‘Failure to prevent fraud’ and what it means for businesses

Shifra Moriarty, bar course graduate and aspiring criminal barrister, explores recent developments in financial crimes legislation

Last week the ECCT Bill (2023) received Royal Assent. This article explores how the bill can be understood within the broad agenda of tackling both economic crime and London’s reputation as its facilitator.

The fraud problem

The old mantra that prevention is better than cure is nowhere better evidenced than when attempting to tackle white-collar crime. Corporate crime undermines confidence in the UK economy and costs an estimated 208 billion in fraud cases alone. Investigating and prosecuting these offences represents a significant drain on national resources, accounting for a staggering 40% of all crimes committed in the UK, with the average fraud case taking 514 days to investigate. This is over ten times as long as in a case of theft which requires on average just 50 days.

The damage caused by illicit finance and corporate fraud undermines legitimate business, finances criminal activity, and impacts on everyday society and the lives of the individuals affected. This is not a ‘victimless crime’.

In recent years London, in particular, has been singled out as a facilitator to oligarchs, kleptocrats, and as a haven for the proceeds of crime, seriously compromising the city’s reputation as a global financial powerhouse.

This is driven both by the perceived prevalence of “professional enablers” and the lack of transparency and oversight of overseas entities. The latest research, shows that over 70 per cent of properties held via overseas shell companies (109,000 out of 152,000) still do not publish information about who really owns them, despite government commitments to crack down on anonymous ownership of UK property.

The government acts

Following the Russian invasion of Ukraine in February 2022, concerned by the amount of illicit overseas funds held in the UK, the government passed the Economic Crime (Transparency and Enforcement) Act 2022 (the ECTE ACT). Catalysed by the war and ensuing public interest, this legislation was passed through parliament in just two weeks. This demonstrated clear capacity to cut through bureaucracy when required.

The focal point of this legislation was increasing transparency through a registry of beneficial ownership of overseas entities. This represented a significant reform of the powers of Companies House, requiring it to take a more active role in gatekeeping and investigating companies and data kept on its register.

The government’s commitment to an agenda which strengthens our economy against corporate crime is commendable. However, the effectiveness of these measures and real commitment to change may be strained by budgetary concerns, with current spending on policing economic crime standing at just 0.042% of GDP.

The failure to prevent offence

Further to the ECTC Act the UK government has committed to bring a further bill, the Economic Crime and Corporate Transparency Bill (the ECCT). Most significantly, the ECCT will introduce a new “failure to prevent” (FTP) offence under which an organisation will be liable for fraud committed by an employee or agent, for the organisation’s benefit, where the organisation did not have reasonable fraud prevention procedures in place.

Historically, the FTP model set a precedent as a highly effective modality in the context of Health and Safety (H&S) regulation. Its impact is ubiquitous. H&S regulation underwent an overhaul following the H&S Work Act (1974). Fatal injuries in the workplace have fallen by 90% since its introduction. Consequently, H&S Regulations were recognised as a runaway success – but why were they so effective?

The FTP approach reverses the burden of proving liability. It is for the company to create and demonstrate reasonable procedures, designed to prevent the incidence or offence.

In the context of corporate crime, this would have the effect of turning a dishonesty offence (once fraud is established) into one of a systems failure. Following this precedent, the burden would be on the organisation to prove that it has reasonable procedures in place to avoid the commission of an otherwise strict liability offence. Therefore, placing the burden on the company to ensure that an environment for fraudulent activity does not exist, rather than reacting to it when it arises.

Arguing over the bill

Last month the House of Commons voted for an exception to the legislation for small and medium- sized enterprises, representing a significant blow to the impact of the ECCT Bill.

The threshold of exemption is extremely high. Dame Margaret Hodge recognised this in the debating chamber, stating that of the 10,400 law firms in the UK, only 100 will be caught by the legislation in its current format. As set out in the introduction, a preventive approach is key for tackling fraud. However, this amendment has restricted the scope of the legislation and therefore failed to provide an incentive for corporate responsibility in the vast majority of potential targets.

This amendment has serious shortcomings. Firstly, introducing legislation which only targets a limited number of organisations will undermine the capacity to instigate the broad, cultural change necessary for tackling fraud. Secondly, criminalising an offence on an unequal basis, namely on the size of the organisation, arguably undermines the spirit of the law.

A collective response is required for a collective issue

In terms of stamping out professional enablers — legislation which affects less than 1% of law firms represents a hollow victory. Professional enablers play a fundamental role in facilitating economic crime. The Law Commission’s recommendations for a failure to prevent fraud offence never considered a SME exemption. It is a government aberration which removes real commitment to a progressive agenda on tackling professional enablers.

Had this amendment been removed, the responsibility to comply with reasonable measures would have lay with firms. This would have engendered a paradigm shift (as we saw in H&S regulation) in corporations shoring up their walls against the pernicious influence of economic crime.

However, the government was clearly committed to retaining the exemption. The ECCT received Royal Assent last week, arguably losing an opportunity to effect real change. Moving forward, it will be vital for our Government to stand firm on their agenda for tackling corporate crime.

Shifra Moriarty is a graduate of City Law School, London and has recently completed the bar course. She is an aspiring barrister, with a particular interest in criminal law.