“It will never happen to me”, is a phrase we often hear when it comes to fraud. Yet, in reality, fraud is the most predominant criminal offence in the UK. A recent Parliamentary report stated that fraud accounts for 40% of all reported crimes in the period ending September 2022. More worrying is that this 40% figure only accounts for reported crimes, what about the fraud crimes that are not reported.
Fraud is any behaviour by which a person intends to gain a dishonest advantage over another, usually a financial advantage. Corporate fraud refers to those cases in the workplace in which an individual, company or organisation is the victim, or worse, the perpetrator.
Fraud in the workplace
Fraudulent activities in the workplace can be in various forms, including deceitful sales practices, false accounting and manipulation of financial statements, concealment of vital information from consumers or investors, bribery and corruption, asset misappropriation and misconduct within financial markets.
It is often said that “fraud is a victimless crime”, I wholeheartedly disagree. Fraud costs billions of pounds in damage to organisations and individuals each year. Additionally, fraud can dramatically affect the quality of life of its victims as well as the employees of its victims. This will often result in job losses, the loss of savings and investments, weakened trust in organisations and a significant strain on resources.
Anti-fraud professionals at the Association of Certified Fraud Examiners (ACFE) estimate that the typical organisation loses 5% of its revenue annually to fraud. Think for a minute about your organisation. How will the loss of those funds affect you? Fewer pay rises, potential layoffs, greater pressure to increase revenue or cut costs, or decreases in employee benefits. Fraud will also affect an organisation’s reputation with its Customers, and potentially lose them to competitors.
Are there penalties that are in place? The UK Fraud Act 2006 covered a wide range of criminal activities, including fraud by false representation, fraud by failing to disclose information, fraud by abuse of position, use of deception to obtain services, money or property.
Yet, the maximum sentence for committing fraud under the Fraud Act, was 10 years in prison and, or an unlimited fine. However, most fraudsters realistically only serve 2 to 7 years imprisonment if they orchestrated a complex fraud, and those who participate tend to get 12 to 18 months community based sentences for their involvement.
Is that enough? I don’t think so, and certainly does not send a strong deterrent message to fraudsters, compared to a maximum life sentence for armed robbery for example.
New “Failure to Prevent Fraud” offence
However, 17 years on from the UK’s Fraud Act, the UK Government has made significant changes to the UK’s economic crime and fraud regime. This includes a new “failure to prevent fraud” offence for large organisations and a widening of corporate criminal liability for economic crimes committed by senior employees and management. The new Economic Crime and Corporate Transparency Act (ECCT Act) is now in force and introduces a number of changes to how the UK tackles economic crime.
The ECCT Act will serve to safeguard victims, including organisations, and combat financial crime and fraud by promoting a cultural transformation towards enhanced fraud prevention procedures within organisations.
One of the key objectives for this new ECCT Act is to minimise fraud against individuals, organisations and SME businesses who are often unknowingly the victims of fraud by other organisations. The key introduction of the “failure to prevent fraud” offence, intends to hold organisations accountable for any gains derived from fraudulent acts committed by their employees, by penalising and prosecuting organisations that consistently undertake fraudulent behaviour.
Under this new “failure to prevent fraud” offence, an organisation will be liable if fraud is committed by an employee or contractor, for the organisation’s benefit; and if the organisation failed to implement reasonable fraud prevention measures.
The “failure to prevent fraud” offence is applicable across all sectors. However, the ECCT Act is only currently limiting the offence to large organisations that meet two out of three of the following criteria:
- have more than 250 employees
- generate a turnover of more than £36 million
- and possess total assets exceeding £18 million.
The Courts will decide the appropriate level of punishment, which is likely to be an unlimited fine against the organisation for “failing to prevent fraud”. Individual fraudsters within the organisation will still face prosecution and prison sentences, but senior management and company officers will not face direct prosecution if they did not know the offence was happening.
Organisations will avoid prosecution if they have “reasonable procedures” in place to prevent fraud. The Government have yet to publish more information about reasonable procedures, but these will be published before the new offence comes into force.
By incentivising organisations to establish or enhance their fraud prevention procedures, this “failure to prevent fraud” offence will foster a significant shift in corporate culture, ultimately contributing to a reduction in fraudulent activities.
How to implement fraud prevention measures
It is not a new phenomenon to include anti-fraud measures in risk management frameworks; however, organisations will now need to revisit and implement specific fraud prevention strategies that are appropriate and designed into all areas of the organisation.
To help prevent, detect and mitigate fraud exposure, as well as helping organisations meet the new “failure to prevent fraud” offence, our advice is to start with the following prevention reviews:
- Design, develop and implement written fraud policies and procedures to promote consistency and mutual understanding between the organisation and stakeholders.
- Conduct security audits across the organisation to review, identify and assess known and unknown fraud risks.
- Develop and monitor the procurement regime of supply chains and their compliance to fraud policies.
- Examine whether corruption schemes exist within an organisation, procurement functions and supply chains.
- Review existing contractual terms with employees, clients and supply chains to ensure compliance with anti-bribery legislation and “adequate procedures” requirements.
- Provide new and updated background checks on all employees, including senior hires and external contractors.
- Identify behavioural red flags displayed by fraud perpetrators.
If you need help with implementing an anti-fraud framework, we can help guide you through the process. Implementing effective fraud prevention procedures is not only ethically sound, but it is also beneficial for the anti-fraud culture across all organisations.
Do you have a suspicion of fraud in the workplace?
The detection of corporate fraud usually arises from an internal audit finding, anonymous tip off, suspicion, complaint, whistle-blower or allegation. In our experience, suspicions of fraud are normally well founded, irrespective of the source.
Contact us immediately if you have a suspicion of fraud, and we will help you set out clear objectives in an investigation plan, and:
- determine the finer details of the suspected fraud, look to identify those involved and understand the mechanics of the fraud
- perform thorough investigations, both in the interest of the victim and to clear innocent people under suspicion
- identify and recover assets lost to fraud and prevent further losses
- provide accurate evidence to help establish proof of loss, guilt and personal gain
- review and implement measures to prevent fraud from occurring again
Whatever the investigation, each case must begin with the intention and preparation that it could end in litigation.