Legislation

5th March 2025

The Failure to Prevent Fraud Legislation: What It Means for UK Businesses

In the ever-evolving landscape of corporate responsibility, one significant legislative development has captured the attention of businesses across the UK: the Failure to Prevent Fraud (FPP) legislation.
Introduced as part of the Economic Crime (Transparency and Enforcement) Act 2022, this law aims to tighten the UK's response to corporate fraud, making it clear that organisations will now face severe consequences if they fail to prevent fraudulent activity within their operations.

 

Understanding the Failure to Prevent Fraud Legislation

At its core, the Failure to Prevent Fraud provision holds businesses accountable for not taking adequate steps to prevent fraud committed by employees, agents, or contractors during the course of their business.
This is akin to the Failure to Prevent Bribery offence under the Bribery Act 2010, which set a precedent for corporate criminal liability in the UK.

Under the new legislation, companies will be required to demonstrate that they have robust systems and controls in place to identify, prevent, and address fraud. If fraud occurs, the company could face prosecution unless it can prove that it took reasonable steps to prevent the illegal activity.

Key Points of the Legislation

1.    Corporate Responsibility: Businesses are now legally responsible for preventing fraud, regardless of whether the fraud was committed by senior employees or third-party contractors. It is not enough to claim ignorance.

2.    Reasonable Procedures: Companies must implement measures to prevent fraud, such as clear anti-fraud policies, internal training, monitoring systems, and effective reporting mechanisms. If the business can prove it had reasonable procedures in place, it can defend itself against charges.

3.    Penalties for Non-Compliance: A company found guilty of failing to prevent fraud could face severe financial penalties. This could include large fines, potential disqualification of directors, and reputational damage that could affect customer trust and market value.

4.    Scope of Fraud: The legislation covers a wide range of fraudulent activities, including false accounting, procurement fraud, misrepresentation, and financial crimes involving false claims or overbilling.

Fines and Penalties
Under the new legislation, businesses found guilty of failing to prevent fraud could face hefty fines. The potential penalties for non-compliance include:

•    Unlimited Financial Penalties: While a fine’s amount will vary depending on the severity of the case, it could be substantial. In serious cases, businesses could face unlimited fines, which could result in significant financial losses.
•    Director Disqualification: In some instances, individual directors may be disqualified from holding positions in any company for a period of up to 15 years. This provision aims to ensure that those at the top of the organisation take fraud prevention seriously.
•    Reputational Damage: Beyond financial penalties, organisations found guilty of failing to prevent fraud risk serious damage to their public image. This could impact customer trust, shareholder value, and long-term business relationships.

Why the Legislation Matters

Fraud continues to be a significant issue for businesses worldwide. According to the UK Government’s National Fraud Authority (2020), fraud costs the UK economy approximately £190 billion per year. A major portion of this comes from corporate fraud. The UK government has recognised that the old regulatory frameworks were insufficient in addressing the widespread issue, and the Failure to Prevent Fraud legislation is a critical part of the solution.

For businesses, the new law provides both a challenge and an opportunity. While there are risks involved, the legislation also offers the chance to improve internal controls, enhance corporate governance, and foster a culture of transparency and accountability. Companies that embrace these changes proactively may find themselves better equipped to combat fraud and emerge as leaders in corporate responsibility.

How Can Businesses Prepare?

The implementation of reasonable procedures to prevent fraud is now a legal requirement. To avoid falling foul of the new laws, companies should consider the following steps:
1.    Review Internal Controls: Regularly audit financial and operational processes to identify vulnerabilities where fraud could occur. Implement stronger systems and checks to prevent such activities.

2.    Develop an Anti-Fraud Strategy: Establish clear anti-fraud policies and communicate them effectively across the organisation. Include training programmes for employees, suppliers, and contractors on recognising fraud and the importance of ethical behaviour.

3.    Designate an Oversight Body: Appoint a dedicated team or individual responsible for monitoring and managing fraud prevention efforts. This person or group should report directly to senior management.

4.    Whistleblowing Mechanisms: Strengthen mechanisms for employees to report fraudulent activities anonymously without fear of retaliation. An effective whistleblower system can act as an early warning system for potential fraud.

5.    Conduct Due Diligence: Before entering into partnerships or contracts, ensure that proper due diligence procedures are in place. This includes checking the financial health and integrity of third parties.

6.    Regularly Update Policies: As fraud schemes evolve, so too must a company’s prevention policies. Regularly update and adapt the fraud prevention framework to remain effective against emerging threats.

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Conclusion

The Failure to Prevent Fraud legislation is a major shift in corporate accountability in the UK. Businesses must recognise that prevention is better than prosecution, and by taking proactive steps to implement strong anti-fraud measures, they can mitigate the risk of significant financial and reputational damage.

The consequences for failing to comply are severe, but the opportunity to build a more robust, fraud-resistant business can provide long-term benefits that far outweigh the initial investment in compliance.

For UK companies, the message is clear: fraud prevention is no longer optional. Companies must take action now to protect their reputation, avoid hefty penalties, and ensure a secure future