The ‘Economic Crime and Corporate Transparency Act 2023, passed in the UK, contains a new corporate criminal offence of “failure to prevent fraud” which will make large companies liable for fraud committed by their associates.

Specifically, this new offense is contained in section 199 of the Act, which makes companies liable if they have failed to prevent misconduct by one of their employees, or “associated person”, as the Act puts it. Thus, it is no longer sufficient for a company to claim complete ignorance of wrongdoing by one of its employees, and its only defense is to certify that it has a compliance procedure in place to detect and seek to prevent any misconduct.

In this way, the UK government strengthens the penalties for companies’ failure to comply with the duty to commit fraud by meeting three requirements:

– Have more than 250 employees

– Turnover of more than GBP 36 million

– Turnover of more than GBP 18 million in total assets.

The Act clarifies that this offense would apply to a parent company if the group led by the parent company meets two or more of the above criteria.

Among the unlawful acts criminalised under this new offense are fraud by non-disclosure or abuse of position, participation in a fraudulent business, false accounting, fraudulent trading, tax fraud, among others.

In turn, a company could be fined if it failed to prevent unlawful behaviour by an employee with the intention of benefiting the company or its customers.

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‘Associated Person’ Under ‘Failure to Prevent’ Fraud

The Act defines the legal concept “associated person”, referring to the employee who commits the offence and that the company is liable in relation to this offence for not having put in place the right procedure to detect and prevent unlawful acts within its office. This would be failure to prevent’ fraud.

-An employee, agent or subsidiary of the company concerned.

-An employee of a subsidiary.

-A professional performing services for or on behalf of the company.

The factor that truly makes a company liable for an offense committed by a “associated person” with it is that the ultimate purpose of the wrongdoing is for the benefit of the company or its customers, although it may also apply where there is an indirect benefit.

Also, this offense can be committed abroad, as long as an “if an employee commits fraud under UK Act, or targeting UK victims, the employer could be prosecuted, even if the organisation (and the employee) is based overseas,” according to the aforementioned act.

Another aspect to be considered under the protection of this new offense are cases where the company is the victim of fraud, exempting it from liability if the fraud is intended to benefit another company or person other than the company itself.