As you may be aware, this time last year new legislation came into force in the shape of the Economic Crime and Corporate Transparency Act 2023 as part of the previous government’s overhaul of the framework for addressing financial crime to make it easier to bring successful prosecutions against large companies. For HR, the most significant change, not yet in force, is the new offence of ‘failing to prevent fraud’. The news is we now have an update, of sorts, on when we can expect the new duty to take effect. We’ll come onto that shortly.
The new offence will make ’large’ corporates and partnerships criminally liable for the acts of a person associated with them who commits an economic crime for the organisation’s benefit or for the benefit of any person to whom the associated person provides services on behalf of the organisation – for example, a customer. Crucially, however, a company will have a defence if they can demonstrate they had reasonable fraud prevention procedures in place, or that not having such procedures was reasonable. That’s where HR comes in. HR will have a key role in making sure the business will be able to rely on that defence, if necessary.
We had been told by the previous government that before the new offence takes effect they would publish guidance on what constitutes ‘reasonable fraud prevention procedures’ and then it would come into force six to nine months later. That guidance was expected to arrive before the end of 2024 but given the change in government, a further delay was always on the cards. The latest news is that Lord Hanson, minister of state for the Home Office, has responded to a question raised in the House of Lords by Lord Garnier. Lord Hanson said he was ‘committed to reviewing the work of the previous government in relation to the delayed guidance with a view to expediting the process as a matter of urgency’. In view of that, it seems likely that publication of the guidance will be delayed until later this year, perhaps the very end of year, which means the new offence may not come into force until June 2025 at the earliest.
Nonetheless, although the new offence is some time off, the 2023 Act has been in force for almost a year, the overall effect of which has been to make it easier to bring prosecutions against companies for the economic crimes committed by its senior managers so let’s hear more about that. Neil McInnes is a specialist in this area and earlier he joined me by video-link from the London office:
Neil McInnes: “So, this is a piece of law that is already in force, it came into force on Boxing Day 2023. It changes the traditional view of corporate criminal liability, so how a company can be liable for the acts of others. Previously, it had to be really, really senior management, so the directing mind will have the company the people making those decisions at board level. The new law takes it down to a significant tranche of senior managers who are not at that level, and their acts, if they do something criminally wrong across a whole range at the moment of economic crimes, not just fraud but a whole range of economic crimes, their acts can be attributed to the company, so the company's liable for their criminal acts. So as an organisation you need to be thinking, well, who are the senior managers? It’s going to be anyone performing some sort of significant role in the management of part of a business. That could be a branch manager, it could be a head of HR, it could be a range of other people in significant functional roles who would never before have been the directing mind or will of the company but now are senior managers and their acts could lead to criminal liability for a company and we could talk about how we deal with that now and what we're seeing companies are doing to respond to that.”
Joe Glavina: “Yes, tell me more about that, Neil.”
Neil McInnes: “So one of the things that we're doing, and we're working with a number of clients on, is thinking about risk assessment. So, when you're looking at your financial crime risk assessment, are you incorporating a sense check on who might be the senior managers under this new definition? Once you’ve done that, once you've identified those people, you might be thinking about, are we sufficiently protecting against risks that those sorts of people could create and are we doing things to support them? So are we giving them enhanced training on economic crime? Are we onboarding them into organisations with sufficiently robust due diligence and vetting? So special measures are being thought about by organisations because of this change to corporate criminal liability bearing in mind there's likely to be quite a lot of litigation and judicial scrutiny over who a senior manager is in future years, but preparing now, thinking about compliance measures that might be focused a bit more on those people within an organisation is prudent now.”
Joe Glavina: “So what are the action steps for HR professionals, Neil? The new offence is on its way so I guess some sort of communications campaign to make sure staff know about it?”
Neil McInnes: “I think it's about a coordinated strategy. This is not a piece of legislation that falls on the desk of HR alone. So, it's about having effective internal stakeholder engagement across a number of different parts of the business. This new law, we've found, a number of people have been involved in organisations discussing it and coming up with a plan. So it's HR, it's legal, its compliance, it's the finance department, because if you're thinking about prevention of fraud so often the finance team will have the systems and controls and need to be thinking about enhancements to those as part of this process. So, it’s a three-way handshake, at least, within an organisation all sponsored, all supported and promoted by a designated senior leader.”
Joe Glavina: “Anything else, Neil? A final message?.”
Neil McInnes: “Well, I think that this law change shines a light on the fact that handling these areas is becoming increasingly sensitive because investigations that go wrong, if they're not run by the right people within organisations, if they're not bringing in the right resources within the organisation, if they go wrong then further down the line we've seen in the public domain over the last few years how that has become, often for organisations, a scandal of some kind. So getting these systems around whistleblowing right, supporting whistleblowers, making sure there's no victimisation of whistleblowers at any part in the process and keeping them informed of what you as an organisation are committed to and, crucially, the culture of the organisation to support people who come forward is the way to go because if you don't do that you run the risk that someone doesn't feel supported and your investigation into their concerns is criticised later and that could involve external criticisms, reputational damage, law enforcement interest and the like. So, really worth investment at the front end to get these systems working effectively.”
Neil and his team have prepared a detailed guide on the new offence of failing to prevent fraud and it’s available now from the Out-Law website. That’s ‘Failure to prevent fraud under the UK's Economic Crime and Corporate Transparency Act’ and we’ve included a link to it in the transcript of this programme.
