On 4 September 2023, the UK House of Commons debated the House of Lords’ amendments to the Economic Crime and Corporate Transparency Bill (the Bill). The House of Commons voted to include an exemption for small and medium-sized enterprises (SMEs), and remove the extension of the proposed offence to failure to prevent money laundering. The Bill has progressed through the House of Lords and is in the final stages, due to receive Royal Assent by the end of the year. The Government is under a statutory duty to publish guidance on ‘reasonable procedures’ before the offences under the Bill come into force.
The failure to prevent fraud (FTPF) offence will make an organisation liable if it fails to prevent a specified fraud offence from being committed where: (i) an employee or other associated person (e.g. a contractor, subsidiary or supplier) commits the fraud; and (ii) the fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation. The offence will effectively mean that organisations will be liable unless they can evidence that they had “reasonable” procedures in place to prevent the fraud from arising. In addition to UK organisations, the new offence will apply to overseas organisations who are based overseas where an employee or other associated person commits a fraud offence under UK law or which targets UK victims. Please see our previous article for more detail on the offence.
The House of Commons first debated whether the FTPF offence should apply only to “large organisations”. Secondly, it considered the proposal to extend the FTPF offence to include money laundering offences.
1. Including an exemption for SMEs
The House of Lords had removed the exemption for the application of the offence to SMEs, meaning that such organisations would effectively be required to have in place ‘reasonable’ procedures to prevent fraud (thereby largely replicating the application of the failure to prevent bribery offence).
However, it was successfully argued that SMEs should not be burdened with the cost of implementing reasonable procedures to prevent fraud, and therefore the offence should only apply to “large organisations”. The definition of “large organisations” is defined as an organisation which satisfies two or more of the following conditions in the financial year preceding the year of the offence: (i) more than 250 employees: (ii) more than GBP 36 million turnover; and / or (iii) assets of more than GBP 18 million.
2. Removing the failure to prevent money laundering offence
The second Lords amendment debated was that which sought to expand the Bill to include a new offence of failure to prevent money laundering. Although there were previous calls for this extension (see here), the Government argued that existing Money Laundering Regulations are sufficient to prevent these offences. It was argued that the expansion would be duplicative, cause confusion and create an unnecessary burden. MPs ultimately voted to remove the failure to prevent money laundering offence.
It was expected that the Bill would receive Royal Assent this year, coming into force during 2024, although a representative of the SFO suggested yesterday at the Cambridge Symposium that the offence could come into force this year. If this is the case, not only will organisations need to move quickly to enhance fraud compliance programmes, but the Government will also quickly need to publish guidance on what ‘reasonable’ procedures to prevent fraud might look like. As set out above, the guidance would need to be published before any offence comes into effect.
The FTPF offence will shift the focus from organisations as victims of fraud (inward fraud) to make it easier for organisations to be prosecuted for fraud committed by employees or third parties that the organisation benefits from (outward fraud). Large organisations should consider conducting a tailored risk assessment to determine whether any existing anti-fraud compliance framework covers outward fraud sufficiently for the purposes of having in place reasonable procedures to prevent fraud (see our previous article here).
We have prepared a survey aimed at legal and compliance departments to explore how aware companies are generally of the specifics of the offence, and what companies are doing to prepare. The survey should only take 5 minutes to complete and the results of the survey will be published anonymously in a report. If this is of interest, the link can be found here.
If you would like to discuss the new offence, how this might affect you and how to implement enhancements to fraud policies and procedures, please contact Andrew Reeves, Naomi Miles or Claudia Van Gruisen and we will arrange a convenient time.