The UK Government’s guidance on the failure to prevent fraud offence, published on November 6th, 2024, outlines the new corporate criminal offence introduced by the Economic Crime and Corporate Transparency Act 2023 (ECCTA).

The new offence will come into effect on September 1, 2025. Organizations therefore have nine months to review the Guidance and implement any changes that may be required to their fraud prevention procedures before the offence comes into force.

Who is in scope?

The offence applies to large organizations (defined in section 201 as meeting two or three out of the following criteria:

• more than 250 employees;
• more than £36m ($46m) turnover;
• more than £18m ($23m) in total assets).

It holds them liable for fraud committed by their employees, agents, or other associated persons, even if senior managers did not order or know about the fraud.

Although the offence of failure to prevent fraud applies only to large organizations, the principles outlined in this guidance represent good practice and may be helpful for smaller organizations. All organizations are therefore encouraged to consider the Guidance carefully and conduct risk assessments, develop policies and procedures, provide training, and establish reporting mechanisms to mitigate fraud risks.

Extraterritorial scope of the new fraud offence

The extraterritorial scope of the new fraud prevention offence is quite broad. It applies to “large organizations” and their subsidiaries, regardless of where they are incorporated or formed.

However, the exact application of the extraterritorial scope will depend on the specific facts of each case. The offence is linked to the concept of a “relevant event,” which is defined as any act, omission, or other event that is necessary to prove the underlying fraud offence.

The Guidance states that:

• non-UK organizations could be prosecuted if an employee/associated person commits fraud in the UK; and
• UK organizations whose overseas employees or subsidiaries commit fraud abroad with no UK nexus will not be caught by the new offence – this would be a matter for law enforcement in the country concerned.

Reasonable fraud prevention measures

The Guidance sets out six principles for a fraud prevention framework:

1. Top-level commitment: Senior management demonstrates a clear commitment to fraud prevention, setting the tone from the top and ensuring adequate resources are allocated.
2. Risk assessment: The organization identifies and assesses the specific fraud risks it faces, considering its size, industry, operations, and other relevant factors.
3. Proportionate risk-based prevention procedures: The organization develops and implements fraud prevention procedures that are proportionate to the identified risks, considering the potential impact and the nature of its activities.
4. Due diligence: The organization conducts appropriate due diligence on third parties and employees to mitigate the risk of fraud.
5. Communication (including training and whistleblowing): The organization effectively communicates its fraud prevention policies and procedures to all employees, provides relevant training, and establishes a robust whistleblowing channel.
6. Monitoring and review: The organization regularly monitors and reviews its fraud prevention framework to ensure its effectiveness and makes necessary adjustments to adapt to changing circumstances. 

Failure to prevent offences

The six principles for a fraud prevention framework are very similar to those for the failure to prevent bribery offence (section 7 of the Bribery Act 2010) and the failure to prevent the facilitation of tax evasion offence (the Criminal Finances Act 2017). This is because they all fall under the category of “failure to prevent” offences, which aim to hold organizations accountable for the criminal activities of their employees and associated persons.

A successful deterrent?

The Guidance states that the fraud offence will “make it easier to hold organisations to account for fraud committed by employees or other associated persons … [and] will also encourage more organisations to implement or improve prevention procedures, driving a major shift in corporate culture to help prevent fraud”.

We asked Charles Bott KC, head of Advocacy at Martin Kenney & Co, and a leading London Silk specializing in financial crime cases for his comment on whether the new fraud offence will be a successful deterrent.

He said: “Serious fraud is out of control and any measures that will genuinely help to prevent it are welcome. There is plenty to like in the spirit and intention of this new offence.

“But it will be difficult to prove and its scope is limited. The fear is that, like its sister offence in the Bribery Act, it will be rarely used and, as a consequence, its deterrent effect will be diminished.”