Employers' new criminal liability for fraud

Employers will be aware that there are already a number of ‘workforce crimes’ on the statute books – such as failing to lodge an HR1 Form for collective redundancies and breaching health and safety legislation.

Employers will soon need to add a new offence to the list of their potential criminal liabilities: failure to prevent fraud.

Ahead of this coming into force, we run through nine key questions and answers for employers, HR and In-house Counsel.

What is the new offence?

It is a ‘failure to prevent’ offence – similar to the existing offence of failing to prevent bribery.

The Economic Crime and Corporate Transparency Bill 2022-23 (‘the Bill’) will introduce a new offence for organisations where:

(1) a specified fraud offence is committed by an employee or agent; and

(2) the fraud is intended to benefit the organisation.

What if the employee or agent’s fraudulent activities are kept under wraps and the organisation knows nothing about it?

This will not be a defence. An organisation can be guilty of the crime of failing to prevent fraud even if it can be demonstrated that its executives and managers had not ordered it or knew nothing about the fraud.

Does that mean that organisations will always be convicted if their employee or agent has committed fraud?

No. An organisation may be able to use a ‘reasonable procedures’ defence. This requires the organisation to show that at the relevant time it had ‘reasonable’ or ‘adequate’ controls to prevent the fraud. It doesn’t matter if the fraud still took place; the organisation can still make use of this defence provided it had the required controls in place.

What does the government mean by ‘reasonable or adequate’ controls?

At the moment, we do not know exactly what that means. But the government will publish guidance on what this will look like before the offence comes into force. The Home Office has said that the procedures required will be similar to those in the Bribery Act ‘adequate procedures’ guidance  for prevention of bribery.

Will all organisations be covered by the new offence?

No. The offence will only apply to large corporate bodies and partnerships, including not-for-profit organisations such as charities as well as public bodies.

‘Large’ organisations are defined as those meeting two out of the three following criteria.

• More than 250 employees.
• More than £36 million turnover.
• More than £18 million in total assets.

Will individuals who did not commit fraud themselves be at risk of prosecution if an employee or agent has committed fraud in order to benefit their organisation?

No. The offence will not apply to individuals such as Directors, HR Managers and In-house legal advisors; it will be the organisation which is prosecuted. However, individuals may still be prosecuted for committing, encouraging or assisting fraud.

Will the new offence apply across the UK?

Yes. Equivalent offences in Scotland and Northern Ireland will be included in the base offence list, with a power for the relevant Minister in Scotland or Northern Ireland to amend the list in relation to devolved offences.

Are overseas organisations covered?

The Bill is silent on territorial scope but the Home Office factsheet on the offence states that it could apply to organisations based overseas where an employee commits fraud under UK law, or targeting UK victims.

What type of fraud offences are in scope?

The government has restricted the scope of the ‘failure to prevent’ offence to economic crimes, such as dishonest sales practices and concealing information from investors. The current list of identified fraud offences that will be in scope include the following:

• fraud by false representation (section 2 Fraud Act 2006)

• fraud by failing to disclose information (section 3 Fraud Act 2006)

• fraud by abuse of position (section 4 Fraud Act 2006)

• obtaining services dishonestly (section 11 Fraud Act 2006)

• participation in a fraudulent business (section 9 Fraud Act 2006)

• false statements by company directors (section 19 Theft Act 1968)

• false accounting (section 17 Theft Act 1968)

• fraudulent trading (section 993 Companies Act 2006)

• cheating the public revenue (common law).

The government intends to keep money laundering law within the existing regulatory regime.

What are the potential penalties if convicted?

Organisations convicted under this offence can receive an unlimited fine. The Courts will be obliged to take into account all the circumstances in deciding the appropriate level of the fine.

What do organisations need to do now?

The Bill is currently in the House of Lords at committee stage with no indication of it being rushed through to implementation soon. Once passed, it is expected that it will be a year before the legislation comes into force.

Organisations should make good use of the lead time to prepare now. The first step will be familiarisation with the draft legislation and the government’s fact sheet and impact assessment. Organisations should keep a watching brief on the progress of the Bill through Parliament and the publication of its associated guidance.

Prudent organisations will already have existing robust policies and procedures to prevent fraud. But these will need to be reviewed and, most likely, significantly expanded.

Although there is still some uncertainty about the exact requirements of the Bill and associated guidance, organisations may get ahead of the curve by reviewing existing anti-bribery guidance, on which the guidance on preventing fraud is likely to be based.

Organisations should also take into account the following actions, which the government’s risk assessment anticipates organisations will need to undertake.

• Familiarisation: reading guidance, planning and mobilising resources.

• Risk assessment: developing a risk register and annually reviewing a risk assessment.

• Communications: including internal staff briefings and information on the organisation’s website.

• Training: to be rolled out to all staff.

The impact assessment sets out the anticipated costs and scope of actions which organisations will need to undertake, with total set-up costs (familiarisation, risk assessment, communication and training) estimated in a range of £357.6 to £451.8 million, with a best estimate of £439.1 million in year 1.

Comment

Fraud is the most common criminal offence in the UK: it accounts for 41% of all crime for the year ending September 2022, according to the government’s fact sheet on the new offence.

So it’s no surprise that the government is clamping down on dishonest practices by ramping up criminal liability for organisations whose employees or agents commit fraud for the organisation’s benefit.

It is alarming that criminal liability will be imposed regardless of whether the organisation ordered or knew about the fraud. But, provided that procedures in line with government guidance are put in place to prevent fraud from occurring, the risk of prosecution is likely to be low.

When published, it will be crucial to review the government’s guidance on what the ‘reasonable procedures’ to prevent fraud will look like and ensure that the standards set out in the guidance are followed.

The government’s impact assessment states the new offence is expected to be implemented within one year of the legislation being passed. However, given the scale of measures that will be required in order to avoid prosecution it would be prudent to be putting in place measures to tackle fraud as early as possible.

Read the Government’s policy paper factsheet here.

Read the Government’s impact assessment on the introduction of the new offence here.

Read the Government’s amendments to the Bill introducing the new offence here.

Contributors: Sarah Maddock and Calum Ross

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.