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Failure to Prevent Fraud Offence

a anonymous suited man reads the business pages of a newspaper

After much debate, the Economic Crime and Corporate Transparency Act has finally been granted Royal Assent. The Act includes a new offence of “failure to prevent fraud”, which will hold a large organisation criminally liable if it benefits from a fraud that is committed by a member of staff. It aims to discourage large organisations from turning a blind eye to fraud and to hold companies to account if they profit as a result. Protect hopes the new offence will help protect victims and reduce economic crime by driving culture change towards better internal fraud prevention procedures.  

Whistleblowers are vital in the detection of economic crime. In 2022 the Association of Certified Fraud Examiners found that 42% of fraudulent actions were detected by tip offs; more than half of which came from employees. We believe that having an effective whistleblowing system will be a key way for organisations to comply with their new duty.  

The offence 

The creation of this new offence means that organisations don’t need to have had knowledge of the fraud to be criminally liable. Historically an organisation has only been liable for fraud where a senior person representing the company’s “directing mind and will” has been directly involved. This has reduced the likelihood of successful prosecutions particularly in large, global organisations with complex organisational structures. With these new powers the government is optimistic that more companies will now implement and improve their fraud prevention procedures. 

The “failure to prevent fraud” offence will apply to large bodies corporate and partnerships that meet two out of three of the following criteria: 

  • more than 250 employees 
  • more than £36 million turnover 
  • more than £18 million in total assets 

This doesn’t just cover companies and businesses but also large incorporated public bodies, not-for-profit organisations and charities.  

We believe that  there is no reason why the offence couldn’t apply to all organisations and not just the very largest. The offence is a step in the right direction, but we would like all organisations to take the threat of fraud more seriously. 

Defence and consequences 

The penalties for falling foul of this new law are severe and if convicted, an organisation can receive an unlimited fine. 

Organisations will, however, be able to avoid prosecution if they can demonstrate they have “reasonable procedures” in place to prevent fraud. We are yet to see from the government what reasonable fraud prevention could look like. 

How can Protect help? 

The Economic Crime and Corporate Transparency Act currently doesn’t set out minimum standards as to what effective whistleblowing arrangements must include. We would like to see future guidance detail this, expecting organisations to do more than simply have a whistleblowing policy (though this is important). Whilst we wait for guidance to be published, large organisations should be looking at their current fraud risk policies and identifying where their systems and controls could go further to mitigate the additional risks that the new offence gives rise to. 

We believe that the most effective way to deal with economic crime from the inside-out will be for an employer to ensure their whistleblowing procedures are adapted to specifically cover fraud and wider economic crime. Employers should prioritise implementing safe routes for employees to raise concerns outside of their line management, ensuring that managers are trained on how to respond to whistleblowing concerns, and that there is a process for reviewing whistleblowing arrangements at senior management or board level. 

Organisations that proactively review their whistleblowing culture and systems regularly will be more aware of their shortfalls and challenges. Protect’s Whistleblowing Benchmark framework can help give a better understanding of how to deal with whistleblowing cases and how to help staff who want to speak up. It identifies areas that need addressing, and helps an organisation develop a road map for improvement. Click here to learn more about how the Benchmark can help your organisation.  

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