Head of Employment | Head of Commercial | Private Equity
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Most employees and third parties are trustworthy, but the actions of just one individual can cause catastrophic financial damage to your business. This article looks at employee fraud including new legislation on fraud prevention and what employers should do on discovering fraud in the workplace.
The Economic Crime and Corporate Transparency Act has recently come into force (having been granted Royal Assent on Thursday 26 October 2023). Amongst other things, it introduces a new corporate criminal offence of failure to prevent fraud and, in doing so, will make certain organisations liable for failing to prevent fraud. The new law means that a company may be guilty of a criminal offence if a person associated with the company, such as a director or other employee, commits a specified fraud offence intending to benefit the company or someone that the company provides services to. Liability for the offence carries an unlimited fine, in addition to the associated public relations consequences.
There are potential defences to the offence, such as the business being able to show that they are a victim of the fraud, rather than an intended beneficiary of the fraud. There is also a defence if it is deemed that the business had reasonable prevention procedures in place to try to prevent fraud.
Currently the offence only applies to large organisations determined by specified criteria in relation to turnover, balance sheet and number of employees. However, there is potential for the offence to be extended to SMEs or small companies in future.
As part of our steps to help prevent fraud series, our fraud experts also surveyed 1,000 senior managers across the UK giving a snapshot of senior managers’ views and business’ preparedness to fight fraud as the Economic Crime and Corporate Transparency Act progressed through Parliament.
Notwithstanding the new legislation, and the fact that it will currently only apply to large organisations, it is prudent for all employers to consider their fraud prevention policies and practices. The shift towards remote and flexible working has revolutionised the way we work, but at the same time means that employees are working in a less secure environment with enhanced opportunities for fraud to be committed without oversight.
When fraud has been discovered it can be a shock and place pressure on the business. An employer should remain calm and ensure that any internal discussions that take place remain productive rather than emotive. This allows the employer to take control of the situation, devise a plan and consider who needs to be involved e.g. solicitors to advice on disciplinary procedures, forensic accountants, public relation consultants, notifying insurers and/or the bank, private investigators or even the police.
In any fraud situation, the usual employment law principles continue to apply i.e. any disciplinary process should be fair and reasonable and in accordance with the ACAS code. The employer may consider suspending the employee if they may continue to commit the fraud whilst employed or may interfere with the disciplinary process. The employer may ultimately wish to dismiss the employee for gross misconduct so will need to demonstrate that the misconduct is suitably serious, and dismissal is within the range of reasonable responses.
Sometimes employees commit fraud outside of the workplace. The employer may still wish to dismiss in this case but it's unlikely to be a conduct matter as it's not internal. In such cases the employer may need to consider the "some other substantial reason" route to dismiss the employee instead, particularly if, for example, the employee works in a position of trust for the employer. Whichever route the employer decides to take, as always, consistency and following a fair process is key.
If fraud has taken place, it is highly likely to constitute both a civil and a criminal offence. Sometimes, it's the police who will come to the employer and inform them of the fraud and in that case they may guide the employer as to when and how they should be conducting any internal investigation. However. often a question for the business is whether to follow the civil route or take the matter to the police.
If you require advice or have any queries in relation to this topic, please contact our experts on the details below.