Failure to Prevent Fraud now covered under the ECCTA

UK Economic Crime and Corporate Transparency Act 2023, is now focussing on the new offence of “failure to prevent fraud.” This legislation holds large organizations criminally accountable if an employee, agent, subsidiary, or “associated person” commits fraud intending to benefit the organization, and if the organization lacked reasonable fraud prevention procedures.

Key sections include:

1. Scope and Applicability: The offence applies to large organizations (250+ employees, £36 million turnover, or £18 million in assets) and is enforceable across the UK. It covers various types of fraud, including false representation, abuse of position, and aiding fraudulent business.
2. Reasonable Prevention Procedures: Organizations must demonstrate top-level commitment, conduct risk assessments, implement proportionate prevention procedures, ensure due diligence, maintain effective communication and training, and regularly monitor and review their fraud prevention measures.
3. Interaction with Other Laws: The guidance explains overlaps with other regulatory frameworks, including tax evasion and corporate governance regulations, and emphasizes that compliance with these frameworks alone may not suffice as fraud prevention.
4. Penalties and Investigations: Prosecutions may be led by various UK legal authorities, with penalties primarily involving fines. Cooperation and transparency with investigations, including possible deferred prosecution agreements, may impact prosecutorial decisions.
5. Examples and Implementation: Practical examples illustrate scenarios where organizations could be liable for failure to prevent fraud, including fraud by misrepresentation, abuse of position, and indirect benefits. The guidance highlights that adherence to best practices, such as regular staff training and proactive internal audits, can support a defense of having reasonable prevention measures in place.

The guidance serves as a framework for large organizations to establish robust anti-fraud systems and encourage a shift in corporate culture toward proactive fraud prevention.