Blogs

13th March 2025

Understanding the New Failure to Prevent Fraud Legislation

In the evolving landscape of corporate responsibility, the UK government has introduced new legislation aimed at tackling fraud at the organisational level. The Failure to Prevent Fraud legislation, set to come into effect in 2025, has significant implications for businesses of all sizes. With this new law, companies must proactively ensure they have robust systems in place to prevent fraud or face serious legal consequences.

This post will delve into the details of the new legislation, its potential impact on businesses, and what steps organisations need to take to comply with the law.





What is the Failure to Prevent Fraud Legislation?

The Failure to Prevent Fraud legislation, introduced as part of the Economic Crime and Corporate Transparency Bill, aims to hold businesses accountable for failing to prevent fraud committed by their employees or associated persons (such as contractors, suppliers, or agents). This new law follows the model of similar anti-bribery laws, where companies can be prosecuted if they fail to take adequate steps to prevent crimes like bribery or fraud within their operations.
Under this legislation, businesses will be required to prove they have implemented reasonable prevention procedures to avoid fraud. If a fraud is committed in connection with the business, and the company cannot demonstrate that adequate measures were in place to prevent it, the business could face criminal liability.
 

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Why Is This Legislation Important?

The UK is one of the world's largest economies and home to numerous financial institutions and multinational corporations. However, despite the country's significant role in the global economy, the fight against fraud has remained challenging. Fraud is a major issue, costing businesses billions of pounds each year.

This legislation marks a key shift in how fraud will be tackled. Rather than focusing solely on individual perpetrators, it places responsibility on the businesses themselves to ensure that adequate systems, policies, and processes are in place to prevent fraudulent activities.
 

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Who Will the New Legislation Apply To?

The new fraud prevention law applies to any corporate body or partnership in the UK, including private companies, public companies, and other organisations that have a corporate structure. While smaller businesses might feel the impact less directly, even smaller companies that have operations involving third parties or deal with larger corporations will need to ensure they comply.

The key here is whether a fraud is committed in connection with the business. This broad definition could encompass a wide range of activities, from simple misappropriations of funds to more complex fraudulent schemes involving international partners.
 

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What Does a Business Need to Do to Comply?

To avoid prosecution under the Failure to Prevent Fraud legislation, businesses need to demonstrate they have implemented reasonable and effective procedures to prevent fraud. Here are some key measures businesses should take to comply:

1.    Establish Clear Anti-Fraud Policies
Businesses must develop and implement comprehensive anti-fraud policies. These should outline the types of fraud that are unacceptable, and the steps employees should take if they suspect fraudulent activity.

2.    Training and Awareness Programs
All employees, particularly those in high-risk areas such as finance or procurement, should undergo regular training on identifying and preventing fraud. Raising awareness across the organisation about fraud risks and the company's policies is crucial.

3.    Due Diligence on Third Parties
Businesses should undertake thorough due diligence on contractors, suppliers, and other third-party partners to ensure they do not have a history of fraudulent activity. This also includes monitoring their ongoing activities.

4.    Whistleblowing Mechanisms
Implementing clear whistleblowing procedures is essential. Employees and external parties should feel confident that they can report suspected fraud without fear of retaliation.

5.    Regular Audits and Monitoring
Continuous monitoring of transactions, audits, and other financial activities can help identify suspicious behaviour before it becomes a significant issue. Businesses should also review and update their fraud prevention measures regularly to stay ahead of emerging threats.

6.    Create a Culture of Integrity
Fostering a corporate culture where integrity is valued and upheld at every level of the organisation can significantly reduce the risk of fraudulent activity. Leaders should lead by example and promote ethical behaviour within their teams.
 

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What Are the Penalties for Non-Compliance?

The penalties for failing to prevent fraud can be severe. Companies found guilty of breaching the law could face unlimited fines, damage to their reputation, and even the risk of criminal prosecution. For individuals within the business, senior managers could be held personally accountable if they are found to have been negligent in preventing fraud.
 
The Failure to Prevent Fraud legislation in the UK will apply to a wide range of businesses, but specifically, it targets corporate entities. Here’s a breakdown of which companies are eligible (or more accurately, which businesses are within the scope of this legislation):

1. Companies Incorporated in the UK

This legislation primarily applies to companies that are incorporated in the UK, including:
•    Private limited companies (Ltd)
•    Public limited companies (PLC)
•    Limited liability partnerships (LLP)
These businesses are considered corporate bodies and are subject to the Failure to Prevent Fraud law if a fraud is committed by someone acting on behalf of the company (like an employee, director, or associated third party).

2. Foreign Companies with a UK Presence

Foreign companies that have a UK branch or place of business will also be subject to the legislation. This means if a business operates in the UK, even if it's headquartered abroad, they will need to ensure they have adequate fraud prevention measures in place for their UK operations.

3. Large Businesses
While the law applies to all corporate bodies, larger businesses with significant financial resources or widespread operations may face more scrutiny. These businesses are more likely to come under the spotlight due to the complexity of their operations and the volume of third-party transactions. Companies that are considered large, especially those listed on the London Stock Exchange, will need to demonstrate rigorous anti-fraud measures.

4. Small and Medium-Sized Enterprises (SMEs)
The legislation also applies to small and medium-sized enterprises (SMEs), although these businesses may face fewer resources and challenges in implementing fraud prevention procedures. Despite this, SMEs will need to comply if fraud is committed within their operations.

5. Partnerships
Partnerships in the UK, including limited partnerships and limited liability partnerships (LLPs), are also within the scope of the legislation. If fraud occurs in the course of business by someone acting for the partnership, the partnership itself could be held liable if it fails to prevent the fraud.

6. Charities and Non-Profit Organisations
Though the primary focus is on for-profit corporations, some charities and non-profit organisations that are incorporated and are subject to corporate law may also be affected. These organisations are expected to have systems in place to prevent fraud, particularly as they often deal with public funds or donations.
 

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Exemptions:

While the legislation applies broadly, it does not apply to sole traders or unincorporated businesses. The key distinction is whether the entity is a corporate body, as that’s the type of organisation that can be held liable under the law.
 
Conclusion

In essence, any corporate entity operating in the UK, whether a UK-incorporated company, a foreign company with a UK presence, or an LLP, is eligible to be affected by the Failure to Prevent Fraud legislation. Regardless of company size or industry, businesses must ensure they have adequate fraud prevention systems in place to comply with the law. Non-compliance could result in significant legal and financial consequences.

The Failure to Prevent Fraud legislation introduces a new era of accountability for businesses in the UK. Companies must now prioritise fraud prevention in their risk management strategies to avoid hefty fines and reputational damage. By taking proactive steps to implement effective anti-fraud measures, organisations can safeguard their operations and ensure compliance with this important new law.

Now is the time for businesses to assess their current fraud prevention strategies and take the necessary steps to strengthen them. Failing to do so could result in severe consequences down the line.