As part of their preparations for the new Failure to Prevent Fraud Offence under the Economic Crime and Corporate Transparency Act (ECCTA), financial firms must ensure they have conducted a comprehensive and documented fraud risk assessment. The Home Office guidance on this issue is clear as they state it will “rarely be considered reasonable” for firms not to have carried out a risk assessment of some kind.
Risk Assessments for Financial Firms
A fraud risk assessment helps firms to identify where fraudulent activity could realistically occur within the scope of their operations. This applies to internal operations or through associated persons. Associated persons are broadly defined by the ECCTA as any employees, subsidiaries, contractors or third-party service providers who act on behalf of the firm. The ECCTA Failure to Prevent Fraud guidance does not specify a fixed format for risk assessments, but it expects a risk-based, proportionate approach, which means the assessment must be specific to the firm’s business model, structure and operations. Firms should make sure the risk assessment:
- Maps key processes, transactions and relationships where fraud could arise
- Differentiates risks based on roles, for example, false representation by external agents or abuse of position by internal employees
- Uses the fraud triangle of opportunity, motive and rationalisation as a framework to evaluate the likelihood and exposure of all risks
Risk Assessments for Designing Reasonable Prevention Procedures
The fraud risk assessment will serve as the foundation for developing reasonable prevention procedures which are outlined as the only acceptable defence under the ECCTA. Risk assessments also provide an audit trail to demonstrate that firms have taken proportionate and considered action. Risk assessments should be:
- Formally documented
- Regularly reviewed
- Used to inform training, controls and third-party due diligence
Firms that act early and implement the outcomes of fraud risk assessments in their roadmaps will align easily with the ECCTA’s expectations. Fraud risk assessments can reduce exposure and demonstrate a robust commitment to ethical governance and compliance.
Get in touch today to learn more about how Novatus Global’s ECCTA Offering can support your organisation in conducting a comprehensive fraud risk assessment.
