Failure to prevent fraud offence: why compliance is key

Today’s compliance environment is complex, ever-changing and imposes on business the burden of responsibility for good governance, compliance with the law and high standards of business conduct. In the absence of these, companies may be at risk of criminal liability and at worst could be found automatically guilty of certain criminal offences.

Minister of State for Security, Tom Tugendhat, confirmed that a failure to prevent fraud offence is to be introduced into UK law. This will expand the current offence which only encompasses bribery and the facilitation of tax evasion. If introduced, this will place a greater onus on companies to ensure they comply with the rules and may also see more severe fines for those who don’t. Coupled with the numerous companies who have seen their CEO accused of fraudulent behaviour, e.g. FTX and Wirecard, it has never been more important for companies to show compliance in all areas of the business.

What are the risk areas?

Bribery, tax evasion, competition/cartels, modern slavery and (soon to come into law) fraud are the main risk areas in terms of risk of criminal liability for both individuals and business. To mitigate the commercial entity risk, any business in the UK must have in place “adequate procedures” to best avoid each of these areas of criminal liability. The impact of such a criminal offence/conviction on a company can be catastrophic – reputational damage, loss of clients, debarment from public contracts and ultimately putting at risk the business’ very existence.

The risks are variable according to a number of factors including sector and jurisdictional reach. If you work in a high-risk sector such as oil and gas, infrastructure and construction, international manufacturing or defence, this is something that you will almost certainly need to address, but the risks can apply across all sectors, depending on factors such as supply chains, use of agents, jurisdictional presence and nature of the work staff are required to do.

Furthermore, if your business has gone through a period of exponential growth, it is likely that whatever systems you had in place to manage conduct, payments, contracts, procurement, bidding, business partners etc. when it was a small enterprise are likely not to be sufficient for the larger business it will have become.

Having a compliance programme which has been independently assessed and verified by a specialist is likely to provide the best protection for your business, should it become associated with any one act of suspected wrongdoing by a member of staff or other individual associated with the business. On a more positive note, having a verifiably high standard of compliance in your business is likely to attract the big, higher-profile clients and customers your business has in its sights. A compliance programme is not only a necessity for legal purposes; it is also a shrewd business decision.

What is a compliance audit?

An audit process would review the existing policies, procedures and systems that a business has in place at present. This would be followed with a gap analysis as to where the programme should be in order to be compliant with all applicable UK (and potentially some overseas) law. The benefits include suitable policies drafted, procedures and guidance updated and the drafting of model clauses to be included in all relevant agreements. Businesses may also request training so that all relevant staff are aware of the law, the risks and the red flags and so can guard against them.

Typically, the exercise follows these steps:

1. Delivery of a tailored questionnaire to ask questions about your current compliance programme
2. Review of responses and any current policies
3. Interviews of staff
4. Gap analysis report and recommendations
5. Drafting of required policies including potentially an overriding Code of Ethics and model clauses
6. Drafting of tailored training and delivery of the same.

Any compliance audit should cover subjects relating to criminal liability risk:

• Anti-bribery/corruption (ABC)
• Tax evasion
• Fraud
• Sanctions,
• Modern slavery

Competition/cartels and anti money laundering (AML).

If you have questions or would like further information about compliance audits for your business, please contact Claire Shaw.