Corporate offence of failing to prevent fraud

The Economic Crime and Corporate Transparency Act 2023 – Corporate offence of failing to prevent fraud

The Economic Crime and Corporate Transparency Act (the “Act”) has received Royal Assent. The Act introduces a new corporate offence of failing to prevent fraud.

What are the aims of the Act?

Following on from the Government’s initiatives under the Economic Crime (Transparency and Enforcement) Act 2022, the Act aims to tackle economic crime and improve the transparency of corporate entities in the UK.

What is changing?

The Government is extending the scope of corporate criminal liability in the UK, making it easier to pursue large organisations for economic crime.

As part of this, the Act introduces the new corporate offence of failing to prevent fraud.

Larger companies and partnerships are caught by the new offence, which meet at least two of the three following criteria:

• more than £36M turnover
• more than £18M in total balance sheet assets
• more than 250 employees

What is a failure to prevent fraud?

"A relevant body which is a large organisation is guilty of an offence if, in a financial year of the body (“the year of the fraud offence”), a person who is associated with the body (“the associate”) commits a fraud offence intending to benefit (whether directly or indirectly) –

(a) the relevant body, or

(b) any person to whom, or to whose subsidiary undertaking, the associate provides services on behalf of the relevant body."

Fraud is defined widely, including offences under the Fraud Act 2006, the Theft Act 1968, the Companies Act 2006, and under common law. A fraud offence also includes aiding, abetting, counselling, or procuring the commission of one of the listed offences.

No knowledge of fraud is required. Corporations can be held criminally liable for the acts of associated persons, including employees, agents, and contractors of subsidiaries.

The Act applies where the victims of the offence are in the UK, or the offence was committed in the UK, even if the corporation is based overseas.

Organisations will not be guilty of the offence if they are a victim of the offence, and the intended benefit was to a person or subsidiary undertaking providing services on their behalf. It will be a defence for the organisation to prove that it has reasonable fraud prevention procedures in place; or that it is not reasonable in the circumstances to expect such procedures to be in place.

Penalties include unlimited fines and the possibility of significant reputational risk.

When will the new offence come into force?

The new offence will come into force on 1 September 2025. The UK Government has published statutory guidance setting out expectations on what will amount to reasonable procedures. The Guidance is critical to relevant organisations to whom the new offence applies in ensuring that they have effective fraud prevention measures in place and therefore a potential defence should one ever be required. 

Action required

Those affected by the new offence should be conducting fraud risk assessments across their business and reviewing existing fraud prevention and detection policies and procedures to determine if they require extending or adapting to cover the new offence or if new policies and procedures should be developed and implemented. Actions required are likely to involve financial, commercial, or accounting controls, training on fraud prevention and ensuring appropriate mechanisms are contained in whistleblowing policies and contracts of employment. The guidance is clear that it will “rarely be considered reasonable not to have even conducted a risk assessment”. We can help with risk assessments as well as considering and developing mitigation measures. 

Please get in touch with our specialists to find out how we can help you navigate the ECCTA.
 

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