What the impending 'failure to prevent fraud' bill means for UK companies

  • Describe what a future failure to prevent bill will include
  • Explain why this is important
  • Describe how this bill, if enacted, could be implemented
What the impending 'failure to prevent fraud' bill means for UK companies
Fraud comes with an annual cost to our economy of billions of pounds. (Ronnie Chua/iStock)

The current legal basis for holding corporates responsible for wrongdoing has long been criticised.

A key part of our law is the concept that a corporate has an identity separate from those who enjoy its ownership or control.

It remains a fact that a corporate can only act through the agency of people. This has come to mean that corporates can only be held criminally responsible for wrongs committed on their behalf if they are committed by a person who holds a significant position of control over the corporate to be called its “directing mind and will”.

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Identifying such an individual for a small company is straightforward. However, the larger the organisation, the harder it becomes. Multinational companies pose a particular challenge.

Senior prosecutors, such as the director of the Serious Fraud Office, have spoken out about the difficulty of prosecuting large corporations, with a former director saying: “The email chain tends to dry up at middle management level.”

The current state of affairs

Almost 12 years ago, there was a novel introduction to our law. The Bribery Act 2010 brought in the legal requirement for companies to prevent the commission of bribery by those associated with them.

This is a strict liability offence, and the only defence is compliance — the adoption of controls and procedures that are adequate to ensure that bribes are neither given nor received on behalf of the company.

The need for these anti-bribery and corruption, or ABC, controls has led to the rise of the ABC professional, and with them an increased focus within companies on the prevention of bribery. The success of this model in the UK has seen it adopted in several other countries. 

However, in more than a decade of enforcement, there have been few prosecutions. And those few have tended to end in a guilty plea or a deferred prosecution agreement. Nevertheless, the value of the offence should not be overlooked. It has undoubtedly led to investor pressure for ethical corporate behaviour. 

This first 'failure to prevent' offence was joined a few years later by the offences of failure to prevent the facilitation of tax evasion in the UK or abroad. Similar to the corporate offence under the Bribery Act, these were also strict liability offences subject to a compliance defence.

To date, there have been no prosecutions for this offence, and it is claimed in some circles that this is testimony to the effectiveness of the legal requirement in changing behaviour.

Be that as it may, HM Revenue & Customs has recently revealed that it has nine live investigations under way that await charging decisions. It also has a further 26 potential investigations to consider. Once again, there is no doubt that the existence of the offence incentivises ethical behaviour. This is to be welcomed.