Failure to Prevent Fraud: Corporates Face New Criminal Offence Amid Accountability Crackdown

Latham & Watkins LLP

Enhanced SFO powers and promises of swifter action on economic crime underscore the importance of anti-fraud measures for corporates and M&A dealmakers.

The UK government is cracking down on corporates turning a blind eye to fraud and other economic crime. Under new legislation set to take effect later this year, an organisation will be automatically liable for fraud committed by its employees and agents, as is already the case for bribery and the criminal facilitation of tax evasion. The same legislation will also make it easier to hold organisations accountable for a wide range of other criminal offences, including money laundering. Against this backdrop, the UK’s specialist fraud agency is significantly more active. Corporates and M&A dealmakers should be alive to the heightened risk of prosecution, and should work with legal counsel to mitigate this risk.

What Should Corporates Be Alert to?

Since 2010 the number of “failure to prevent” offences — which pass on criminal liability to organisations for wrongdoing by those working on their behalf — has been growing. As liability can accrue from crimes committed by employees or agents working anywhere in the business, and at any level, even legitimate and sophisticated organisations have been caught out. Fines are potentially unlimited — last year, a fine of £465 million was imposed to settle an investigation into failure to prevent bribery.

The Economic Crime and Corporate Transparency Act (the Act) makes an organisation automatically criminally liable if someone working on its behalf commits a specified “fraud” crime — provided the fraud either takes place on UK soil or affects UK victims. The list of specified fraud crimes is very broad and covers a range of dishonest financial conduct. For example, dishonest sales practices, false accounting, and hiding important information from consumers or investors are all potentially in scope.

In this environment, a corporate could face criminal liability if its personnel, agents, representatives, or subsidiaries commit fraud intending to benefit either the corporate, or any other person or entity to which the corporate provides services. A defence will be available if appropriate measures are in place to mitigate fraud risk, so corporates should act now to ensure robust oversight within their organisations — including the review of compliance policies and procedures, internal (“whistleblower”) reporting channels, staff training, audits and risk assessments, and standard due diligence checks of third parties.

Related reforms mean it is also easier to hold organisations responsible for a range of other economic crimes, including various money laundering offences. An organisation may now be guilty if one of its “senior managers” commits an offence — a significantly lower threshold than the previous “directing mind and will” test. The question of who amounts to a senior manager is one of substance, not form, so job titles alone will not be determinative.

M&A Impact — Dealmakers Should Exercise Caution

More extensive due diligence in this area is expected, including forensic scrutiny of financial information. Recent cases gaining media attention have highlighted the importance of conducting enhanced, comprehensive, and robust due diligence pre-closing, including thorough disclosure exercises which both buyers and sellers should prepare for in advance. Deal teams should work closely with all of their advisers (internally and externally) and support ongoing discussions between each of them. This collaboration encourages cross-practice information flows (which is critical as issues discovered in due diligence often relate to or overlap across multiple areas), enabling careful negotiation of acquisition agreement language, including warranties and indemnification provisions and post-closing mechanics. Boilerplate provisions and dispute resolution methods are often more important than is appreciated pre-signing by contracting parties, who are understandably focused on getting the deal over the line.

As discussed in our earlier article on “Avoiding Buyer’s Remorse in M&A Deals”, the discovery of instances of fraud in the context of acquisitions are not uncommon, but can have a rapid and detrimental impact on the value of an M&A deal, including fines and penalties for associated wrongdoing. Buyers suspicious of fraud should seek legal advice as soon as possible to help them navigate this complex area without causing further harm.

Why It Matters — A More Proactive SFO

The new director at the UK’s Serious Fraud Office (SFO) has promised “swifter action” on economic crime, and early signs — including a significant uptick in new investigations and dawn raids at UK business premises and private homes — indicate he is delivering.

Notably, the SFO now has enhanced powers to issue requests for information (RFIs) before it formally opens an investigation. RFIs can raise complex questions of jurisdiction, scope, and timeframe, and failure to comply with an RFI is a criminal offence, punishable by imprisonment for the individual recipient. The SFO is reportedly recruiting heavily and is pushing for closer collaboration with law enforcement partners such as the National Crime Agency and the Metropolitan Police.

Conclusion

The latest failure to prevent offence will be an additional tool for an increasingly active SFO. Law enforcement organisations show appetite to hold more organisations to account for criminal wrongdoing, and a willingness to speed up investigations with decisive action. In this environment, ensuring companies implement and maintain compliance measures proportionate to their level of risk will be key.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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