How to prepare for the proposed UK ‘failure to prevent fraud’ offense

In February 2022, it was confirmed that a new UK offense of failure to prevent fraud will be prioritized, following the UK Law Commission report on corporate criminal liability in 2022. The UK Government is planning to introduce the offense as an amendment to its Economic Crime and Corporate Transparency Bill. The proposed offense forms part of broader reforms of corporate criminal liability in the UK.

Although the details of the offense are still to be clarified, a failure to prevent fraud offense will change the landscape for fraud investigations and compliance in the UK. In particular, it will shift the focus from companies as victims of fraud (inward fraud) to make it easier for companies to be prosecuted for fraud by employees or third parties that the company benefits from (outward fraud). It will also require many companies to make significant changes to fraud compliance programs to cover outward fraud.  

We have been receiving various questions from clients on the proposed offense. This post explores some of the most common questions, explaining what the new offense will likely cover, when it will come into force, and how companies can prepare.  

When will the new offense come into force? 

We would expect that the new offense will come into effect in 2024 to allow for guidance on “adequate” and “reasonable” fraud procedures (similar to the Ministry of Justice Adequate Procedures Guidance in relation to the UK Bribery Act) to be prepared and issued.  

What will the new offense look like, and what are the implications?

It is likely that under the proposed offense of failure to prevent fraud, a company would be criminally liable for fraud where:

• An associated person of a company (which is likely to be defined broadly and include employees, subsidiaries, service providers, and intermediaries) commits an offense of fraud; and
• The offense was for the benefit of the company or a person to whom services are provided on behalf of the company.

Similar to the UK Bribery Act, it is likely to cover companies carrying on a business in the UK and UK companies, and the only defense is likely to be where the company can show it had in place “adequate” / “reasonable” procedures to prevent fraud.  

The proposed offense is significantly broader than the current position, in which companies are only criminally liable for fraud where a directing mind and will of the company, e.g., a very senior executive or director, has been personally involved in the fraud.  

Given the significant increase in civil claims alleging fraud, we expect to see companies increasingly facing parallel civil fraud proceedings and criminal investigations. There is also likely to be a greater risk for companies of private prosecutions brought by victims of the fraud.   

What do companies need to be doing now?

We have set out below five key steps companies can take to begin to prepare for the new offense (and to manage fraud risk generally): 

1. Risk assessments: companies should conduct fraud risk assessments (or adapt existing fraud risk assessments), ensuring the risk of both inward and outward fraud is assessed.
2. Policies and procedures: businesses will need to ensure that they have in place and can demonstrate reasonable (and risk-based) procedures to prevent fraud. Existing policies and procedures should be supplemented based on the risk assessment results.
3. Training: companies should update their fraud training, ensuring that this includes outward and inward fraud by referencing real-life examples (ideally those faced by the company or its peers). Tailored training for employees in higher-risk positions should be considered.
4. Due diligence: companies should enhance existing third-party and M&A due diligence processes to include outward fraud risks and develop appropriate fraud-related contractual protections.
5. Monitoring and review: as companies build or supplement their fraud compliance programs, they should ensure that monitoring and review processes (e.g., transaction testing, sample auditing) cover both inward and outward fraud.

The authors would like to thank Thomas Hubbard for his contributions to this post. 

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Andrew Reeves, pictured above left,  is a Partner based in Norton Rose Fulbright’s London office. He works on a range of major regulatory and criminal investigations and related litigation, focusing on bribery and corruption, fraud, financial crime and money laundering. He can be reached here.

Claudia Culley, above right, is a Senior Associate based in Norton Rose Fulbright’s London office, focusing on investigations, white-collar and compliance. Claudia advises on a range of internal, criminal and regulatory investigations, including major bribery and corruption, financial crime and fraud investigations and prosecutions brought by regulators and authorities globally. She can be reached here.