Failure to prevent fraud – update on scope of proposed offence

The proposed offence of "failure to prevent fraud" has now been discussed for the first time at the Committee Stage, as the Economic Crime and Corporate Transparency Bill continues its journey through Parliament.

The full Hansard transcript of the 27 April discussions are available here.

In summary, much of the discussion centred around two critical areas:

  1. Whether the offence should apply only to larger companies and not to SMEs; and
  2. What level of involvement in a fraud is required from a company in order to be guilty of an offence.

Should SMEs be liable too?

The government's proposed wording for the offence suggests a company would only be caught by the failure to prevent fraud offence if two or more of the following criteria are satisfied:

  • Its turnover is £36m+
  • Its balance sheet total is £18m+
  • It has more than 250 employees

The government is concerned to avoid imposing a disproportionate burden upon SMEs in the fight against fraud.

However, many involved in fraud prevention would argue that restricting the offence to large corporates – who often apply a pure commercial analysis to fraud prevention - would be insufficient to create the culture shift necessary. Further, there is a risk that the government's wording will encourage fraudsters to target SMEs instead. As noted by Spotlight on Corruption (an anti-fraud interest group) in a statement made on 11 April 2023, SMEs are already known to be at a high risk of fraud, and "encouraging them to have appropriate anti-fraud procedures would not only help prevent fraud, but also better protect them from becoming victims of fraud".

We will wait to see if SMEs are later proposed to be included or whether the thresholds are lowered to include more companies than the original proposal.

When should companies be liable?

The Committee stage is also considering how broad the offence should be.

The government's proposal is, arguably, a rather narrow version of the offence: whereby, to be liable, a company needs to have benefited from the fraud that has been committed (or attempted to be committed).

Others though would rather see a much wider version of the offence whereby a company is liable of an offence if it somehow facilitated a fraud (e.g. if its products/services were used in the committing of a fraud). Proponents of this wider proposal argue the intention is not to criminalise unintended and innocent involvement in a fraud, but to punish companies that did not take reasonable steps to spot the warning signs of the fraud or those without satisfactory anti-fraud procedures in place. The concern is that the government's proposed wording does not go far enough as many companies' services/platforms are often exploited to perpetrate frauds on (other) innocent victims.

Whatever the final form of the offence, prudent corporates will be reviewing their fraud prevention strategies as the direction of travel is clear: fraud prevention is everyone's responsibility, not just law enforcement.  

We'll keep you informed

The Bill's progress through its Committee stage continues this week and we shall continue to keep our clients and contacts updated with what might be on the horizon in the continued fight against fraud.

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