As forensic accountants, we are often involved in the resolution of legal disputes after fraud is detected. We are also increasingly involved in the investigation of fraud and other economic crimes, attached in some cases to business distress and insolvency. This is unsurprising given the alarming statistics reported by the National Fraud Intelligence Bureau which revealed losses of £2.7 billion as a result of fraud in the UK for the year ending 31 August 2023.
In response, the UK government passed the Economic Crime and Corporate Transparency Act 2023 (ECCTA), introducing a new offence termed the 'failure to prevent fraud' offence. This measure is part of a series of 'failure to prevent' (FTP) offences (see the Bribery Act 2010 and Criminal Finances Act 2017) aimed at prompting organisations to take responsibility for inadequate systems and controls that could be exploited for criminal activities – especially fraud, bribery and corruption and tax evasion.
Our Disputes, Investigations and Valuations team can play a pivotal role in assisting organisations in navigating the complexities of the Act. Our expertise in financial analysis and investigative techniques enables us to identify potential instances of fraud and assess risk exposure. By conducting thorough forensic examinations, we are able to provide valuable insights into financial irregularities and assist in evidentiary support for legal proceedings.
Key provisions of the Act
Failure to prevent fraud offence
The Act introduces a new offence termed ‘failure to prevent’ which is aimed at holding organisations accountable for fraudulent acts committed by employees or agents for the organisation’s benefit, provided adequate prevention measures were not in place. Notably, culpability does not require evidence of management’s direct involvement or knowledge of the fraud.
Scope of offences
The Act encompasses various fraud offences, including false representation, fraudulent trading, and false accounting, signalling a broad regulatory approach to combat corporate malfeasance.
Liability and penalties
Organisations failing to prevent fraud face unlimited fines upon conviction. While individuals within companies may already be prosecuted for involvement in fraudulent activities, they are shielded from personal liability under this Act.
Senior manager test
The ECCTA amended corporate criminal liability laws on 26 December 2023. Previously, liability required attributing the offence to a person representing the company's ‘directing mind and will’. Now, any organisation, including small and overseas companies, can be found guilty if a senior manager commits a relevant offence such as bribery or money laundering. There is also no requirement to prove intention to benefit the organisation to establish liability.
Our recommendations for organisations
We recommend organisations look to establish the following ahead of the Act coming into force later in 2024.
Preventative measures
To mitigate the risk of prosecution, organisations must establish robust fraud prevention procedures tailored to their operations.
Risk assessment and management
Conducting comprehensive risk assessments, including forensic analysis, is essential to identify potential areas of exposure to fraud.
Anti-fraud policies and controls
Implementing anti-fraud policies and controls aligned with regulatory requirements is imperative.
Due diligence and monitoring
Enhanced due diligence on transactions and third-party relationships, coupled with proactive monitoring mechanisms, is crucial for fraud prevention.
Internal review and oversight
Regular internal reviews of systems and controls, coupled with active engagement from senior management and the board, foster a culture of compliance and accountability.
In a recent matter, we were engaged by the Board of a listed company to independently review a potential fraud issue, identified in this instance by the external auditors. This process clearly demonstrated that fraud risk is real, and that auditors will be very focused in assessing their clients’ response to the new FTP offence.
It also appears that the SFO are gearing up to utilise the new legislation – in agreeing DPAs (and associated fines/undertakings) and leveraging the new definition associated with a senior manager, a huge change from the old and exhausted ‘directing mind’ provisions.
Conclusion
The FTP fraud legislation signals a new era of corporate accountability, necessitating proactive measures to prevent and detect fraudulent activities. By leveraging forensic accounting expertise, organisations can enhance their fraud prevention capabilities and mitigate legal and reputational risks in an increasingly stringent regulatory environment.
We expect companies may be hesitant to react to this – until:
- They experience a fraud and the associated crisis; and/or
- The auditors question the company’s response to the FTP offence and threaten potential qualifications of company accounts.
It seems now is the time, for a variety of very good reasons, to deploy expert resource to consider and respond, and help all of us fight the fraud pandemic.
