Failure to prevent Fraud - How will it look?

The Government has recently announced new proposals to crack down on "economic crime" with a flagship new offence of "failing to prevent fraud or money laundering". The plans are at a very early stage, with the Ministry of Justice intending to consult this summer on how any changes in the law should be made. In the meantime however, we can speculate about the likely path of the law by looking at existing "failure to prevent" offences.

A key existing parallel is the corporate "failure to prevent bribery" offence under S7 of the Bribery Act 2010. The bad news for corporate entities is that the offence is widely drafted with limited defences. Very briefly, a commercial organisation commits an offence if an associated person commits the offence of bribery with an intention of obtaining or retaining a business advantage for the organisation.

How will this be transposed into a "failure to prevent" fraud or money laundering offence?

  • The first question is how widely will associated persons be interpreted? In the world of bribery, it is very widely defined (including employees, contractors, agents or any person who provides services for an organisation). If this continues as a theme, commercial organisations will have to be even more careful in vetting their agents and service providers. 
  • The next question is what defences (if any) will be available? Again, in the world of bribery, a defence is available to companies who show that "adequate procedures are in place" to prevent bribery. Whilst Ministry of Justice guidance is available, the answer to "what is an adequate procedure?" varies hugely between companies, and remains a constant source of confusion. Will a similar defence be available (and will it cause similar problems) for any new offences?
  • What penalties will a company face if found guilty of an offence? Again, using the Bribery
  • Act as a guiding line, the current position is that the Courts have access to unlimited fining power. Sweett Group plc recently pleaded guilty to a failure to prevent bribery offence, and was ordered to pay £2.25 million in total as a result. This figure will ring alarm bells for those facing compliance risks.
  • Finally, how will these new offences be practically enforced? Bribery Act prosecutions were relatively rare in the first few years of its life, and only recently have "failure to prevent" offences started to see successful prosecutions. This may be a ray of hope for companies - they will hopefully have a similar grace period to update compliance procedures and policies before prosecutions start to flow.

Hopefully, as with the Bribery Act, proper preparation, training, and policies will be enough to protect companies and directors from liability. Achieving this in a cost effective and reasonable manner looks likely to be yet another challenge for HR departments, in-house counsel and directors.

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