Act ahead of new 'failure to prevent' fraud offence, businesses advised

Tom Stocker, Andrew Sackey and Rachel Trease of Pinsent Masons said it is apparent that an offence of organisational failure to prevent fraud will be provided for in the Economic Crime and Corporate Transparency Bill, which is currently in the final stages of being passed in parliament, despite the fact MPs and peers have yet to agree on the scope of the offence. While the Lords have pushed for the offence to apply widely, the Commons, driven by the UK government’s policy position, wants to limit it to just ‘large organisations’.

During the summer, the Lords backed amendments to the government’s proposals, which, if adopted, would have expanded the scope of the offence to all UK-incorporated bodies or formed partnerships or foreign-incorporated bodies or formed partnerships that carry on a business or part of a business in the UK.

Last week, though, in considering the Lords’ amendments, MPs reiterated their desire to restrict the scope of the proposed new offence to large organisations only, citing the cost to business entailed with introducing the offence into law. However, with the Bill subject to parliamentary ‘ping-pong’ – where it is passed back and forth between the House of Commons and the House of Lords until consensus is reached on its wording – the Lords put forward a compromise.

The plans put forward by Conservative peer Lord Garnier would have extended the ‘failure to prevent’ fraud offence to include ‘non-micro organisations’ as well as ‘large organisations’. However, that attempt at finding compromise was unsuccessful, with MPs voting on Wednesday to “insist” that the scope of the ‘failure to prevent’ fraud offence be restricted to large organisations.

Lord Sharpe of Epsom, the parliamentary undersecretary of state in the Home Office, has previously expressed the government’s concern that a broad new offence of ‘failure to prevent’ fraud would place a disproportionate cost burden on small businesses. However, Lord Garnier, has described the plans to limit the failure to prevent fraud offence to corporates falling within the government’s definition of ‘large organisations’ as “both absurd and incoherent”. He highlighted that the existing ‘failure to prevent’ offences on the UK statute book – which concern failure to prevent bribery or tax evasion offence – do not contain any “SME exemption”.

“The public interest in requiring a company with a small turnover and only a few employees to prevent its associates committing fraud for its benefit is no lesser than in a far larger company,” Lord Garnier said in a debate in the Lords on Monday.

The Bill is now due to go back before the Lords for further consideration. A provisional date of Wednesday 18 October 2023 has been set for this next stage.

“While it is clear that the failure to prevent fraud offence will make its way into the statute book, the application of the offences to small and medium size business is subject to further debate with a final decision looking imminent,” said Trease. “No matter what parliament decides, organisations in scope will push fraud prevention obligations down the supply chain through contractual obligations.”

Stocker, a specialist in in corporate criminal defence, said: “This is a change the Serious Fraud Office has spent 10 years pushing for to make it easier to prosecute companies. The law will not be brought into force until guidance on reasonable preventative procedures is published, but the law could be in force shortly thereafter.”

Sackey, specialist in global investigations at Pinsent Masons, added: “The range of diverse conduct captured by the proposed offence of failing to prevent fraud is remarkably broad; encompassing key prohibitions from across the UK’s Fraud, Theft, and Companies Acts – as well as the incredibly wide common law offence of cheating the Revenue.”

“The government’s stated objective remains to drive ‘a culture change towards improved fraud prevention procedures in organisations’. We are already engaging with clients and beginning to scope out how existing risk assessments can be most effectively updated to provide the necessary protections from this new and imminent enforcement risk,” he said.