Please note that the Economic Crime and Corporate Transparency Bill and therefore the ‘Failure to Prevent Fraud’ offence, has received royal assent, but there is no guidance currently published. This blog is based on expert opinion. Please refer to the guidance when it is released.
We’ve seen the headlines.
There is a new amendment coming to the Economic Crime and Corporate Transparency Bill 2023; the ‘Failure to Prevent Fraud’ criminal offence. And according to experts, it’s likely to come into effect by the end of 2024.
What does Failure to Prevent Fraud mean for companies like yours?
According to the UK government website, ‘an organisation will be liable where a specified fraud offence an employee or agent commits the offence, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place’. It’s important to note that your organisation don’t need to be aware of, or order, the fraudulent activity to be liable.
It’s designed to strengthen the existing powers to fine and prosecute organisations, closing loopholes. Those unlimited fines can be a hefty penalty. Furthermore, although this is a UK law, it applies to organisations outside of the UK if the the perpetrator commits the offence in the UK or targets UK victims.
This creates an onus on companies to ensure they have effective fraud-prevention measures in place, and to prove it if asked.
Who does the failure to prevent fraud offence apply to?
The ‘Failure to Prevent Fraud’ offence applies to large companies. These are ‘organisations meeting two out of three of the following: more than 250 employees, more than £36 million turnover and more than £18 million in total assets.’ If this is the case for you, then yes, it would be prudent to review your current fraud prevention policies and procedures. Since companies from outside the UK can also be prosecuted, we recommend any company where this applies should take precautions.
Other companies can also benefit from taking further preventative measures, even if the laws currently do not apply. It’s possible that because of this law, medium-sized companies may become the target of fraud as large companies’ checks become more stringent. From that viewpoint, it’s a good idea for any company to prepare for this change by having thorough fraud prevention measures in place.
What falls under this law?
For the ‘failure to prevent fraud’ law to apply, the fraudulent activity should benefit the business and be undertaken by an associated person. This could be an employee, agents, subsidiary or intermediary. Anyone who performs services for, on behalf of the organisation.
We should note that an exception would be made if the fraudulent activity was intended to be only for the individual’s benefit.
Offences that could fall under this law include:
- Financial statement fraud.
- Non-financial statement fraud.
- Rogue trading.
- Bribery and corruption.
- Intellectual property breaches, including theft.
How can we defend against the ‘failure to prevent fraud’ offence?
To comply with the law, organisations must show that they have reasonable fraud prevention procedures in place.
What does a reasonable fraud prevention procedure look like?
Guidelines are not published yet. However we can assume that companies should complete fraud checks appropriate to their risk level. This could include:
- Completing fraud risk assessments regularly.
- Providing awareness and educational programmes for employees and other associates. This can include the Economic Crime and Transparency Act, Fraud Act and Bribery Act.
- Updating your policies and procedures, and ensuring no person handles too much of any financial transaction.
Further controls for strong fraud prevention and detection include:
- Setting up a reporting system or procedure.
- Background checking and police checking employees.
- Tracking changes in supplier payment information.
- Monitoring inconsistencies in accounts receivable and payable.
- Comparing staff information against master supplier files, and alerts when there is an alteration to the master supplier file.
- Checking Purchase card expenses and other expense claims regularly.
- Ensuring your risk detection software is up to date and that your team log in often to check risks.
- Backing up your records and having a transparent audit trail.
- Making employees and associates aware of your anti-fraud measures as a deterrent.
Many of these measures could be set up now so your organisation can operate them smoothly by the time the offence comes into effect.
How FISCAL helps your organisation check for internal fraud.
Our software solution makes it easy to identify fraud risks and take action faster. Using advanced forensics and AI, our platform completes continuous analysis of suppliers and transactions to identify fraud risks. Those checks include:
- Employee-to-supplier credential matching.
- Checking the master supplier file for issues including dormant accounts, changes and duplicate suppliers.
- Identifying unusual supplier payments, such as round amounts, and exceptions or inconsistencies in transactions.
- An audit trail to discover who has made changes, and when.
Using our fraud prevention software allows you to have greater control around your spend, and who you spend with. It gives a high level of oversight, giving you peace of mind.