New corporate criminal offence casts fraud investigation net wider - Tom Stocker
Once official compliance guidance is published, “large organisations” will be criminally liable should they fail to prevent fraud and other economic crimes committed by associated persons, when the fraudulent conduct is intended to benefit the organisation.
Large organisations are commercial organisations which meet two or more of the following criteria: a net turnover of £36 million or more; a net balance sheet of £18 million; and 250 or more employees. Parent companies are caught if their group subsidiaries collectively meet these thresholds.
The offence captures a broad range of corporate criminal conduct from across the UK’s Fraud, Theft and Companies Acts, as well as the common law offence of cheating the revenue and fraud under Scots common law.
The new offence differs in significant ways from those of failure to prevent bribery and failure to prevent the facilitation of tax evasion. The Bribery Act 2010 does not consider subsidiary companies to be associated persons of a parent company unless the subsidiary is performing services for the parent company. By contrast, for the purposes of the failing to prevent fraud offence, subsidiary companies and their employees are associated persons of their parent company.
An organisation will have a defence against liability for the new offence if it can prove that, at the time the fraud offence was committed, it had reasonable procedures in place to prevent a fraud offence being committed, or that it was not reasonable in all the circumstances to expect it to have any prevention procedures in place.
The legislation is intended to make it easier to hold companies to account and to prosecute them for the criminal conduct of their employees, subsidiaries, agents, professional advisors and other service providers when the intended beneficiary of the act is the company. The new law is more significant than the Bribery Act because it captures a far wider range of associated persons, activities and conduct. The Serious Fraud Office (SFO) has been pushing for this legislation for more than 10 years.
In practice, we come across far more cases of fraud than bribery but, until now, there was limited corporate criminal risk under UK law. That has now changed and it is clear the new failure to prevent fraud offence and the significant change to the principles of corporate criminal attribution for the principal fraud offences will embolden the SFO, and I anticipate corporates will be an increasing area of focus for the SFO and other prosecutors.
In Scotland, the Crown Office and Procurator Fiscal Service will need to consider whether to extend a self-reporting initiative for corporate bribery to a broader set of economic crimes. Such an extension would likely serve to increase detection and enforcement of corporate fraud which would complement the objectives of the Act.
Tom Stocker, Partner and Corporate Crime Specialist at Pinsent Masons
Want to join the conversation? Please or to comment on this article.