Why does "Failure to Prevent Fraud" get all the limelight?

The most high-profile offence of the two is the new section 199 “Failure to Prevent Fraud” offence for large organisations which goes lives on 1 September. See my other posts about getting ready in this regard. 

However, many organisations are still unaware of the second of the two offences; an offence that has been in force since Boxing Day 2023. Under section 196 of ECCTA, organisations of any size can be guilty of the fraudulent acts of their Senior Managers.

What is the 'Senior Managers' offence?
The Senior Managers offence is a significant development in corporate liability. It applies to all corporate bodies (including companies, LLPs, charities and traditional partnerships), regardless of size, and holds them accountable for offences committed by senior managers within the scope of their authority. 

How does the offence work?
If a senior manager commits a relevant offence (of which there are 48 in Schedule 12 of the Act) within the actual or apparent scope of their authority, the organisation is also guilty of the offence. A “Senior Manager” is defined as anyone who plays a significant role in making decisions about the whole or a substantial part of the organisation's activities, or in actually managing or organising those activities. They do not need to hold the job title of “senior manager”. The definition will therefore not only capture those in management (such as directors/ board members), it will also capture partners and others in senior positions.

Examples of relevant offences include:

• False statements
• False accounting
• Offences under the Fraud Act 2006
• Offences under the Financial Services and Markets Act 2000
• Offences under the Proceeds of Crime Act 2002

As such, if someone in a position of authority (satisfying the definition of being a 'senior manager') commits one of the listed offences, the organisation will also therefore be guilty of the same offence.

The organisation could face prosecution, a criminal conviction and a corporate criminal record, fines, potential regulatory scrutiny and significant reputational damage.

Recommendations

Unlike the new Failure to Prevent Fraud offence (which technically only applies to the largest of organisations), there is no defence of having had 'reasonable fraud prevention measures' in place at the time the offence was committed. Organisations must therefore do what they can to ensure that the opportunity for fraudulent behaviour does not arise in the first place. They should therefore be proactive in assessing and reducing their fraud risk. Steps that can be taken to do so include:

• Conducting a thorough fraud risk audit
• Implementing clear anti-fraud policies and procedures
• Undertaking enhanced screening processes for new members of staff, for example, DBS checks and checking fraud databases
• Clearly identifying who the senior managers are and defining the scope of their authority
• Fostering a strong anti-fraud culture where fraud is not tolerated at any level

If you have undertaken an audit and ensured that you have “reasonable fraud prevention measures” in place for the Failure to Prevent Fraud offence (from 1 September onwards) then your organisation should be well placed to design out its section 196 risk.

The danger zone though is for organisations that do not meet the large organisation threshold. They are unlikely to have “reasonable fraud prevention measures” and they may well find themselves being the target or otherwise implicated in frauds as fraudulent behaviour is diverted away from large organisations. It is imperative that those organisations take some steps to protect themselves. Please do contact us to discuss what your organisation should be doing and how we can assist.