‘Failure to Prevent Fraud’ rules unlikely to greatly impact fraud levels

Most will agree that preventing fraud is crucial, especially when its investigation and successful prosecution is complex, expensive and requires huge investment in, and commitment to, creating a criminal justice system that is fit for purpose – all lacking in successive governments.

Section 199 of the Economic Crime and Corporate Transparency Act 2023 is in force from 1st September. It criminalises ‘large’ businesses if a person ‘associated’ with the company (such as an employee) commits a fraud offence, or one of the other fraud-type offences set out in Schedule 13 of the Act, intending to benefit that organisation or another person to whom they provide services on behalf of the company. The company would not be liable if it is or is intended to be a victim of the base fraud offence, if it has reasonable prevention procedures in place, or it is reasonable in all the circumstances for it to not to have such procedures.So, another offence which, effectively, criminalises compliance failures. But the ‘failure to prevent’ provisions in this Act do not represent the seismic shift in the landscape of corporate criminal liability and wider anti-fraud policy which some have spoken of, albeit they are a useful reminder to the ‘large businesses’ captured by the legislation that they must embed an anti-fraud culture in their organisation and do what they can to prevent fraud and the other offences in Schedule 13 of the Act.

Some figures: at the start of 2024, there were approximately 5.499 million private sector businesses in the UK. Of these, 5.491 million had fewer than 250 employees. Approximately 8,250, so less than 0.2% of the total, were ’large’ businesses with 250+ employees.
Employee numbers are just one of the criteria which would bring a business into the scope of s.199, although government statistics suggest that businesses which have fewer than 250 employees are, in any event, unlikely to meet the other two criteria, thereby rendering them liable under s. 199. The extraterritorial reach of the Act complicates the analysis still further – and, of course, the change to the identification principle (a more significant provision of the Act) has made it easier to prosecute all companies for substantive fraud offences by broadening the identification principle, allowing the attribution of relevant criminal conduct by ‘senior managers’ to their company. These points notwithstanding, the s.199 offence has a very narrow ambit – narrower than the similar ‘failure to prevent’ provisions in s.7 of the Bribery Act, despite, arguably, fraud being a more significant and present threat – after all, fraud accounts for an estimated 41% of all crime in England and Wales, with 1 in 15 adults the victims of fraud in the year ending December 2022.

So, is the new offence merely performative when it comes to fraud reduction? There is a temptation to regard it as such. Most of the limited number of businesses in scope will have relevant procedures already, albeit perhaps not coherently structured, and over 40,000 firms are regulated by the FCA which requires compliance with the anti-financial crime provisions of the Handbook – a good starting point for asserting a defence to an allegation under s.199. And the NCA has identified investment fraud, romance fraud, courier fraud and payment diversion fraud as ‘priority frauds’. Although, of course, these may be enabled by in-scope companies through compliance failures, the typology of this form of criminality and its perpetrators need different approaches from law enforcement with disruption rather than prosecution often the most realistic option.

The ‘failure to prevent’ offence may drive an anti-fraud corporate culture in large companies, trickling down to smaller businesses (as envisaged in the Act’s Home Office impact assessment), but whether further criminalising of compliance failures will be effective in reducing fraud is doubtful. There are other, more relevant initiatives which seem more promising. Two examples: the City of London Police’s ‘National Policing Strategy For Fraud, Economic and Cyber Crime 2023-2028’, published after the Economic Crime and Corporate Transparency Bill was introduced to Parliament, sets out a comprehensive plan for tackling fraud, with a target of reducing the number of frauds to the 2019 level of 3.33 million, with a particular focus on helping victims. It does not mention the forthcoming legislation. Second, fraud is now included in the Strategic Policing Requirement – unlocking some limited funding and providing a national policing focus.

When placed in the context of these interventions, the s.199 offence has played a disproportionate part in the anti-fraud discourse of the last few years and will have only a small presence in the overall anti-fraud landscape, where the vast majority of victims sustain often relatively small losses from organised crime groups and criminals which devastate their lives. The key compliance component of the legislation has the advantage of its costs being met by the private sector, but to tackle fraud on anything like the scale needed, particularly if law enforcement is to make use of the change in the identification principle to prosecute companies, a very significant increase in public funding in the criminal justice system as a whole is required.

This article was written by Stephen Gentle and first published in the FT adviser of 1st September 2025.