07 November 2023

UK businesses should be reviewing compliance programmes and contracts ahead of the introduction of a new offence hitting the statute books – failure to prevent fraud.

The Serious Fraud Office has spent a decade pushing for changes in UK legislation to make it easier to prosecute companies and we are now closer than ever as the Economic Crime and Corporate Transparency Bill enters the final stage of passing through parliament.

Background

The Bribery Act 2010 was the first legislation applying across the UK to adopt the ‘failure to prevent’ approach to corporate criminal liability, carrying with it unlimited fines. One eye-watering example is the sentence imposed in November 2022 on global commodities trader Glencore for bribery in Africa – the company was ordered to pay a record amount of £281 million, consisting of a £182.9 million fine, a £93.5 million confiscation order and £4.5 million in respect of the Serious Fraud Office’s costs.

However, under the existing laws, companies were only held criminally liable for failing to prevent bribery by intermediaries and others, where it could be proved that a statutory director was proven to knowingly party to the fraud. 

The 2010 Act was later used as a model for two further offences around tax evasion contained in the Criminal Finances Act 2017, and now the Government is adopting the mechanism to introduce an offence of failing to prevent fraud.

What is the key offence in the Bill?

The Bill provides that a company can be held liable for a fraud where individuals other than statutory directors have been involved in the offending. This could include activities senior managers or divisional level directors and project managers. 

‘Failure to prevent’ offences can also make a large company criminally liable where a person associated with the company commits fraud or facilitates a fraudulent act where the intention is to benefit, directly or indirectly, the commercial organisation. At present, that associated person definition includes employees, subsidiary companies, agents and professional advisers. The critical aspect is that the offence will be established regardless of whether the company was aware of the misconduct when it took place. 

The only defence is having the right type of compliance procedures or ‘preventative procedures as it was reasonable in all of the circumstances’ in place to prevent the misconduct.

In essence, the new offence will make it easier for criminal prosecutions to be brought against companies in circumstances where there is not a clear bad actor directing criminal actions. In practice, it would mean that prosecutors would no longer have to show that the ‘directing mind and will’ of a company were involved in the fraud; it would be enough to show that the company failed to have sufficiently robust measures in place to prevent fraud.

What companies will be caught by the legislation?

MPs and peers have yet to agree on the precise scope of the offence.

The Commons wants to limit the offence to defined ‘large organisations’, whereas the Lords pushed for the offence to apply widely, by backing amendments earlier this year to the scope of the offence to include all UK and foreign incorporated bodies/formed partnerships that carry on a business or part of a business in the UK. Amendments from the Lords in that vein, which would simply mirror the scope of existing failure to prevent offences, were voted down by MPs in September this year. The vote ‘insisted’ that the offence be limited to large organisations.

As currently drafted and based on the position voted on by MPs last month, the new offence catches larger companies and partnerships which meet at least two of the three following criteria:

• more than 250 employees;
• more than £36 million turnover; and/or 
• more than £18m in total assets. 

The offence will apply to a parent company if the group headed by it meets two or more of the above criteria. The threshold can be amended by secondary legislation so it is possible for the scope to expand in future.

Will Directors and Officers be caught by the offence?

For many corporate criminal offences there is parallel officer liability for those deemed to have contributed to alleged wrongdoing by ‘consenting, conniving or neglecting’ duties. As drafted, there is no intent to expand the offence to include individual criminal liability for the new corporate offence, although the Bill has not yet been finalised.

When will the Bill become law?

The Bill is in the final stages of its passage into law and was debated by the House of Lords on 18^th October 2023. 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.

BTO’s Regulatory and Criminal Defence Team can assist with advice and support on reviewing the strength of company policies and procedures in place aimed at preventing fraud.

Lindsay MacNeill, Senior Associate: lmn@bto.co.uk / 0141 221 8012