Long ReadMay 18 2023

Govt fraud proposals unlikely to impact organised crime

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Govt fraud proposals unlikely to impact organised crime
Fraud accounted for 41 per cent of all crime experienced by adults in England and Wales in 2021. (MargJohnsonVA/Envato Elements)

It is become a feature of the modern world; you receive a text or email from an unfamiliar sender, blue hyperlink aglow, and the hairs on the back of your neck tingle. Are you about to fall victim to a scam?

Such a state of vigilance is well justified. In its recently published economic crime plan, the government said that as many as one in 15 adults had been the victim of fraud in 2022.

Addressing this is a key feature of the plan, with the government committing to introducing legislation to deter fraudsters.

There can be no doubt that action is required, with the government explicitly categorising economic crime as a threat to our national security.

Fraud’s role in this threat is demonstrated by the sobering statistic that it accounted for 41 per cent of all crime experienced by adults in England and Wales in the previous year.

There are challenges in holding to account companies that do not do enough to prevent their misuse for fraudulent purposes.

The act of fraud is committed in many ways. However, the use of well-established businesses is common, with fraudsters impersonating customers’ banks, for example.

In its fraud report for 2021, UK Finance recorded that bank fraud accounted for approximately £750mn in stolen money.

That is not to say that legitimate businesses do not already do a great deal to prevent services being misused by fraudsters; UK Finance has noted that banks’ security systems prevented the theft of a further £736mn. However, it is also clear that more can be done.

Pinning the blame

There are currently challenges in holding to account companies that do not do enough to prevent their misuse for fraudulent purposes.

Even if those companies are actively complicit in the fraud, bringing a successful prosecution is difficult because of the need to tie the offending behaviour to a person who can be said to constitute the company’s “directing mind and will” – that is, an individual who has the requisite seniority, discretion and autonomy to be said to embody the company.

This is particularly acute in relation to large companies, where complex management structures can make it hard to prove that the relevant individuals had oversight of the activities in question.

These problems saw the Law Commission tasked with finding a solution, and in the summer of last year, it published its recommendations. These included statutory reform of the current basis on which a company’s directing mind and will is identified.

It is unlikely that imposing a requirement on legitimate businesses to prevent fraud will have much of an impact on organised criminals.

They also included proposed strict liability criminal offences of failure to prevent certain types of economic crime, such as fraud, being committed by their associated persons, a model for which can already be found in existing legislation governing corporate liability for bribery and the facilitation of tax evasion.

When these recommendations were first published, it seemed likely that companies would face this obligation at some time in the future, but it seems this may now happen more quickly than originally anticipated.

Draft legislation currently passing through parliament would make it an offence for a large organisation to fail to prevent certain specified types of fraud – including false accounting and false statements by directors – from being committed for its benefit, or for the benefit of a person to whom the organisation provides services, by an associated person.

To qualify, an organisation would have to fulfil at least two of the following criteria in the financial year preceding the alleged offence:

  • an annual turnover in excess of £36mn;
  • a balance sheet total of more than £18mn; or
  • more than 250 employees.

An organisation charged with this offence would be able to avoid conviction – and a potentially unlimited fine – only by showing that it had in place procedures that could reasonably be expected to prevent fraud. 

Prevention is better than cure

If this offence does become law, it will create more work for compliance teams. However, there is reason to take some comfort.

As with the existing offences of failure to prevent bribery and failure to prevent the facilitation of tax evasion, the draft legislation requires the government to issue guidance on preventative procedures.

The guidance issued in relation to the existing offences is based on six principles.

These principles require corporates to undertake risk assessments, and the implementation of policies and procedures that are tailored to the risks identified, the efficacy of which should be kept under regular review.

Such procedures should specifically include the undertaking of due diligence on prospective associated persons, such as suppliers, to identify any red flags.

When organised criminals set out to defraud the customer of a bank, the customer is not the only one to lose out.

There is also an expectation that the senior management of the organisation will set the right tone; it should be made clear to employees and third parties that the conduct in question is not condoned, with regular internal training provided to reinforce the message.

It is likely that these principles would at least form the basis of guidance in relation to reasonable fraud prevention procedures.

The lessons learned in the decade since the requirement to prevent bribery came into being are likely to be applicable, and compliance teams will not be required to build from the ground up.

As the government recognises in its economic crime plan, fraud and organised crime go hand in hand.

While measures that make things difficult for fraudsters are welcome, it is unlikely that imposing a requirement on legitimate businesses to prevent fraud will have much of an impact on organised criminals.

Gangs often use companies specifically created for the conduct of fraud – for example, the calls targeting elderly people to persuade them to 'invest' in various fraudulent schemes are made from behind companies created purely for that purpose.

It remains to be seen whether it will successfully complete its journey.

Outside of this example, when organised criminals set out to defraud the customer of a bank, the customer is not the only one to lose out: the bank does too.

This type of fraud would be beyond the reach of the proposed legislation, which aims to prevent the commission of fraud committed for the benefit, rather than detriment, of the company.

The proposed offence has just been agreed at the committee stage in the House of Lords, but may be subject to further scrutiny at subsequent stages in a process in the Lords that could continue for several more weeks.

It will then pass between both Houses of Parliament over the following months as it navigates its way to becoming law, and may yet be amended further.

It remains to be seen whether it will successfully complete its journey, and if so, what form it will take – and it will be longer still before its impact on the levels of fraud in our society can be judged.

Anneka Randhawa and Jonah Anderson are partners at White & Case