Fraud laws have received a major shake up and businesses have been sent a stark warning to be weary of the “hidden danger”.
New failure to prevent fraud offence, which came into effect today, mean firms could face prosecution from fraud committed by employees – even if management was unaware of it.
Large firms will be held accountable over their internal anti-fraud measures and businesses can be held criminally liable if an employee commits fraud that benefits the company with no reasonable fraud prevention procedures in place.
Laura Ford, partner and UK corporate crime head for DLA Piper: “The key thing for businesses right now is to double and triple-check if they’re in scope.
“Companies in the UK and overseas may unexpectedly find themselves liable, with compliance costs they weren’t prepared for.”
The law applies to companies with more than 250 staff, £36m in turnover and £18m in total assets.
One crucial defence
Fraudulent acts including financial markets trading and sales practices deemed dishonest along with hiding information from investors or consumers are enshrined in the new law.
Sam Tate, global head of the regulatory and investigations at Clyde & Co, said: “The hidden danger lies in complacency; relying on outdated controls, assuming whistleblower policies or anti-corruption controls are enough.
“The offence casts a wide net with dishonest sales practices, misleading investor communications, and market manipulation all in scope.”
Tate said the “significant development” meant companies must now prove it took reasonable steps to prevent the fraud at the time of wrongdoing. He listed the “evidential burden” as the more challenging aspect of the changes.
“The only defence is demonstrating reasonable prevention procedures were in place at the time of the offending.”
He added Clyde & Co had seen a surge in failure to prevent compliance instructions which showed “companies are taking this seriously”.
Seismic shift in criminal liability
The bill marks a major step in the overhaul on fraud prevention across the UK.
Ford said: “The bigger picture is the seismic shift in corporate criminal liability underway.”
Labour’s Crime and Police Bill – introduce February 2025 – is set to significantly expand corporate criminal liability by making corporations more responsible for any criminal offence committed by a senior manager, provided the act was within their actual or apparent authority.
This is set to replace the Economic Crime and Corporate Transparency Act 2023, which was limited to economic crimes.
Ford said should the bill pass it would potentially hold companies responsible for a “much broader range of offences committed by senior managers, even where there is no benefit for the company.
“These changes will dramatically increase compliance burdens for businesses and have significant implications for corporate governance and accountability.”
Nick Ephgrave, director of the Serious Fraud Office (SFO), said: “This is a significant new tool for prosecutors to tackle serious and complex fraud which damages UK business and undermines our economy.”
The SFO boss has previously vocalised his intention to be the first agency to prosecute a company under the new legislation and said he will “show no mercy” to companies that have not got their regulatory measures in order come September.