The recent Patisserie Valerie charges against four individuals provide a preview of the type of scenario in which companies could be investigated under the new failure to prevent fraud offence as well as the expanded test for corporate criminal liability. In this blog, we outline the charges brought by the SFO, provide an update on the progress of the new failure to prevent fraud offence through Parliament, and summarise the key steps that companies can take now to prepare for the new law coming into force next year.
On 13 September 2023, the SFO brought charges against four individuals linked to the collapse of Patisserie Valerie Holdings Plc, including its former CFO.
The SFO charged all four suspects with conspiring to inflate the cash in Patisserie Holdings’ balance sheets and annual reports from 2015 to 2018, including by allegedly providing false documentation to the company’s auditors. The company’s former Financial Consultant, Financial Controller and CFO are also charged with five counts of fraud by false representation and one count of making and supplying articles for use in frauds. Additionally, the former CFO is charged with making false statements as a company director. It is alleged that debts of nearly £10 million were not disclosed to its investors and creditors and that the company’s cash position was overstated by £30 million.
Economic Crime and Corporate Transparency Bill (the “Bill”) – current status and next steps
Fraud by false representation, false statements by company directors and fraud by failing to disclose information are all offences covered by the Economic Crime and Corporate Transparency Bill’s proposed new failure to prevent fraud offence, through which the Government intends to target “dishonest sales practices, false accounting and hiding important information from consumers or investors”. Meanwhile, conspiracy to defraud and making or supplying articles for use in frauds are offences covered by the Bill’s proposed reform of corporate criminal, which would create liability for a company where a “senior manager” commits these (or other specified) “economic crimes”.
This Bill is currently in the final stages before Royal Assent is given. Once the failure to prevent fraud offence is in force, it will be easier to prosecute companies for fraud intended to benefit a company (“outward fraud”) because it will not need to be shown that a senior individual was involved in the underlying offence. The only defence companies will have will be to show that they have “reasonable procedures” in place to prevent fraud. Similarly, the Bill is likely to increase the number of prosecutions against companies if the “directing mind and will” test for corporate criminal liability is replaced, as is proposed, with a much broader “senior manager” test.
These reforms represent an expansion in the Government’s focus on fraud to increase accountability for organisations as beneficiaries (as well as victims) of fraud. Taken together, the reforms are likely to result in more companies being prosecuted (or entering into DPAs) and fined for fraud offences, such as the types of offences alleged in the Patisserie Valerie case.
What should companies do now?
The Government will produce guidance on reasonable prevention measures in due course. In the meantime, companies should carry out risk assessments to assess where their key risks lie, so that they can ensure they have proportionate and risk-based policies and procedures in place that will appropriately mitigate the risk of liability. The proportionate policies and procedures should include ensuring appropriate fraud due diligence is conducted (particularly when engaging third parties), that effective audit and monitoring processes are in place, that training is given so that individuals are fully aware of how potential offences may arise, and ensuring clear “tone from the top” regarding the company’s zero tolerance to fraud.