Sector specialists cool on failure to prevent fraud offence

Legal experts agreed that this week’s announcement of a proposed new criminal offence of failure to prevent fraud leaves important questions unanswered. The much-awaited measure was outlined in an amendment to the Economic Crime and Corporate Transparency Bill, currently in committee stage in the House of Lords. If passed, corporations that fail to take sufficient measures will be liable to unlimited fines.

The creation of such an offence was among the options proposed last year in the Law Commission’s report on corporate criminal liability.

However specialists in the sector warned that the ‘failure to prevent’ doctrine as applied to bribery or tax evasion might not be applicable to fraud. ‘The idea that there is a template out there we can just dust off and adapt is not just wrong, but dangerously so,’ said John Binns, a partner at business crime firm BCL Solicitors.

While ‘most of us know what bribery and tax evasion look like, and most companies can assess their risks in those areas’, fraud is a more nebulous concept, Binns said. Fraud could be against a customer, an employee, a supplier, HMRC, ‘anywhere, in any way, to any extent, online or offline, with any degree of success, or none’.

Much will hinge on what constitute ‘reasonable prevention measures’ – guidance will be published ‘in due course’, the government said. ‘It is only then that we will be ready to assess if this new offence will work in practice,’ Binns said.

Kathleen Harris, partner at international firm Arnold & Porter, agreed. ‘It will be helpful to see clear and practical guidance on what will constitute “reasonable fraud preventative procedures”,’ she said.

Other commentators noted that the bill is still liable to amendment as it completes its passage through the Lords. Louise Hodges, head of the criminal litigation practice at London firm Kingsley Napley, said that the current proposal to limit the offence to large corporations, ‘is likely to be subject to challenge’.

The bill, the second such measure in two years, already contains a patchwork of measures designed to prevent corporate abuses and to crack down on so-called ‘enablers’. These include a ‘proactive information request power’ for the Solicitors Regulation Authority in relation to economic crime. However it does not tackle the tricky question of corporate criminal liability in the absence of a ‘directing mind’ – also the subject of a Law Commission proposal.

Binns summed up the central problem: ‘After years of contemplation yielding nothing concrete, the government has been bounced into legislating quickly. That creates false expectations and an industry of speculation, while the real work stays on the to-do list.’

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