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Failure to prevent fraud


A potential new tool for tackling unscrupulous loss assessors and claims management companies?

The Government is creating a new Failure to Prevent Fraud offence to hold organisations to account if they profit from fraud committed by their employees. The offence will be introduced through the Economic Crime and Corporate Transparency Bill (the Bill), which is currently making its passage through the House of Lords. It is not yet known when it will come into force, but it is unlikely to be until towards the end of 2024.

The new offence will strengthen the powers already in existence to fine and prosecute organisations and their employees for fraud. Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation does not have reasonable fraud prevention procedures in place. Notably, it does not need to be demonstrated that the company knew about the fraud. The intention is to discourage organisations from turning a blind eye to fraud by employees that may benefit the company. The offence will encourage more companies to implement or improve fraud prevention procedures, driving a major shift in corporate culture to help reduce fraud.

The Government has identified nine offences:

  • Fraud by false representation
  • Fraud by failing to disclose information
  • Fraud by abuse of position
  • Obtaining services dishonestly
  • Participation in a fraudulent business
  • False statements by company directors
  • False accounting
  • Fraudulent trading
  • Cheating the public revenue

If convicted, an organisation will receive an unlimited fine.

As currently drafted, the Bill states that an offence will be committed if an “associated person” commits a fraud offence intended to benefit the organisation or any person who receives services from the organisation.

An associated person will be anyone who is an employee, agent or subsidiary of the organisation or anyone who performs services for or on its behalf. Consequently, it can extend to consultants and advisors whether they are directly employed by the organisation or not.

The organisation can have a defence to the offence by evidencing that it had reasonable procedures in place to prevent the fraud or that it was reasonable not to have such procedures as the risk of fraud was extremely low.

The Government has yet to publish guidance on what it will consider reasonable procedures to be undertaken by organisations. However, the implementation of the Bill will require all organisations to reflect on their current fraud prevention procedures and consider whether they need to develop new procedures to meet the new legal requirements.

Will this help with tackling unscrupulous loss assessors?

The fact that an associated person includes not only employees but can extend to consultants and advisors, whether or not they are directly employed by the organisation, will greatly assist in utilising this offence as a tool for tackling loss assessors who may not be directly employed by the loss assessing firm.

The breadth of the offence, which includes fraud by false representation, failing to disclose information and abuse of position together with obtaining services dishonestly, is likely to encompass the actions which are being undertaken by dishonest loss assessors and claims management firms.

It is also unlikely that loss assessor and claims management firms will be successful in seeking to rely on the defence that it was reasonable not to have such procedures on the basis that the risk of fraud is extremely low, given that fraud is prevalent within the insurance industry.

The main difficulty with it being useful in tackling loss assessors and/or claims management companies is that the offence will only apply to “large” companies and partnerships. To qualify as a large organisation at least two out of three of the following criteria must be satisfied in the financial year preceding the year in which the offence is committed:

  1. It must have more than 250 employees
  2. Have more than a £36 million turnover; and/or
  3. Have more than £8 million in total assets.

It is, therefore, likely that while this may be utilised to challenge some loss assessors and claims management organisations, small- and medium-sized businesses will not fall within the scope of the Bill. It may also encourage larger loss assessing and claims management companies to set up subsidiary companies and franchises to make it difficult for them to be prosecuted.

It is possible, however, that these thresholds may be amended in future as the Government has stated that it intends to keep these thresholds under review and the Bill has been criticised for potentially creating a situation where small- and medium-sized business neglect their fraud prevention procedures because the new legislation does not apply to them.

Ultimately, however, the new offence will make it easier to convict larger loss assessing and claims management firms for failing to prevent fraud, which may assist with combating the practices and procedures of certain of these firms.

It is currently difficult for criminal convictions to be pursued against companies, albeit they can be pursued against individual loss assessors and claims managers. The new offence means that an organisation can be responsible for failing to prevent fraud committed by an employee. It casts, therefore, a much wider net and large loss assessor and claims management firms comprising numerous staff with high levels of temptation to conduct fraud will face an increased risk of getting prosecuted.

In reality, given the parameters for a prosecution to be presented, and specifically that it currently only applies to large organisations, it is unlikely that there will be a significant number of prosecutions against loss assessors and/or claims management firms. It may, however, be something which can be utilised as part of a strategy to disrupt their tactics and procedures, especially for the largest of these firms operating in the market.

Louise Murphy

Louise Murphy

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