Tom Stocker: Ambit of corporate fraud set to increase
Currently, companies which benefit from fraudulent acts by employees or contractors are rarely prosecuted, but that will almost certainly change when new laws come into force which make it far easier to prosecute and to hold companies criminally liable for failing to prevent fraud from which they benefit.
When the Bribery Act 2010 came into force more than a decade ago it transformed corporate criminal liability by making businesses criminally liable for failing to prevent bribery by intermediaries and others, and this change in the law led to corporate bribery being a priority focus area of the Serious Fraud Office and to corporate fines totalling billions of pounds.
However, corporate fraud prosecutions – particularly of large companies – are rare and one of the reasons for this is because under the existing fraud laws, companies are only criminally liable for fraud if a statutory director is proven to be knowingly party to the fraud.
The proposed corporate fraud offences contained in the Economic Crime and Corporate Transparency Bill – which goes back to the House of Commons for the final approval stages on 4 September – will change that and are likely to be even more impactful than the Bribery Act.
The bill provides that companies will commit a fraud offence where senior managers, including below statutory director level, are involved in the offending and the activities of a divisional level director or even a project manager could attribute criminal liability to a company.
Larger commercial organisations will also be guilty of a new offence of failing to prevent fraud if a person associated with the company, including employees, subsidiary companies, contractors, consultants and professional advisers, commits fraud or facilitates a fraudulent act with the intent of benefitting the commercial organisation.
The new offence of corporate failure to prevent fraud is significant because fraud is the most common offence in the UK and corporate criminal fraud investigations are likely to be a priority focus area of the Serious Fraud Office going-forward.
Areas of risk for businesses include mis-selling of consumer services and products; dishonest statements of capabilities and experience in tenders; inflated time recording for charging customers; charging for materials where dishonest “double invoicing” can arise; and “open-book” construction, facility management and other services contracts where “hidden discounts” are negotiated and entered into by way of side agreements with suppliers and contractors.
The new corporate failure to prevent fraud offence will be subject to a defence of having in place reasonable preventative procedures. The government is required to publish guidance on what businesses should have in place. It is likely that a central pillar of a prevention programme will be to have a fraud risk assessment. This will necessitate companies assessing the risks of frauds being perpetrated by their employees, contractors and subsidiaries and putting in place policies, processes, and training to mitigate those risks.
The new laws will be welcomed by the public but represent a significant risk and compliance challenge for businesses in the years ahead.
Tom Stocker is a partner at Pinsent Masons