Duty to Prevent Fraud – A Practical Guide

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Failing to Prevent Fraud: A New Corporate Offence Under the Economic Crime and Corporate Transparency Act 2023

The Economic Crime and Corporate Transparency Act 2023 introduces a landmark shift in how organisations are held accountable for financial wrongdoing. Among its provisions is a new corporate offence: failing to prevent fraud. This offence reflects growing recognition that companies must take active responsibility for the conduct of those working on their behalf, rather than simply reacting once misconduct comes to light.

To fully understand the implications, it is useful to contrast this new offence with the existing offences under the Fraud Act 2006 and the corporate duty to prevent bribery under the Bribery Act 2010.

The New Offence: Failing to Prevent Fraud

Under the new legislation, an organisation commits an offence if:

• A person associated with it commits a specified fraud offence,
• With intent to benefit the organisation, or a client it provides services to,
• And the organisation failed to put in place “reasonable procedures” to prevent such fraud.

Crucially, liability arises even if senior management was unaware of the wrongdoing. This offence shifts the burden onto businesses to show they had adequate safeguards, training, and oversight in place.

The defence available is similar to that in bribery legislation: if an organisation can demonstrate it had reasonable procedures to prevent fraud, it may avoid conviction. Guidance from government is expected to clarify what constitutes “reasonable” in different contexts.

Duty to Prevent Fraud and the Fraud Act 2006

The Fraud Act 2006 focuses primarily on individual conduct. It sets out three specific offence:

• Fraud by false representation,
• Fraud by failing to disclose information,
• Fraud by abuse of position.

Prosecutions under the Fraud Act generally target individuals rather than organisations. To hold a company criminally liable under this Act, prosecutors often had to prove that senior managers were directly involved in, or aware of, the fraud—something difficult to establish in large, complex firms.

By contrast, the new duty to prevent fraud removes the need to demonstrate complicity at board level. It acknowledges that fraud may be committed by middle managers, employees, or contractors in ways that still benefit the company, and places a duty on organisations themselves to create environments hostile to fraudulent conduct.

Comparisons With the Duty to Prevent Bribery

The new offence is closely modelled on the “failure to prevent bribery” offence in the Bribery Act 2010. Both laws are built on the principle that organisations should be proactive in preventing wrongdoing.

Key similarities include:

• Liability triggered by acts of associated persons (employees, agents, subsidiaries, or contractors).
• A statutory defence of having “adequate” or “reasonable” procedures in place.
• An emphasis on organisational culture, training, and monitoring.

The main difference lies in scope: bribery is narrower and easier to define, while fraud encompasses a wide range of behaviours. This makes compliance more complex. Preventing fraud requires organisations to address everything from false invoicing and procurement manipulation to investment misrepresentation and fraudulent claims.

Why This Matters for Organisations

The introduction of this offence is a clear signal: regulators and law enforcement expect businesses to play an active role in tackling economic crime. Compliance will not be optional. Organisations must:

• Conduct fraud risk assessments tailored to their sector and activities.
• Implement reasonable prevention procedures, which may include staff training, due diligence on third parties, whistleblowing hotlines, and continuous monitoring.
• Demonstrate to regulators and courts that anti-fraud measures are living practices, not box-ticking exercises.

The consequences of failing to prepare could be severe—financial penalties, reputational damage, and loss of public trust.

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Checklist: Preventing Fraud

Here’s a practical checklist of reasonable procedures businesses can adopt to demonstrate compliance with the new failure to prevent fraud offence under the Economic Crime and Corporate Transparency Act 2023:

1. Risk Assessment

• Conduct thorough fraud risk assessments tailored to your sector and operations.
• Review risks at least annually and after any major change (e.g., mergers, new markets, or regulatory shifts).
• Document outcomes and mitigation strategies.

2. Policies and Procedures

• Establish a clear anti-fraud policy that sets zero tolerance expectations.
• Embed fraud prevention into procurement, finance, HR, and client onboarding processes.
• Ensure procedures cover third parties such as contractors, intermediaries, and subsidiaries.

3. Leadership and Governance

• Assign senior management responsibility for fraud prevention.
• Regularly brief the board or audit committee on fraud risks and mitigation.
• Create a culture where ethical conduct is valued and reinforced.

4. Training and Awareness

• Provide mandatory training on recognising and preventing fraud.
• Tailor training for high-risk roles (finance, procurement, sales).
• Reinforce awareness with regular updates, campaigns, and practical scenarios.

5. Due Diligence

• Carry out proportionate due diligence on third parties, particularly high-value or high-risk relationships.
• Verify suppliers, contractors, and business partners through background checks.
• Monitor ongoing relationships for red flags (e.g., unusual payments, conflicts of interest).

6. Whistleblowing and Reporting Channels

• Provide safe, anonymous channels for employees and third parties to report concerns.
• Publicise these channels widely and make them easy to use.
• Ensure reports are investigated promptly, confidentially, and impartially.

7. Monitoring and Review

• Use data analytics and audit processes to detect anomalies and suspicious activity.
• Conduct regular internal audits of high-risk functions.
• Test controls through mystery shopping, spot checks, or forensic audits.

8. Incident Response Plan

• Define clear procedures for responding to suspected fraud.
• Ensure responsibilities for investigation, reporting, and escalation are assigned.
• Learn from incidents by updating controls and training.

9. Record-Keeping

• Maintain detailed records of risk assessments, training, due diligence, and investigations.
• Ensure documentation demonstrates active fraud prevention, not just paper compliance.

10. Continuous Improvement

• Benchmark against industry standards and regulatory guidance.
• Adapt to emerging fraud typologies (e.g., cyber-enabled fraud, invoice manipulation).
• Treat fraud prevention as a dynamic process, not a one-off exercise.

Tip: Documenting these measures is as important as implementing them. Courts and regulators will expect tangible evidence that procedures are both reasonable and effective in practice.

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Conclusion: The Duty to Prevent Fraud

The failure to prevent fraud offence fills a longstanding gap in corporate liability. Where the Fraud Act 2006 focused on individuals and the Bribery Act 2010 established a duty to prevent corruption, the Economic Crime and Corporate Transparency Act 2023 ensures that organisations cannot turn a blind eye to fraudulent behaviour carried out in their name.

This development raises the compliance bar across all sectors. Businesses that embrace the change will not only avoid liability but also build resilience, trust, and long-term integrity in an era where economic crime is under intense scrutiny.