Failure to Prevent Fraud Under the Economic Crime and Corporate Transparency Act 2023

The offence of “failure to prevent fraud” has been incorporated into The Economic Crime and Corporate Transparency Act 2023 (the Act). This legislation aims to hold companies accountable if fraud is committed by employees or associated persons for the organisation’s benefit. Businesses must take active steps to prevent fraudulent activities or risk substantial penalties.

In this article, we examine the implications of the offence of a ‘failure to prevent fraud’ in more detail. 

Who does the offence apply to?

The failure to prevent fraud offence applies to large organisations that meet at least two of the following criteria:

• More than 250 employees
• More than £36 million in turnover
• More than £18 million in total assets

It does not apply to small and medium-sized enterprises (SMEs). However, SMEs should still adopt strong anti-fraud measures to safeguard their operations and reputation.

What constitutes failure to prevent fraud?

An organisation may commit the offence of “failure to prevent fraud” if:

• An employee or associated person, such as an agent or subsidiary, commits fraud.
• The fraud is intended to benefit the organisation or another party.
• The organisation failed to have reasonable fraud prevention measures in place.

Fraud offences covered include false representation, failing to disclose information, and abuse of position under the Fraud Act 2006. However, the scope of the offence is broad and may also encompass other fraudulent activities. 

What are the penalties? 

Penalties can be severe and are supposed to deter businesses from neglecting fraud prevention responsibilities. 

A conviction may lead to unlimited fines, reputational damage, loss of investor confidence, and potential regulatory sanctions. Directors and senior managers could also face direct scrutiny, particularly if they failed to take reasonable steps to prevent fraud.

Beyond financial penalties, businesses may be subject to civil lawsuits from affected parties. Shareholders, clients, and partners may seek compensation for damages caused by fraudulent activities within the organisation. This can lead to prolonged litigation and financial strain.

Possible Defences 

A business can avoid liability if it can show that it had “reasonable procedures” in place to prevent fraud. Some examples of reasonable procedures include:

• Risk Assessments: Regularly identifying areas where fraud risks are highest.
• Fraud Prevention Policies: Implementing clear fraud prevention policies and enforcing them.
• Employee Training: Providing fraud awareness training for staff and associates.
• Monitoring and Reporting Mechanisms: Establishing whistleblowing channels and internal auditing processes.
• Governance and Oversight: Appointing compliance officers to oversee fraud prevention measures.
• Third-Party Due Diligence: Ensuring suppliers, agents, and third parties undergo proper background checks to mitigate external fraud risks.

By implementing the above measures, a business can demonstrate its commitment to preventing fraud. 

How can businesses identify fraud risks?

Fraud risks exist across different areas of a business. Companies should regularly assess operations and supply chain vulnerabilities. A comprehensive fraud risk assessment should be conducted at set intervals and during significant business changes. Carrying out these checks helps businesses identify potential weaknesses and areas of improvement. 

Implementing internal controls 

Strong internal controls can help to prevent fraud. These include separating key duties, closely monitoring finances, and thoroughly tracking all transactions. Automated fraud detection systems can also help spot and stop suspicious activity in real-time.

Fostering a fraud prevention culture

Businesses should promote honesty and accountability. Company leaders can set a strong example, enforce ethical policies, and take a zero-tolerance approach to fraud. This will help to prevent liability. 

The importance of whistleblowing mechanisms

A confidential whistleblowing procedure allows employees to report fraudulent activity without fear of retaliation. Employees should be encouraged to report concerns, and they must be shielded from adverse consequences.

How often should compliance audits be conducted?

Regular audits ensure fraud prevention measures are effective. They also highlight potential areas for improvement. Businesses may also use external auditors to gain impartial insights into fraud prevention strategies.

The importance of regular reviews 

Fraud risks evolve over time. Companies should regularly update fraud prevention policies to address new threats like cyber fraud, insider fraud, and procurement fraud. Ongoing training also ensures employees stay informed.

Key challenges for businesses

Implementing effective fraud prevention measures can be challenging. Some key concerns for businesses include:

• Cost of Compliance: Implementing comprehensive fraud prevention measures may require significant technological, training, and personnel investment.
• Complex Supply Chains: Large multinational companies may struggle to monitor fraud risks across their many suppliers, agents, and partners.
• Evolving Fraud Tactics: Fraudsters continuously adapt their methods, making it necessary for businesses to stay ahead through continuous risk assessments and policy updates.
• Balancing Prevention with Business Operations: Strict fraud controls may slow legitimate business operations.

A balance between compliance and maintaining operational efficiency must be struck. 

In summary 

The introduction of the failure to prevent fraud offence requires businesses to implement comprehensive fraud prevention measures. Failure to do so can lead to severe penalties and reputational damage. By meeting legal expectations and strengthening fraud controls, businesses can protect themselves from liability under Act.

For more information on causes of action for fraud, please see our articles on Private prosecution on fraud and fraudulent misrepresentation.

At Lincoln & Rowe, we understand the importance of helping our clients keep their businesses running smoothly. As well as in-depth commercial expertise, we provide excellent service to our clients and practical advice and guidance.

We have wide-ranging experience in litigation and corporate law and were named as winners of the Global 100 for Best Firm for Commercial Disputes of the Year 2025 and Gamechangers Global Awards for Commercial Litigation Law Firm of the Year in the United Kingdom 2025.

If you would like to talk to one of our expert legal team members about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030, and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.