Failure to prevent fraud becomes legal offence in UK - six principles for organisations to keep procedures up to date

The Economic Crime and Corporate Transparency Act 2023, which came into force in late 2023, has introduced a new corporate criminal offence of the failure to prevent fraud. Prosecutions under the new offence are able to be brought from 1 September 2025 and all applicable businesses should be alive to the legal and reputational consequences that come with it.

This new offence introduces strict penalties and therefore companies are encouraged to implement and/or improve their fraud prevention procedures and is accompanied by government issued guidance which sets out what reasonable anti-fraud measures look like. This article sets out the key takeaways of the guidance with recommendations on fraud prevention methods. 

What is the new offence?

Under sections 199-206 and schedule 13 of the Economic Crime and Corporate Transparency Act 2023, a company may be criminally liable where an employee, agent or subsidiary or other ‘associated person’, commits fraud intending to benefit the company and the company did not have reasonable fraud prevention procedures in place to stop this from occurring.

• This offence does not preclude the individual who committed the fraud from being prosecuted directly.
• It does not need to be demonstrated that directors or senior managers ordered or knew about the fraud or that the company actually benefitted. 
• Simply aiding, abetting, counselling or procuring fraud can also cause an organisation to become liable for this offence. 

Who does it apply to?

The offence applies to ‘large organisations’ meaning organisations which satisfy two or more of the following conditions, in the financial year that precedes the year of the fraud offence:

• Turnover of more than £36 million
• Balance sheet total of more than £18 million
• More than 250 employees

What is the penalty?

Organisations found guilty will be issued with a fine, to which there is no limit. The exact value will be at the court’s discretion.

Exceptions

Unincorporated bodies, the police and government departments will not be considered 'relevant bodies' under the offence.

This offence is limited to the company itself that failed to prevent fraud and will not incur liability for any of its individuals.

Employees of UK organisations that are overseas and commit fraud with no influence on the UK, will not be liable for prosecution under this offence. However, if a relevant person whilst acting for an overseas-based company commits fraud or targets others in the UK, their employer could be liable. 

Reasonable fraud prevention procedures

The decision of whether reasonable fraud prevention is in place is only answerable by the courts. The organisation under scrutiny will have the burden of proving to the court that their fraud prevention methods were more reasonable than not. 

To make their fraud prevention procedures as reasonable as possible, organisations should look to adhere to the following principles:

1. Top level commitment - senior management discouraging and rejecting fraud by their own conduct.
2. Risk assessment - it will be rare that, at a minimum, not having conducted a risk assessment in relation to particular fraud risks, will be considered reasonable.
3. Proportionate risk-based prevention procedures - considering the nature of the risk in relation to cost and economics of the business preventing it.
4. Due diligence - reasonable use of technology in onboarding and vetting employees and clients.
5. Communication - such as policies and training.
6. Monitoring and review - ensuring procedures are reviewed regularly.

In addition to the procedures in place, the courts will also consider the level of cooperation with law enforcement after an investigation or charge is brought. 

Note that even the strictest adherence to the guidance may not necessarily be enough when considering the circumstances of the offence as a whole.

Conclusion

If you're a decision-maker for a large organisation, you need to ensure your fraud prevention procedures are up to date, considering the six principles above. It will also be key to review the guidance in full to ensure your business is able to respond to potential investigations under this new offence. 

If your organisation becomes the subject of this offence, please don’t hesitate to get in contact with Ian Manners, head of our regulatory, compliance and investigations team who will be able to assist.