Britain strengthens fraud prevention measures

THE government of the United Kingdom has just added a new corporate “failure to prevent fraud” offence to the Economic Crime and Corporate Transparency Bill, which is currently making its way through the British parliament.

Designed to make it easier to prosecute a large organisation if its employee commits fraud for the organisation’s benefit, the failure to prevent fraud offence is likely to come into force by the end of 2024.

Employees of companies and other organisations can commit fraud in various ways, such as through dishonest sales practices, hiding essential information from consumers or investors, or fraudulent practices in financial markets. Individuals, other businesses or taxpayers may become victims of such activities.

The new provision aims to protect victims, including businesses, and reduce crime by driving a culture change towards improved fraud prevention procedures in organisations, and holding them accountable through prosecutions if they profit from the fraudulent actions of their employees.

It shares similarities with Section 7 of the UK Bribery Act 2010, which targets the failure of commercial organisations to prevent bribery, and Section 17A of Malaysia’s MACC Act 2009, which addresses corporate liability for corruption.

But whereas Section 7 of the UK Bribery Act and Section 17A of the MACC Act deal with bribery, this new provision specifically targets fraud and false accounting.

Directors and senior management of Malaysian companies operating in the UK or dealing with clients there should take note of this new offence, which will apply to all large bodies corporate and partnerships, including businesses, large not-for-profit organisations such as charities, and incorporated public bodies.

It will apply to all sectors, but to ensure that burdens on business are proportionate, only large organisations are under the scope. These are defined as organisations meeting two out of three criteria, i.e. more than 250 employees, more than £36mil turnover, or more than £18mil in total assets.

The impact of the provision will be kept under review, and the threshold at which companies are excluded can be amended through secondary legislation if necessary.

Organisations can avoid prosecution if they have reasonable procedures, which will be published by the UK government, in place to prevent fraud.

Penalties for convicted organisations include unlimited fines with courts taking all circumstances into account when deciding the appropriate level for a particular case. However, company bosses will not be held individually liable or prosecuted for failure to prevent fraud.

The Malaysian companies concerned should review and strengthen their fraud prevention procedures to avoid potential prosecution and penalties under the “failure to prevent fraud” offence.

To do this, their directors and senior management should take steps such as:

> Conducting regular risk assessment to identify and address potential vulnerabilities to fraud;

> Implementing and maintaining clear and comprehensive fraud prevention policies and procedures;

> Providing regular training to employees on fraud prevention and reporting mechanisms;

> Establishing an anonymous reporting channel for employees to report suspected fraudulent activities without fear of retaliation; and

> Ensuring that senior management and board members are committed to promoting a culture of ethical behaviour and compliance within the organisation.

RAYMON RAM

Financial crime risk specialist

Kuala Lumpur