A new offence of ‘failure to prevent fraud’ is a good start, but if we really want to stop this crime we need better incentives for whistleblowers, says Dr Alison Cronin
Earlier this month the government published its guidance on the new corporate ‘failure to prevent fraud’ offence, from the Economic Crime and Corporate Transparency Act 2023, which will come into force next year.
The Home Office deserves some credit. Unlike the attribution of corporate liability for the substantive offence of fraud itself, for which it is necessary to show that senior managers or directors were involved or knew about the fraud, the new failure to prevent offence is suitably broad. Instead of relying on just senior managers or directors, it holds large organisations to account where an employee, agent, subsidiary, or other “associated person” commits a fraud offence. Liability can be imposed where the organisation did not have reasonable procedures in place to prevent the offence and the fraudster intended to benefit: the organisation, its clients, or indeed just the fraudster themselves if their actions also benefitted the organisation.
Accordingly, the guidance states that a company may be prosecuted for failure to prevent fraud where a salesperson engages in mis-selling to increase their own commission and, consequently, the turnover of the organisation. Given the staggering size of the PPI mis-selling scandal with total redress of approximately £50bn, and the recent Court of Appeal judgment regarding liability for the mis-selling of car loans, the new offence looks admirably suited to its purpose.
However, the new offence’s limited application to large companies while letting smaller businesses completely off the hook is a mark in the negative column. Further, to prove corporate liability, the prosecution must prove to a criminal standard that the associated person did commit a base offence. While this approach may work well for an offence of bribery, it overlooks the peculiar nature of fraud.
Fraud is not an activity in itself, but the way in which an otherwise lawful activity is performed. It is the element of dishonesty that serves to delineate the crime. Accordingly, not all frauds can be reduced to the individuals engaged in the criminal conduct. If the individuals involved in the day-to-day activity, such as the mis-selling, are not themselves acting dishonestly, they will not have committed the base offence on which corporate liability depends.
This may well be the situation in relation to examples of pervasive and industry-wide practices. While the corporate activity may be considered dishonest, it might be the culmination of various divergent factors such as corporate and individual sales targets, sales policies and risk aversion strategies. The honesty of the individual employees involved in the activity, and who are simply doing their job, may not be in question. Without addressing this lacuna, the law will arguably still fail to address the headline-hitting frauds of this nature.
Fraud is not an activity in itself, but the way in which an otherwise lawful activity is performed. It is the element of dishonesty that serves to delineate the crime
In addition to these problems with the law, the current approach to enforcement is letting criminal companies off the hook, as I have set out in a paper for the Institute of Economic Affairs. The over-reliance on deferred prosecution arrangements has created a situation in which the authorities offer lenient punishments in return for self-declaration of fraud. Businesses therefore just see DPAs as a cost of doing business.
Incentivising whistleblowers
The threat of real prosecution, and the financial and reputational damage that comes with it, must be real to act as a deterrent. The UK should look to the US for a tougher approach. A better way to obtain evidence, without having to offer leniency to the corporations, is to buy it from those with easiest access to it. The UK should therefore incentivise corporate whistleblowers.
Recent research shows that whistleblower incentivisation schemes in the United States work and that they serve as a potent deterrent. What’s more, the cost of incentivising whistleblowers is far outstripped by the benefit of the legal enforcement that it enables. In the US, awards to whistleblowers under the False Claims Act totalling $9bn related to sanctions imposed of over $75bn between 1989 and 2023.
Corporate fraud damages our economy by eroding public trust, deterring economic activity, distorting competition, misallocating resources and reducing tax revenue. While the new failure to prevent fraud offence is welcome, it is not perfect. And without proper enforcement, we will never have the deterrent to stop companies ripping us off.
Dr Alison Cronin is author of IEA Fixing Fraud and principal academic in law at Bournemouth University