ECCTA: ‘failure to prevent fraud’ offence will create culture shift amid UK fraud epidemic

Currently, approximately 40% of reported crime in England and Wales is due to fraud, according to a recent House of Commons Justice Committee report (50 pages / 586 KB).

The failure to prevent fraud and other economic crimes offence, introduced via the Economic Crime and Corporate Transparency Act 2023 (ECCTA) (376 pages / 3.7 MB) applies to large organisations. For the purposes of ECCTA, a ‘large organisation’ is defined by meeting two of the three following criteria: turnover of more than £36 million; balance sheet total of more than £18 million; and more than 250 employees. The offence, and ECCTA overall, aims to drive a corporate culture shift towards better fraud prevention practices.    

What is the ‘failure to prevent fraud’ offence?

The offence will make large corporate bodies and partnerships criminally liable for the acts of a persons associated with them who commit economic crime for the organisation’s benefit or for the benefit of any person the associated person provides services on behalf of the organisation, such as a customer.

Associated persons include employees, agents, subsidiaries and any other person performing services for or on behalf of the organisation. This definition may also extend to suppliers when they provide ancillary services, and to agents, distributors, advisors, brokers, contractors, consultants, and joint venture partners. The ‘benefit’ must be linked to the organisation the associated person is working or providing services for or on behalf of, or another group company, customer, or clients of the organisation.

Why has the ‘failure to prevent fraud’ offence come to fruition?

The legislation is aimed at preventing the large-scale financial collapses of the past.  With recent headline cases, such as Patisserie Valerie and Carillion, the fraudulent practices have brought these companies into financial collapse.  The impact of both of these cases – and others – has wider ramifications across the UK economy than just on the organisations themselves.

In the Patisserie Valerie case, four individuals were charged with fraud connected to the collapse of the bakery business. The Serious Fraud Office (SFO) brought charges against the company’s former director and chief financial officer, his wife, a financial controller, and a financial consultant of the business. The charges related to allegations of inflating the amount of cash the company had and hiding debts of £10 million. The four were accused of providing false documentation to the company’s auditors and giving investors and creditors misleading information. The case had significant impact, leading to the abrupt closure of 70 stores and the loss of 900 jobs.

The Carillion case revolved around the collapse of the major UK construction and services company, which went into compulsory liquidation in 2018. The UK Financial Conduct Authority fined three former Carillion directors, accusing them of publishing false information about the company’s financial health. The directors were slammed for ‘knowingly and recklessly’ misleading investors amongst other stakeholders.

The collapse affected thousands of jobs and numerous building projects, resulting in substantial financial losses for investors and taxpayers. The case has been a focus point for various issues, including the responsibilities of UK company directors around false or misleading documentation.

‘Failure to prevent fraud’ offence will shift the focus of current fraud thinking

Firms often focus “on” fraud committed on them, but they do not generally think about fraud carried out “by” themselves, either to inflate revenue, hit targets or for company survival. However, the offence will now require large organisations to focus on how they could be a beneficiary of fraud and the different scenarios in which this could arise.

Large organisations may consider that their existing measures are sufficient to meet the requirements under the new offence. However, this, in our experience, is unlikely to hold true in all cases as most organisations will not have fully considered cases where they are benefitting from fraud. Both the Patisserie Valerie and Carillion cases demonstrate instances where fraud has been committed by the organisation themselves to either inflate revenue or for company survival.

It is important to think about ongoing as well as potential fraud risk, updating policies and procedures as required, to ensure a companywide shift towards more preventative, ethically minded measures, such as ensuring financial health figures are correct and regularly updated.

Company leaders, such as directors, need to demonstrate to the organisation as a whole that they are taking ECCTA and the new prevention offence seriously, making changes now where needed, to ensure the new attitude is adopted firm wide.

ECCTA is very broad, it is not just about financial statement fraud or the financial element of alleged fraudulent activity. The failure to prevent fraud offence goes further and takes into consideration representations large organisations are making.

Stakeholders, whether this be investors, customers or other interested parties, now more than ever rely on annual reports published by large organisations in a much ‘bigger picture’ way than just the financial statements. Ensuring that the content of the financial statements represent a true and fair position of the company will, of course, continue to be important, but the failure to prevent fraud offence also covers non-financial information disclosures too such as environmental and sustainability reporting. These types of metrics are not yet subject to the same level of scrutiny, however disclosures, which if inaccurate, could represent a criminal offence under failure to prevent fraud.

Co-written by Hannah Bragg of Pinsent Masons.