New proposals mean SME bosses may be liable for employee fraud

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The Ministry of Justice intends to introduce new corporate criminal offences addressing failure to prevent economic crime. This heralds a significant expansion in the potential for criminal liability for companies. Rachel Adamson, Head of Regulatory Law at Stephensons considers the proposals and their impact on businesses and business leaders.

A consultation has been launched to look at introducing corporate liability where companies failing to prevent offences such as fraud, theft, money laundering and offences under the Financial Services and Markets Act 2000, by their employees. The government originally announced its intention in May 2016 with the consultation expected shortly after. However, delays meant that the consultation was ultimately launched on 13 January this year and is due to close on 24 March.

While the reach of any legislation on this matter is not yet known, measures are likely to target any offence that could be deemed ‘economic crime’.

This development in respect of economic crime is an interesting resurrection of a proposal that was quietly shelved in September 2015. It seems that the current political climate and the interest in anti-corruption has fuelled the government’s desire to reconsider these issues.

Many SMEs will be concerned by the changes, principally because under existing law, for a prosecution to be successful, it must be demonstrated that senior members of the company or corporation had some involvement – or at least awareness – of the illegal activity. This was known as the ‘directing mind’ test. This requirement is likely to be removed if these proposals are brought in and businesses will be considered to be strictly liable.

Any new offences are likely to mirror those contained in the Bribery Act 2010 – offences where there is a positive duty on companies to have robust procedures and policies in place to prevent corruption. It is anticipated that now companies, corporations and any other relevant body will be required to ensure that it has policies and procedures in place to prevent any person or legal body associated with the company committing economic crime. This could be employees or contractors.

SMEs need to be aware of the huge burden this will place on them. Some of the more pressing issues include:

· The financial burden of conducting detailed risk assessments.

· The financial burden of taking advice on and producing policies and procedures which will be necessary to defend any allegation of corporate failure to prevent fraud.

· The concern that the criminal activity is likely to include crimes committed anywhere in the world – not just in the UK.

· The financial burden of monitoring compliance by all persons associated with the company – including employees, contractors, agents and subsidiaries.

· The financial burden of training and due diligence in respect of these policies and procedures.

The increasing regulatory burdens being placed on businesses, coupled with the threat of a hugely increased chance of being found criminally liable mean that it is ever more important for businesses to protect themselves from the outset. It is increasingly likely that specific insurance such as ‘Directors and Officers’ policies will be required to provide vital financial support and cover against legal costs if a company is forced to defend any allegations of this nature.

In my view, the fact this consultation has now been launched – in spite of the delay – can only mean that the government is determined to introduce these changes sooner rather than later. The potential for loss – both financial and reputational – is significant and I would anticipate that a company could receive an unlimited fine if they are convicted of this type of offence.

Businesses would be well advised to start preparing now and protecting themselves.

https://www.stephensons.co.uk/site/individuals/serious_fraud/serious_fraud_overview/