The United Kingdom Parliament is close to passing legislation that will create a new criminal offence in the UK targeting those that fail to prevent fraud perpetrated by companies that they control and also their agents (embodied in the Economic Crime and Corporate Transparency Bill). The new law will apply to all companies of a certain size that do business in the United Kingdom. In this bulletin, we look at the implications for companies that carry on business in the UK and the steps that will be required to be taken to avoid falling foul of this new criminal law.
The United Kingdom Parliament is close to passing legislation that will create a new criminal offence in the UK, targeting those that fail to prevent fraud perpetrated by companies that they control and also their agents (embodied in the Economic Crime and Corporate Transparency Bill). The new law will apply to all companies of a certain size that do business in the United Kingdom. In this bulletin, we look at the implications for companies that carry on business in the UK and the steps that will be required to be taken to avoid falling foul of this new criminal law.
Failure to prevent...
The new law will extend the scope of criminal behaviour beyond the mere commission of the fraud to the failure to prevent others committing fraud. Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that company bosses ordered or, indeed, even knew about the fraud.
The Government has provided examples of the types of fraud that the new law is designed to capture.
“Employees of companies and other organisations can commit fraud in a wide variety of ways – for example, by dishonest sales practices, hiding important information from consumers or investors, or dishonest practices in financial markets.”
The Government has stated that the legislation aims to reduce the incidence of corporate criminality through behavioural and cultural changes.
Which frauds will be covered
The fraudulent behaviours that companies will be required to endeavour to prevent include the following existing statutory frauds:
Fraud by false representation An offence is committed if a person dishonestly makes a false representation, and intends, by making the representation (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss. In this context, a representation is false if (a) it is untrue or misleading, and (b) the person making it knows that it is, or might be, untrue or misleading. A representation may be express or implied.
Fraud by failing to disclose information An offence is committed if a person (a) dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and (b) intends, by failing to disclose the information (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss.
Fraud by abuse of position An offence is committed if a person (a) occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person, (b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss. A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act.
False statements by company directors An offence is committed where an officer of a company (or person purporting to act as such), with intent to deceive shareholders or creditors of the company about its affairs, publishes or concurs in publishing a written statement or account which to the knowledge of that person is, or may be, misleading, false or deceptive in a material particular.
A number of other fraud offences, such as false accounting and fraudulent trading, will also be covered by the new law.
Mitigation - reasonable procedures
Companies may protect themselves by putting in place procedures “designed to prevent persons associated with the body from committing fraud offences”. Those procedures should be such as are “reasonable in all the circumstances to expect the body to have in place”. Before the law comes into effect the Government will publish guidance on reasonable fraud prevention procedures.
However, in the meantime, the Government has given some indication, in its own Impact Assessment paper, of the work that organisations would need to undertake:
a. Familiarisation: Which includes activities such as reading guidance; planning and mobilising resources; defining stakeholders and the scope of the project; identifying information sources and allocating responsibilities. It also includes setting control objectives and risk approach.
b. Risk assessment: This includes developing and populating a risk register. It also includes prioritising risks and testing risks against the [company's] control framework. It is assumed that after the risk assessment in the first year the risk assessment is refreshed annually but the costs of the refresh are much less than a full assessment as the initial required groundwork has already been done.
c. Communications: These include set-up costs from a statement to external audiences via company websites and costs every year where the management and Board set out their anti- fraud policies to staff.
d. Training: It is assumed that all staff receive on-line training from a commercial training provider.
Penalties and extraterritorial effect
The penalty upon conviction of the new offence will be a fine the amount of which will not be limited by the statute. However, company bosses will not be held individually liable and prosecuted. Moreover, the Government has indicated that where an employee commits fraud under UK law, or targeting UK victims, their employer could be prosecuted, even if the organisation (and the employee) are based overseas.
What size of company will be subject to the new law?
Parliamentary debate on the Bill is nearing a conclusion. That debate will resume on 18 October. The last remaining point of contention is whether the law should apply to substantially all bodies conducting business in the UK or whether the law should apply only to larger entities. In the current version of the Bill, only larger organisations are in scope – defined as organisations meeting two out of three of the following criteria: ·
- more than 250 employees;
- more than £36 million turnover;
- more than £18 million in total assets.
An update will follow shortly with details of the final scope of the new law, its commencement date, the administrative guidance provided by the UK government and, in particular, the impact on overseas entities that do business in the UK.
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