency Bill (the “Bill”)  which introduces a new corporate offence of failing to prevent fraud.

Aimed at preventing the abuse of UK corporate structures and tackling economic crime, the Bill, introduced into the House of Commons in September 2022, is expected to become law later this year.

Who can commit the offence?

The original Bill stated the offence could only be committed by "large organisations" and partnerships who meet two of the following three criteria in the year that precedes the year of the fraud offence:

• more than 250 employees
• turnover is more than £36 million; and
• the value of its assets exceeds £18 million.

However, the Bill was amended in the House of Lords to apply to all organisations, regardless of size. The House of Commons will consider this amendment in September 2023 (where it may or may not be approved).

The offence will be committed by an organisation if:

• a person (the “associate”) associated with an organisation (the “relevant body”) commits a “fraud offence” intending to benefit (whether directly or indirectly) the relevant body or any person to whom, or to whose subsidiary, the associate provides services on behalf of the relevant body; or
• an employee of the relevant body commits a fraud offence intending to benefit the relevant body.

An “associate” is an employee, agent or subsidiary of the relevant body or performs services for or on behalf of the body.

What is meant by a “fraud offence”?

A "fraud offence" consists of the offences which are listed in the Bill and include common law offences, such as cheating the public revenue, and statutory offences under:

• the Theft Act 1968, being false accounting and false statement by company directors
• the Companies Act 2006, being fraudulent trading; and
• the Fraud Act 2006, including fraud, participating in fraudulent business carried on by sole trader and obtaining services dishonestly.

A "fraud offence" also includes aiding, abetting, counselling or procuring of any of these offences.

If fraud occurs under UK law, or is targeting UK victims, the organisation could be prosecuted even if it is not incorporated or based in the UK.

It will not be necessary to prove that a company's management knew about or ordered the fraud.

Defences to the offence

The relevant body will not be guilty of this offence if it was, or was intended to be, the victim of the fraud offence.

It will be a defence for the relevant body to prove that, at the time the fraud offence was committed it had:

• reasonable prevention procedures in place; or
• it was not reasonable in all the circumstances to expect the relevant body to have any prevention procedures in place.

What are "prevention procedures"?

Prevention procedures are designed to prevent persons associated with the relevant body from committing fraud offences.

The government will issue guidance in relation to these procedures before the offence comes into force. This guidance is expected to be based on the same six principles as those in the Bribery Act guidance, which are:

• clear, practical, accessible, effectively implemented and enforced procedures which are proportionate to the nature, scale and complexity of the business
• commitment to those procedures by the top-level management of the business
• the procedures being based on risk assessment which is periodically carried out and documented
• due diligence procedures are in place in respect of persons who perform or will perform services for or on behalf of the business
• communication of the procedures internally and externally, and staff training; and
• monitoring and reviewing existing procedures and making improvements where necessary.

Penalties for committing the offence and next steps

The potential penalty for parties found guilty of failing to prevent fraud is an unlimited fine.

The Bill has completed its third reading in the House of Lords and the House of Commons will consider it amendments in September 2023. We will monitor the developments and, once the Bill receives Royal Assent, will be able to provide an update.

If you would like a conversation to find out how we might help you or if you have any questions in relation to any of the topics examined in our Companies House reform series, please get in touch with Aselle Djumabaeva-Wood.