'Is your business prepared for govt's failure to prevent fraud rules?'

This article summarises two key reforms, namely the introduction of a new corporate offence of failing to prevent fraud and amending a long-standing principle of English law, known as the identification principle, to make it easier for authorities to hold corporates to account for economic crimes.  

The new 'failure to prevent' fraud offence

Companies will be criminally liable where an "associated person" commits a specified fraud offence, with the intention to benefit the organisation, or any person who receives services from the company. 

The failure to prevent fraud offence will be a strict liability offence, meaning it will enable prosecutors to pursue acts of fraud where there is no knowledge or awareness of senior managers or board members.  

A company will not commit the offence if it is the target or victim of the intended fraud. 

Start identifying those individuals across the business who could potentially fall within the category of being a senior manager.

The list of prescribed fraud offences is broad and covers existing common law and statutory fraud, in addition to offences relating to false accounting and cheating the revenue.  

The scope of companies to whom the offence will apply has been the subject of ongoing debate in the Houses of Parliament. 

The current proposal would extend the offence to all businesses other than micro-organisations, which are defined as a company that meets two of the following criteria: a turnover below £632,000; a balance sheet total under £316,000; or fewer than 10 employees.    

It is a defence for a company to prove that it had reasonable prevention procedures in place at the time the fraud was committed or that it was reasonable to not have any procedures in place. A company convicted of the offence can receive an unlimited fine.

Reforming the identification doctrine

The current test for attributing liability for criminal acts of individuals to corporates requires that an individual who represents the “directing mind and will” of the company (usually a member of the board of directors) must have been complicit in the relevant conduct for the corporate itself to be held criminally liable.  

As companies have grown in size and governance structures have become more complex, decision-making has been diffused across a large number of managers within the business.

As a result, it has become increasingly difficult for prosecutors to identify and prove wrongdoing by the directing mind and will of the company in order to establish corporate criminal liability.

Corporate prosecutions have been increasingly rare and there is a perceived lack of accountability for corporate wrongdoing for economic crimes. 

The proposed reform will widen the scope of the identification doctrine to the knowledge and actions of "senior managers" in connection with economic crimes, including fraud, false accounting, money laundering, sanctions evasion, bribery, and tax evasion.  

This reform will significantly broaden the range of individuals whose actions can result in corporate criminal liability for their employer and is set to embolden authorities by further enhancing their prosecutorial toolkit.  

What should companies do to prepare?  

Compliance professionals should take a proactive approach in ensuring that their organisation is prepared for the introduction of the new offence, seeking early engagement with senior management and other stakeholders.  

In-scope businesses should review and reassess their existing fraud risk assessment. This should start with a holistic assessment of the broad range of potentially complex fraud offences that are covered as part of the proposed legislation.  

It would also be prudent to start identifying those individuals across the business who could potentially fall within the category of being a senior manager.

Regulated firms will want to conduct a distinct assessment to ensure they have mapped the individuals who may qualify as a senior manager under the expanded identification doctrine, but who may not be senior managers under the Financial Conduct Authority's senior managers and certification regime.

This will be a fact-based assessment depending on the individual's role.

Individuals identified as senior managers should be provided with targeted training on economic crime offences and companies should consider what enhanced controls measures may be required to monitor senior management conduct on an ongoing basis.   

Neil Donovan is a senior associate at Ashurst