The UK government is introducing major legislative reforms to tackle fraud, money laundering and corruption within large corporate bodies. The Economic Crime and Corporate Transparency Bill 2022-2023 is set to expand corporate criminal liability for economic crimes significantly.

Although the final scope is unclear, the government intends to introduce new ‘failure to prevent’ criminal offences for fraud, false accounting and potentially money laundering. This would make it easier for prosecutors to hold large companies doing business in the UK criminally liable if they do not have reasonable procedures to prevent economic crimes within their organisations.

Businesses should start preparing for these changes, which could come into force within the next few years. This article summarises the key proposals within the Bill, outlines ways for companies to assess and manage their risks, and provides practical steps organisations can take to prepare.

The Bill: Background and Scope

The Bill forms part of the UK government’s drive to reform laws tackling economic crime. It follows the Economic Crime Act 2022, passed in response to Russia’s invasion of Ukraine. The government sees the Bill as the next step – delivering a “suite of wider-ranging reforms” to improve corporate transparency and combat economic crime.

The Bill is currently proceeding through Parliament and could become law sometime in 2023, coming into force by 2024. It contains various proposals, including reforms to the Companies House, increased powers for regulators, and expanded investigation powers for the Serious Fraud Office.

However, the headline measure is a new ‘failure to prevent’ offence for fraud and false accounting. This is modelled on the offence in the Bribery Act 2010, which holds companies criminally liable for failing to prevent bribery. The government intends to make it easier to prosecute large corporates if economic crimes occur within their organisations.

The key aspects of the proposed corporate offence are:

• It will only apply to ‘large’ corporate bodies meeting 2 of 3 criteria: over 250 employees, over £36 million turnover, and over £18 million in assets.
• A company commits the offence if someone associated with it commits fraud or false accounting to benefit that organisation.
• There is a defence if the company has reasonable procedures to prevent such offences.
• No offence is committed until the government publishes guidance on ‘reasonable procedures’.
• If convicted, companies face unlimited fines.

The offence covers a wide range of fraudulent conduct and false accounting. The government removed proposed money laundering offences from the latest draft, so these would remain under existing laws. The offence applies to organisations doing business in the UK, including overseas companies with UK connections.

There have been numerous changes to the scope, reflecting concerns raised during parliamentary debates. So the final impact still needs to be made clear. But a new failure to prevent fraud offences seems likely, representing a major expansion of corporate criminal liability for economic crime.

Assessing and Managing Risk

With new offences on the horizon, all large UK corporates should be assessing their risk exposure and developing plans to mitigate fraud and false accounting risks within their organisations.

Some key steps include:

• Evaluating the risk of fraud or false accounting occurring based on the company’s size, sector, business model and other factors. Financial institutions and professional services may face greater risks.
• Assessing if the company potentially falls within the scope of the new offence, including monitoring employee numbers, turnover and assets.
• Considering the magnitude of risk based on the potential for large fines and broader regulatory implications of prosecution.
• Reviewing whether the company has adequate resources to manage fraud risks across prevention, detection and response.
• Appointing compliance specialists if the company lacks capability in this area.
• Ensuring economic crime is part of the company’s overall risk management strategy overseen at senior executive and board levels.

Companies should undertake rigorous risk assessments to identify potential problem areas and priorities for action. Ongoing monitoring will also be required, given the evolving regulatory landscape.

Preventing Fraud and False Accounting

Developing and implementing ‘reasonable procedures’ to prevent economic crimes will be central to complying with the new laws and creating a defence for companies. Although formal guidance is pending, businesses can already be taking action in this area by:

• Delivering training to employees and agents on fraud risks, policies and their duties. Refresher training at regular intervals is advisable.
• Reviewing and updating codes of conduct, financial controls, and other policies to address fraud, bribery and related risks.
• Ensuring whistleblowing and other reporting mechanisms provide accessible and safe channels for staff to raise concerns. Appointing an independent compliance officer can aid this.
• Conducting periodic fraud risk assessments and adapting prevention procedures accordingly.
• Implementing robust onboarding and due diligence on new clients, suppliers and business partners to identify ‘red flags’.
• Overseeing high-risk areas such as procurement, expenses, payroll, revenue recognition and inventory management.
• Embedding a culture of compliance and zero-tolerance for economic crime throughout the company.

When guidance on ‘reasonable procedures’ emerges, companies should assess the adequacy of existing processes and make necessary improvements. Seeking input from legal counsel can help interpret policies against expected standards.

Detecting and Responding to Fraud

Alongside prevention, companies need strategies to detect fraud or false accounting within the organisation and respond effectively. Steps might include:

• Utilising data analytics, forensic accounting and audits to proactively identify wrongdoing through transaction monitoring and testing.
• Encouraging staff to report suspicions and protecting whistleblowers through confidential hotlines or anonymised reporting tools.
• Planning a rapid response if an issue emerges – appointing a core team, informing key stakeholders, and commencing investigations under legal privilege.
• Forensically preserving documents, data and other evidence relevant to suspected offences.
• Seeking external assistance from legal counsel, forensic accountants, IT specialists and communications experts.
• Updating policies as lessons are learned from each incident and periodically testing response plans through ‘dry runs’.

Maintaining robust detection capabilities and response plans will enable companies to take appropriate action if problems arise while minimising potential liabilities.

Ongoing Review and Preparation

With the Bill not yet finalised, the timeline uncertain and guidance pending, businesses should take action now and monitor developments closely. As the new laws crystallise, companies must refine their policies, procedures and risk management approach accordingly.

Seeking legal advice can help interpret the new laws, define ‘reasonable’ prevention steps and develop tailored compliance programs. Investment in skilled staff, monitoring tools and external support may be warranted to manage elevated fraud and false accounting risks.

Above all, large UK corporates should be putting in place the foundations to adapt to the changing regulatory landscape. While precise requirements remain fluid, the direction of travel is clear. Failure to prevent economic crime will become a new reality for big business in the UK.