By Neil Hay, Partner & Head of Private Crime, and Cameron Irons, Trainee Solicitor
The UK Government have shown recent determination to deliver a contemporary programme of wide-ranging reforms that are designed to tackle economic crime, improve the transparency and accountability of corporate entities and support national economic security. The Economic Crime & Corporate Transparency Act 2023 (‘the 2023 Act’) is a key piece of legislation associated with these reforms, which has important implications for large organisations.
The new offence
The offence of Failing to Prevent Fraud is committed by the organisation where an employee, agent, subsidiary or other associated person commits a fraud which is intended to benefit the organisation, and the organisation does not have reasonable fraud prevention measures in place. For the offence to be committed, it is not necessary for any of the directors or senior managers within the organisation to have known of the fraud.
The rationale behind creating such an offence is to broaden the scope of corporate criminal liability for organisations, and to increase the level of accountability in situations where employees or other associated persons are engaged in fraudulent activity that is potentially benefiting the organisation, or in certain circumstances, the clients of the organisation. As part of a wider corporate cultural shift, the new offence is designed to encourage more organisations to implement and enhance their own fraud prevention frameworks.
Which organisations does it apply to?
On 6 November 2024 the UK Home Office published guidance in relation to the criminal offence of Failure to Prevent Fraud under Section 199 of the 2023 Act. The offence applies to large, incorporated bodies such as companies and LLPs, as well as partnerships. It also applies to certain public bodies incorporated under Royal Charter. However, the offence can only be committed by “large organisations”. These are defined as organisations which meet two out of the following three criteria:
- more than 250 employees;
- more than £36 million turnover; and
- more than £18 million in total assets.
When does the offence come into force?
The offence comes into effect on 1 September 2025, which allows time for organisations to consider their current fraud prevention measures, to obtain specialist legal advice and to introduce further procedures if necessary.
What defences are there available?
If an organisation is investigated and subsequently prosecuted for the offence under Section 199 of the 2023 Act, it is a defence to the charge if the organisation can prove that at the time the fraud was committed “(a) reasonable fraud prevention measures were in place or (b) it was not reasonable in the circumstances to have prevention measures in place”.
If an organisation is prosecuted in court, the onus of proof falls upon the organisation to establish that it had in place appropriate procedures to prevent fraud, with the standard of proof being measured on the balance of probabilities.
What can we do to prepare?
Organisations will not only wish to pay particular regard to the activities of their employees but will also have to pay careful attention to arms-length individuals or entities in their organisations, including agents, subsidiaries and other associated persons. It is imperative for organisations to have comprehensive procedures in place so that in a scenario where they face criminal investigation or prosecution, they can demonstrate they have appropriate procedures in place to prevent fraud, or that none were necessary in the particular circumstances of the case.
How our specialist legal advice can help
If an organisation is facing criminal investigation and potential prosecution, a great deal of time and resources will be required to prepare a defence, and to mitigate the risks of reputational harm. Levy & McRae are well equipped to offer tailored guidance on the appropriate procedures required by organisations to demonstrate they have reasonable fraud prevention measures in place. We are also widely instructed in professional reputation management, which is often an essential service for corporate bodies during a criminal process. Any organisation facing investigation or prosecution should not hesitate in instructing specialist lawyers that can provide forensic advice, robust representation and a thorough defence. Levy & McRae have extensive experience in defending criminal charges and are well placed to support any organisation who require expertise in this area.
(This article does not constitute legal advice and is intended as general guidance only)
