Following an intense and lengthy period of speculation, on 8 February 2023 the UK Government confirmed the introduction of a new “failure to prevent” corporate criminal offence. The new offence will be introduced by way of amendment to the Economic Crime and Corporate Transparency Bill (the Bill) which is currently undertaking its passage through Parliament.

Further to our article setting out in detail the background to this new offence, we consider here the practical steps that companies may need to undertake in response, and potential risk areas arising for corporates.

Background to the new offence

The current position in the UK is that it is not a criminal offence to “fail to prevent” economic crime; however, the concept of “failure to prevent” offences in UK law is not a new one.

The Bribery Act 2010 (the Bribery Act) contains a “failure to prevent bribery” offence and the Criminal Finances Act 2017 (the Criminal Finances Act) contains two “failure to prevent the facilitation of tax evasion” offences.

The Law Commission previously considered whether reform of corporate criminal liability was required in 2010 and concluded that it was not necessary. However, the question of reform came to the fore in the second half of 2022 after the Law Commission published an Options Paper concluding that there is a consensus on the need for reform.

This was followed by a proposed amendment during the Commons Committee Stage of the Bill in November 2022 to introduce a new corporate offence to “fail to prevent fraud, false accounting or money laundering” by an “associated person.” This amendment did not pass, but the UK Government committed to examine this further. Further weight was thrown behind a change in the law when the House of Lords Fraud Act 2006 and Digital Fraud Committee recommended in its report on 12 November 2022 that “[t]he Government must introduce a new corporate criminal offence of ‘failure to prevent fraud’ across all sectors.”

The UK Government faced further pressure when a cross-party group of MPs tabled similar amendments at the Bill’s Third Reading. Significantly, the Director of the UK’s Serious Fraud Office, Lisa Osofsky, also then backed the introduction of a “failure to prevent fraud” offence on 25 January 2023 when she described a potential new offence as having the “potential to transform prosecution” of the crime.

Lord Sharpe then confirmed on 8 February 2023 that the UK Government intends to introduce a new “failure to prevent” criminal offence during the Lords Committee stage.

What will the “failure to prevent” criminal offence look like?

Full details of the proposed offence are expected to be published shortly during the Lords Committee stages; however, it is widely expected that a new “failure to prevent” fraud offence would mean, broadly, that any company that fails to prevent fraud by an associated person would be committing an offence. It is likely that the only defence would be that the company had procedures in place to prevent fraud. Undoubtedly, the UK Government will look to draw on concepts used in similar offences under the Bribery Act and the Criminal Finances Act.

A key question will be around the precise scope of the new “failure to prevent” offence. In its Options Paper, the Law Commission recommended limiting the scope of any new offence to “core” fraud offences. These include:

• fraud by false representation;
• obtaining services dishonestly;
• cheating the public revenue;
• false accounting;
• fraudulent trading;
• dishonest representation for obtaining benefits; and
• fraudulent evasion of excise duty.

As with the “failure to prevent bribery” offence, we would expect that the UK Government will publish statutory guidance on the procedures-related defence.

Impact on companies

A key focus for corporates will be understanding the precise scope of the offence and the UK Government’s expectations concerning any procedures-related defence.

Most critically, corporates which already have fraud detection and prevention systems and controls in place will likely need to re-appraise them in the light of any statutory guidance produced by the UK Government. And, of course, where companies do not have such systems and controls they will need to be established.

In all likelihood, companies will need to ensure:

• top-level commitment to preventing fraud;
• that risks have been assessed and are kept under review;
• that policies and procedures are in place and supported by appropriate training on fraud prevention issues;
• that reasonable financial, commercial and accounting controls are in place to prevent fraud;
• that conflicts of interest are avoided and internal functions are appropriately separated;
• that appropriate enforcement mechanisms are in place, for example, through contracts of employment for employees and through general contractual terms for third parties;
• that whistle-blowing procedures are adapted or adopted that cover fraud; and
• that anti-fraud measures are periodically monitored, reviewed and evaluated.

By way of example, on the assumption that the Law Commission’s recommended scope of the offence is adopted, it will create an additional reason for directors, officers and employees to:

• in the ordinary course of business, not make green-washing claims, as these could constitute fraud by false representation. It remains to be seen, however, whether the Serious Fraud Office will include greenwashing claims in its enforcement remit, as other authorities and agencies (e.g. the Competition and Markets Authority, the Financial Conduct Authority and the Advertising Standards Authority) are already paying rapt attention to greenwashing claims. Notably, the FCA has proposed an “anti-greenwashing” rule that would apply to all regulated firms (expected to be introduced in mid-2023) and the CMA is expected to gain new powers to enforce civil consumer protection law, including prohibitions against misleading actions and omissions, directly under the Digital Markets, Competition and Consumer Bill (expected to be introduced in Spring 2023);
• in the context of M&A, make statements that are accurate to a seller, buyer or investor (as applicable);
• in a capital markets context, ensure that statements made to investors are not false or misleading;
• in a lending context, ensure any statements made by a borrower to their lenders are accurate; and
• in both solvent and distressed situations, ensure that good corporate governance practices are followed and that the directors continue to act in good faith and in compliance with their duties, that they keep an adequate and up-to-date assessment of the financial position of the company, that they keep detailed records of decision making and that they seek independent professional advice where appropriate.

When the new offence comes into force, UK-incorporated parent companies will likely find themselves at greater risk of liability arising from the actions of associated persons. In particular, the potential statutory liability for failure to prevent subsidiaries’ fraudulent behaviour adds another layer of risk for parent companies who are already grappling with the implications of the UK Supreme Court’s findings that a UK-domiciled parent company may owe a duty of care toward claimants allegedly impacted by the actions of a foreign subsidiary (Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3 and Vedanta Resources PLC and another v Lungowe and others [2019] UKSC 20).

The new criminal offence is clearly aimed at making it easier for successful public prosecutions to be brought and it is likely that companies who are successfully convicted (or who enter into deferred prosecution agreements, assuming that they are available) will face significant penalties. The new criminal offence may also provide another legal basis for enforcement by private actors – for example, activists may seek to launch private prosecutions or lodge complaints with regulatory authorities against companies who may have failed to prevent fraud, particularly in the context of greenwashing and broader sustainability issues.

Next steps

The UK Government has not published a definitive timeline for when the Bill might become law. Furthermore, we would expect that, given that the UK Government will likely need to publish guidance on the expected procedures-related defence, there would be a period of consultation before the offence comes into force. The consultation process for the similar offence under the Bribery Act took around 15 months. We would expect a similar timeframe here, indicating a possible entry into force for the new offence in mid-2024.

As with the introduction of the Bribery Act’s “failure to prevent bribery” offence, this is an opportune moment for companies to consider their existing compliance framework to ensure they are well-positioned for when the offence is introduced.

Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Eve Giles, Brandon O’Neil, Jonathan Benson, Amy Edwards, Tom d’Ardenne or your usual contact at Allen & Overy LLP.