Under the Economic Crime and Transparency Act (ECCTA), large organisations may be held criminally liable for fraud offences committed by associated persons acting on their behalf. An associated person is broadly defined as any individual or legal entity that performs services for or on behalf of a company. This includes employees, agents, third-party contractors, service providers and intermediaries. Classification as an associated person is assessed based on all relevant circumstances including the nature of the relationship and the functions performed on behalf of the organisation.
What are the Responsibilities and Potential Liability for Firms?
Unless a firm can prove it had reasonable preventative procedures in place, it can be held liable for the conduct of associated persons. If an associated person is acting fraudulently, then the firm can face serious legal, financial and reputational consequences. The Failure to Prevent Fraud Offence’s scope is limited to those who are defined by meeting two out of the three following criteria:
- More than 250 employees
- Turnover exceeding £36 million
- Total assets exceeding £18 million
The Home Office guidance encourages courts to assess reasonableness based on the balance of probabilities which will be impacted by the firm’s size, structure and risk exposure levels. Firms should consider three main factors:
- The level of control they have over associated persons
- The proximity of the associated persons to the organisation
- The degree of supervision the organisation can exercise over those individuals or entities
What are the Legal and Financial Risks of Failing to Prevent Fraud?
ECCTA introduces significant legal consequences for large firms who are found liable under the Failure to Prevent Fraud Offence. ECCTA is aligned with other legislation such as the Bribery Act and penalties are consistent in terms of the severity of these offences. If found liable, organisations may face unlimited fines, confiscation of assets or civil litigation. Individuals who were directly involved in fraudulent activity or found guilty of failing to prevent fraud may face fines or imprisonment. The legal outcomes are often accompanied by broader financial and operational consequences such as disruption to the business, and internal investigations. It is important to note that, under new guidance from the Serious Fraud Office, in-scope organisations charged with the Failure to Prevent Fraud Offence under ECCTA can reach a Deferred Prosecution Agreement (DPA) if they self-report. It is therefore vital to have in place not only preventative measures, but also the ability to identify fraud where it has occurred for the benefit of an in-scope organisation.
ESG and Reputational Consequences
Firms who have been found liable for failing to prevent fraud can face serious reputational damage which is a critical risk in terms of ESG compliance. Stakeholders increasingly expect companies to demonstrate ethical governance and transparency while proactively working to combat fraud. Potential ESG-related consequences include:
- Diminished investor confidence: Institutional investors may divest from firms facing allegations of fraud to remain compliant with their own ESG mandates for governance
- ESG ratings downgrade: Failure to prevent fraud can negatively impact a company’s ESG score as it represents a damaging indictment on the governance of the company, which can prevent future inclusion on sustainability indices or restrict access to capital
- Erosion of stakeholder trust: Employees, customers, business partners and third parties might lose confidence in light of a public fraud scandal or where customers have been harmed
Failure to prevent fraud has many implications beyond legal compliance, and firms should take their social and governance responsibilities seriously in these areas. Under ECCTA, large organisations must take proactive steps to implement reasonable fraud prevention procedures or risk being held criminally liable for the actions of associated persons. If you would like to understand how Novatus Global’s ECCTA Offering can support your compliance efforts and help mitigate the risk of being charged under the Failure to Prevent Fraud Offence, reducing the likelihood of prosecution and substantial fines, get in touch today.
