Government issues policy paper on new failure to prevent offence

The government published on 11 April a policy paper and impact assessment on the new failure to prevent fraud offence, designed to hold large organisations to account if they profit from fraud committed by their employees, which will be introduced as part of the Economic Crime and Corporate Transparency Bill. An impact assessment has also been published on the Solicitors Regulation Authority’s (SRA) proposed new proactive information request power in relation to economic crime.

The new failure to prevent offence, aims to strengthen the existing powers to fine and prosecute organisations and employees for fraud, which the policy paper states includes ‘closing loopholes that have allowed organisations to avoid prosecution in the past’.

The new measures will make organisations liable where a specified fraud offence has been committed by an employee or agent, for the organisation’s benefit, and the organisation did not have ‘reasonable fraud prevention procedures’ in place. The new offence aims to encourage companies to implement or improve their fraud prevention procedures.

The new Economic Crime and Corporate Transparency Bill 2022 will come into force once it has received Royal Assent. At which point the government will also publish guidance on what constitutes ‘reasonable fraud prevention procedures’.

The new information request power to be granted to the SRA is designed to ensure that the regulator has the necessary powers to fulfil its obligations to prevent economic crime. The impact assessment explains that the new power should enable the SRA to create a more effective regulatory regime and better target its enforcement and monitoring activities, by giving the SRA the ability to spot-check all individuals and firms it regulates.

Commenting on the proposed failure to prevent fraud offence, Louise Hodges, Head of the Criminal Litigation practice at Kingsley Napley LLP, said: “Although the proposed failure to prevent offence is narrower in scope than the wide-ranging economic crime offence that many had campaigned for, it is still a significant step which broadens criminal liability and increases the risk of unlimited fines against large corporates that benefit from fraud committed by employees. Companies that have in place appropriate compliance and fraud deterrence measures will have a defence - ultimately the goal is to drive a cultural shift for companies to clean up their act and root out misconduct in their own organisations and punish those that turn a blind eye. The intention is for all large corporations to be subject to the legislation, including not for profit or charitable organisations. SMEs are currently carved out of the proposals, although this is likely to be subject to challenge as the legislation passes through Parliament with many seeing smaller businesses as particularly vulnerable to becoming vehicles of fraud. Whilst we still await the finalisation of the Economic Crime and Corporate Transparency Bill, the Government's tabling of this additional amendment is another reminder that companies should be reviewing their compliance and risk assessment measures to double down on fraud prevention.”

Kathleen Harris, Managing Partner at Arnold & Porter, said: “This is an important step forward to increase the range of offences available to Prosecutors to combat financial crime. Given the offence is targeted towards larger organisations, it will be helpful to see clear and practical guidance on what will constitute ‘reasonable fraud preventative procedures’. It is hoped that the guidance will prevent companies becoming embroiled in long litigation and uncertainty.”