failure to prevent fraud

Government sets out plans for ‘failure to prevent fraud’ offence

The government has set out its plans for the “failure to prevent fraud” (FTPF) offence contained in a recent amendment to the Economic Crime and Corporate Transparency Bill.

The offence is intended to mirror existing failure to prevent offences and will cover a set of core fraud offences such as fraud by false representation, fraud by failing to disclose information, and false accounting.

A defence would be available where an entity can prove “reasonable procedures” for the prevention of fraud were implemented by the organisation, with provision that in some circumstances it may be reasonable for no such procedures to be in place. The sanction for the offence would be an unlimited fine.

The FTPF offence is set to be complemented by a new power for the Solicitors Regulation Authority (SRA) to proactively request information and documents to use in relation to tackling economic crime.

This power allows the SRA to request information from solicitors and their employees, recognised bodies and their employees and managers, and persons with an interest in the body, only where it is necessary to do so for the purposes of an investigation.

The provisions broaden the SRA’s existing power to spot-check information from individuals and firms in its role as a Professional Body Supervisor under the Money Laundering Regulations (MLRs) 2017. Many firms are not covered by the MLRs, meaning that the SRA cannot practise proactive checks, and therefore risk-based regulation, across the whole of its regulated community.

Explaining the SRA’s new power, the government said:

“The crisis in Ukraine has shone a light on the exposure of professional services sectors to economic crime. The legal services sector was assessed in HMT’s National Risk Assessment of money laundering and terrorist financing (2020) as at a high risk of abuse for money laundering purposes. The sector is also exposed to further-reaching risks such as fraud or breaches of sanctions legislation. We need to ensure that legal services regulators have the powers they need to tackle economic crime.”

The Economic Crime and Corporate Transparency Bill is currently at the committee stage in the House of Lords.

Guidance on the extent of “reasonable procedures” for the prevention of fraud will come at a later date.

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