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Lexis+ AI
Christopher David

Partner, Clifford Chance

Abigail Maton-Howarth

Associate, Clifford Chance

Quotation Marks
By making it easier to convict corporates for what is a failure of process, the offence creates the impression of being tough on fraud, without the necessary government investment in enforcement

The Economic Crime and Corporate Transparency Act 2023

Opinion
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The Economic Crime and Corporate Transparency Act 2023

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Christopher David and Abigail Maton-Howarth present their opinion on the new failure to prevent fraud offence and the government’s decision to target large organisations

The UK government's Fraud Strategy for 2023 bluntly sets out the enormity of the issue facing the UK when it comes to tackling rising rates of fraud. Fraud currently accounts for over 40 per cent of all criminal offences in England and Wales. In addition, the reported total loss to businesses and individuals amounted to £2.46bn in the financial year ending 2022 and yet only one in 1000 estimated frauds currently results in a successful prosecution.

International and public perception of the UK also suggests that levels of fraud are endemic. As Dame Margaret Hodge, chair of the All-Party Parliamentary Group on Anti-Corruption and Responsible Tax, said “We are now, sadly, one of the jurisdictions of choice for money launderers, criminals and kleptocrats. We do not just tolerate, but—unwittingly, perhaps—facilitate economic crime”.

Unfortunately, successive UK governments have talked tough on tackling fraud with little to show for their rhetoric. Fraud schemes have undoubtedly grown in complexity; harnessing technology, artificial intelligence and international criminal networks, which has resulted in an increasingly difficult regulatory and enforcement landscape in which the government has been forced to navigate. However, measures introduced to date have been disappointingly lacklustre in successfully confronting the seismic change in the scale and methods by which fraud is committed.

New legislation

The introduction of the Economic Crime and Corporate Transparency Act 2023 represents the first proactive statutory change introduced in recent years, which includes new legislation seeking to tackle fraud. Or does it?

The new offence of failing to prevent fraud creates a strict criminal liability for large organisations when a person associated with that business, including employees and agents, commits a fraud offence for the company’s benefit. The only available defences are if the company is itself the victim of fraud, or has reasonable prevention procedures in place.

Looking at the offence through a cynical lens, the government is financially incentivised to target corporates as they are more likely to pay large fines as part of a plea deal or deferred prosecution agreement. Regardless of the evidence against them, many shareholders and Boards will simply be unwilling to risk a criminal trial or conviction by contesting the allegations in court. Organisations are, therefore, likely to perceive a plea or settlement as the best outcome for the company, regardless of the hefty fine attached. Pursuing an investigation against the corporate may also be viewed as an acceptable method of accountability where an investigation against the perpetrator is deemed to be too complicated.

In effect, the new offence forms part of a growing arsenal of corporate criminal offences which seek to criminalise large companies through the guise of a quasi-regulatory process. This must also be viewed against the backdrop of a lack of government investment in fraud prevention and enforcement, which has resulted in a reduction in fraud investigations and, consequently, prosecutions of individuals.

Conclusion

The reality is that people commit fraud. Therefore, the best deterrent is investigating and prosecuting individuals, as opposed to outsourcing enforcement to corporates. This outsourcing merely transfers the financial burden that arises from running complex and time-consuming fraud investigations to organisations and their shareholders, without creating a meaningful reduction in fraud.

In addition, whether the failure to prevent offences introduced so far (bribery and tax evasion) have been successful remains open to debate. There have been limited bribery prosecutions and no tax prosecutions. Companies also remain in the dark as to the suitability of their compliance procedures and whether too much or too little is being done. This can lead to inefficient governance and unnecessary legal and consultancy costs.

The new failure to prevent fraud offence looks to be similarly divisive. The offence places the burden for fraud prevention onto the company as opposed to the individual. By making it easier to convict corporates for what is a failure of process, the offence creates the impression of being tough on fraud, without the necessary government investment in enforcement. Only time will tell if targeting organisations is the way to combat fraud.

Christopher David is a partner and Abigail Maton-Howarth is an associate at Clifford Chance
cliffordchance.com

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