Navigating the failure to prevent fraud offence

Fraud remains a significant issue in the UK.

According to the KPMG Fraud Barometer, the total value of high-value reported fraud cases (£100,000+) decreased in 2024 but the overall volume of cases increased, suggesting a rise in lower-value fraudulent activities.  Whilst reported fraud losses declined by 76% last year, the number of incidents remained high, indicating that many cases may not be accounted for. According to the Crime Survey for England and Wales (CSEW) only 14% of fraud cases are reported to the police, demonstrating that the actual scale of fraud is likely far higher than official figures suggest.  Experts believe that underreporting is especially high in the finance and procurement sectors.

To address the spiralling numbers and deal with the scourge of fraud, the Economic Crime and Corporate Transparency Act 2023 introduced a failure to prevent offence (FTPF) which comes into force on 1 September.

Corporates now have 3 months to consider existing compliance procedures, or introduce robust ones, to counter the effect of associated persons (i.e. employees, subsidiaries, agents, consultants etc.) committing a fraud for the benefit of the entity.  To assist all businesses, the Home Office published its guidance (Guidance) on the new corporate criminal FTPF offence in November 2024.

The Guidance not only offers an overview of the FTPF offence; including which organisations are within the scope, but also takes a mature and more practical approach to compliance. It also sets out what is expected of businesses in an age where corporate compliance programmes have (or at least should have) been at the top of a business’ agenda. In short, it encourages corporates to take a pro-active stance and to regularly review and update corporate programmes.

By way of reminder, Chapter 3 of the Guidance sets out specifically what any existing or prospective fraud prevention frameworks and systems should include, as follows:

• Top level commitment: “responsibility for the prevention and detection of fraud rests with those charged with the governance of the organisation”
• Risk assessment: “the organisation assesses the nature and extent of its exposure to the risk of the employees, agents and other associated persons committing fraud in scope of the offence”
• Proportionate risk-based prevention procedures: “an organisation’s procedures to prevent fraud by persons associated with it are proportionate to the fraud risks it faces and to the nature, scale and complexity of the organisations activities”
• Due Diligence: “the organisation applies due diligence procedures, taking a proportionate risk-based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, to mitigate identified fraud risks”
• Communication: “the organisation seeks to ensure that its prevention policies and procedures are communicated, embedded and understood throughout the organisation, through key internal and external communication”
• Monitoring and reviewing: “the organisation monitors and reviews its fraud detection and prevention procedures and makes improvements where necessary”

In seeking top level commitment, a relevant corporate will now be guilty of an offence if a senior manager commits the offence while acting within the actual or apparent scope of their authority.  The offence therefore also includes exposure for a corporate’s directors and officers and their D&O insurers.

The Guidance acts as a toolkit for corporates and advises on the range of available measures to detect fraud and attempts at fraud.  It sets out a series of questions relevant organisations can ask themselves, such as those regarding the data analytics tools that are being used and how staff are being encouraged to speak up in relation to any suspicion of fraudulent activity. The Guidance also offers questions as to the investigative process of suspected frauds, such as queries around the authorisation process and the documentation of an organisation’s decision to perform an investigation. 

To hear more on the impacts of the offence to corporates and their directors and officers as well as measures and steps corporates can take to improve fraud prevention frameworks and systems, please join us on Tuesday 3 June as Iskander Fernandez, partner and lead of Kennedys’ global white collar crime and investigations team discusses what is expected and how the new offence may operate.