Businesses should review their fraud prevention procedures before it’s too late - Tom Stocker

There is now close to vicarious criminal liability for frauds and other economic crimes, writes ​Tom Stocker

The clock is ticking for businesses across Scotland and the UK to review their fraud prevention procedures.

Sweeping reforms to the attribution of corporate criminal liability for fraud and other economic crimes are already in force. Previously, companies could only be prosecuted for fraud if the directing mind – such as the CEO or managing director – was directly involved. But the Economic Crime and Corporate Transparency Act 2023 overhauled rules around corporate criminal liability.

Nick Ephgrave, the director of the Serious Fraud Office (SFO) has stated that the Act is “the most significant boost to the SFO’s ability to investigate and prosecute serious economic crime in over ten years” and that he is looking for a case to bring “right now”.

Tom Stocker is a Partner and Head of Global Investigations & Corporate Crime, Pinsent Masons

Under the new regime, businesses face prosecution for the primary offence of fraud if any senior manager commits fraud – “senior managers” is widely defined and could include regional directors, divisional directors and even senior project managers. This new approach to corporate criminal attribution applies to all commercial organisations.

Compounding the risks, applicable to large organisations (with a turnover of more than £36 million, a balance sheet of more than £18 million and/or more than 250 employees), in the next six to nine months, a new secondary offence of organisational failure to prevent frauds by employees and other associate persons (including sub-contractors) from which the business benefits, will come into force. The SFO Director has informed Parliament that he wants the SFO “to be the first organisation to take a prosecution forward”.

While the Act provides for a “reasonable procedures” defence to the offence of failing to prevent fraud, many businesses do not currently have adequate risk assessments or controls in place to address outward fraud risk as opposed to inward risks such as embezzlement.

For smaller businesses, the greatest risk is the new easier test for attributing criminal liability for fraud to an organisation. There will also be compliance pressure from larger organisations, such as banks, insurers and customers, which will contractually pass on fraud prevention obligations.

Significant risk areas are in the provision of services and products to the public sector where there is an increased public interest in preventing and prosecuting frauds against the “public purse”.

As a result of company auditors themselves being subject to increased enforcement and civil damages claims, we are also seeing an increase in auditor scrutiny of frauds which impact a company’s financial statements or trust in management. This will inevitably lead to more frauds being identified and reported to the relevant authorities.

These reforms to corporate criminal law are significant. There is now close to vicarious criminal liability for frauds and other economic crimes which has not previously been the case in the UK. Fraud prevention is set to become the compliance challenge for 2024/2025.

Against this backdrop, we have strengthened our Forensic & Accounting Services offering with the appointment of former Big Four forensic accountant David Lister, who joins as a Partner specialising in forensic investigations and fraud risk management. David is based in Edinburgh and a huge asset in bolstering our service offering in fraud risk management.

Pinsent Masons has developed a Preventing Corporate Fraud starter pack and is running a series of fraud risk assessment workshops throughout June in Aberdeen, Edinburgh and Glasgow.

Tom Stocker is a Partner and Head of Global Investigations & Corporate Crime, Pinsent Masons