Failure to Prevent Fraud – Potential Pitfalls for Group Companies

This article was written for and published as original content in Business in East Anglia.

Large organisations in the UK now face significant risk in corporate liability with the introduction of the Failure to Prevent Fraud offence under the Economic Crime and Corporate Transparency Act 2023. This offence potentially applies even to smaller UK companies, who form part of a larger group outside the UK and therefore the legislation has far wider reaching scope than some companies may have initially realised.

What is the offence?

This new offence is designed to hold companies accountable where:

1. Fraud is committed;

2. Committed by employees or other “associated persons”;

3. For the organisation’s benefit; and

4. The organisation is a “large organisation”.

If an associated person commits a specified fraud offence intending to benefit the organisation or its clients, the organisation can be held criminally liable unless it can demonstrate it had reasonable fraud prevention procedures in place.

Fraudulent offences include cheating the public revenue, false accounting or statements by company directors, abuse of position, failure to disclose information, making false representations, fraudulent trading and obtaining services dishonestly.

What is an associated person?

An employee, agent or subsidiary is automatically an “associated person” for the purposes of this offence. In addition, a contractor who provides services on behalf of the relevant body is also an associated person while they are providing those services. However, individual franchise holders are not associated persons since they are connected to the main franchise company by contract only.

A subsidiary could fall within the large organisation criteria itself or, even if it is not a large organisation, can be an “associated person” to the wider group. Therefore, it is possible for a parent company to be prosecuted for failure to prevent fraud where the base fraud offence is committed corporately, by a subsidiary and where the beneficiary is the parent organisation, or its clients to whom the subsidiary provides services for or on behalf of the parent organisation.

Organisations can also be prosecuted even if the associated person is prosecuted for an alternative offence, or not prosecuted at all, if it can be proven, beyond a reasonable doubt, that the associated person committed the fraud.

What is meant by being “for the organisation’s benefit”?

The fraud must be committed for the organisation’s benefit - even if senior management was unaware of the wrongdoing. This can be financial, or non-financial. For example, the fraud could give the organisation an unfair business advantage or disadvantage a competitor. However, the organisation will not be liable where it is a victim of the fraud, which is intended to benefit the organisation’s clients.

A victim is one where the fraudulent person intends the organisation to bear the loss. The organisation will not be a victim only because it suffered indirect harm from the fraud, for example by its reputation being damaged.

An organisation does not have to actually receive a benefit for the offence to apply, it just has to be the intended beneficiary. The intention to benefit does not have to be the dominant motivation for the fraud - the associated person’s intent could be to benefit themselves, or a client of the organisation, but if the actions also benefit the organisation the offence can apply.

Which organisations are covered?

The offence applies to “relevant bodies”, which include UK and overseas companies and partnerships. They must be “large organisations”, meaning they must meet at least two of the following criteria:

• More than 250 employees

• Annual turnover exceeding £36 million

• Balance sheet total exceeding £18 million

The criteria applies to the whole organisation including subsidiaries, regardless of where the organisation is head-quartered or where its subsidiaries are located. If a group company contains multiple subsidiaries, you must take the combined total of the employees, turnover and balance sheets (regardless of if they are based in the UK or not) for all group companies to see if the company is a large organisation.

The offence will only apply where the associated person commits a base fraud offence under the law of part of the UK: that one of the acts which was part of the
underlying fraud took place in the UK, or that that the gain or loss occurred in the UK. If a UK-based employee for example commits fraud, the employing organisation could be prosecuted, wherever it is based.

If you require legal advice on matters discussed in this article, please contact our expert Corporate and Commercial Law team at Thompson Smith and Puxon by calling 01206 574431 or by emailing enquiries@tsplegal.com.