The law now includes an addition to the existing ‘failure to prevent’ offences to cover failure to prevent fraud committed by an employee on a company’s behalf.
This is a significant addition to the existing ‘workplace crimes’ such as employees failing to lodge HR1 forms for collective redundancies and breaching health and safety legislation. HR departments now need to ensure they are compliant with the new measures relating to fraud and economic crime by staff members within their company.
Reducing the risk of failing to prevent
The ECCTA allows that large organisations can face prosecution with a potential unlimited fine where an employee commits a fraud offence intended to benefit the organisation. For the purposes of the Act, a 'large organisation' is defined by meeting two of the three following conditions: a turnover of more than £36 million; a balance sheet of more than £18 million; and more than 250 employees.
HR teams need to ensure there are reasonable fraud prevention procedures in place. An organisation can be held liable for failure to prevent fraud even if it wasn’t aware of the employee’s activities. For example, if the person in question (any member within the company) concealed their activities from the employer.
However, with the right procedures in place to prevent this behaviour, the organisation has a complete defence and significantly less at risk of being held liable.
Read more: The new Failure to Prevent Fraud offence: the employer perspective
To avoid the risk of being held liable for fraudulent activity by employees on behalf of the organisation, HR teams should consider whether the fraud preventative procedures they currently have in place are likely to comply with the ECCTA, or whether there is more that could be done. The government will issue guidance in the next couple of months on what they expect reasonable procedures to be before the offence comes into force.
However, HR teams can get ahead of the game now by carrying out assessments of the risk of fraud benefiting the company. While we can’t know for sure, failure to prevent fraud may (partly or largely) reflect the existing guidance for the almost identical failure to prevent bribery and tax evasion facilitation offences.
Crucially, pre-emptive assessments of fraud preventative procedures should not be limited to just financial functions, if there are broader risks. Fraud benefiting the company can also cover dishonest sales and trading practices that hide information from consumers and investors (e.g. greenwashing), as well as dishonest practices in financial markets.
Expanding the definition of economic crime by senior managers
The ECCTA has also expanded the identification principle to include senior managers. This means it is easier for law enforcement to attribute responsibility and prosecute companies for economic crimes committed by its senior managers.
Read more: Theft by employees rises as cost of living bites
Behaviours listed under ‘economic crime’ include money laundering, bribery, tax evasion, sanctions violations and terrorist financing offences. The offence applies to companies of all sizes, and there is no reasonable procedures defence for HR teams or the company as a whole to rely on in this instance. The safety net instead comes in the form of an economic crime compliance programme.
Coordination between HR, compliance and internal communications teams is needed to convey full messaging, guidance and training to employees, reminding them of their obligations to their employer, the severity of economic crime, as well as advice on using whistleblowing systems to report wrongdoings (and actively encouraging this).
Additional onus falls on the HR team to equip all employees – senior managers in particular – with correct understanding and tools to mitigate the risk of anyone committing an economic crime offence.
By Ben Cooper, partner in national law firm TLT’s economic crime compliance team
