The Incoming Corporate Criminal Offence of Failure to Prevent Fraud – Where are we now?

The Economic Crime and Corporate Transparency Bill is the subject on an ongoing debate between the House of Commons and the House of Lords as the two legislative wings of Parliament dispute the scope of the incoming offence of failure to prevent fraud, the full details of which are available here.

The primary issue is the question of to which businesses the new offence ought to apply. On 11 September, the House of Lords voted by 211 to 185 to make only the smallest of businesses exempt from liability under the new offence, a move which would mean only “micro-sized” businesses fell outside of the scope of the new law. Under this definition if a business met two of the following three criteria it could be liable for failing to prevent a range of financial crimes:

1. a turnover of between GBP632,000 and GBP36 million;
2. an annual balance sheet between GBP316,000 and GBP18 million; and
3. between 10 and 250 staff.

There is no disagreement between the two Houses that businesses which exceed these definitions ought to be subject to the failure to prevent offence.

The Lords withdrew attempts to add money laundering from the offence in a bid to limit the cost of compliance on SMEs. Therefore, the final Bill which makes it onto the statute book will not extend the failure to prevent offence to money laundering.

Even on the narrower offence, amendments by the Lords to the threshold for a business to be caught by the offence was voted down by the House of Commons two days later. The Government remains concerned that the compliance procedures which would have to be adopted by SMEs would represent an undue burden and expense on small businesses. As such, the Bill (as currently drafted) would only impose criminal liability for failing to prevent fraud on businesses which meet two of the following three tests:

1. a turnover in excess of GBP36 million;
2. an annual balance sheet in excess of GBP18 million; and
3. over 250 staff.

While exclusion from the scope of the offence may appear to save SMEs from the burden of implementing reasonable procedures to prevent fraud, there remains a compliance burden on them for preventing fraud nonetheless. SMEs are easier to prosecute as corporates, as the directing mind and will - via whom criminal liability can be attributed to the corporate - is more likely to be identifiable and/or involved. This risk is elevated now given the further change to criminal liability brought about by the Bill, with “senior managers” being capable of incurring criminal liability for their employer. As such, SMEs will still need robust procedures to prevent employees from committing fraud in order to minimise the (now increased) risk of being prosecuted for a substantive fraud offence. The difficulty posed by the amendments to the Bill is that by being excluded from the scope of the new offence, SMEs can only be charged with a substantive fraud offence, which does not carry the statutory defence of reasonable prevention procedures; whereas a larger business would be availed of such a defence in response to a charge of failure to prevent fraud.

What further amendments will be made to the Bill remain to be seen when the House of Lords next debate the Bill on 18 October.