The UK Home Office has issued guidance pertaining to the newly introduced offence of failure to prevent fraud by the Economic Crime and Corporate Transparency Act 2023, set to be enforced in nine months.
According to Moody’s, this pivotal legislation marks a notable shift in how corporate accountability for fraud prevention is approached across various sectors of the UK economy.
This new offence complements existing laws, allowing for the prosecution of individuals for their fraudulent actions while also holding organisations accountable for failing to prevent such crimes. It specifically targets “large organisations,” defined as those with over 250 employees, a turnover exceeding £36m, or total assets above £18m, encompassing all subsidiaries regardless of their location.
The legislation mandates that large organisations implement stringent fraud prevention measures, stressing a risk-based strategy tailored to each entity’s specific circumstances. Key elements of effective fraud prevention procedures highlighted include top-level commitment, comprehensive risk assessment, proportionate prevention strategies, thorough due diligence, consistent communication and training, along with ongoing monitoring and review.
The offence covers various fraud offences, including those outlined in the Fraud Act 2006 and other common law offences such as cheating the public revenue. It introduces a broader scope of liability for frauds committed by “associated persons,” which could include employees, agents, subsidiaries, or any service providers acting on the organisation’s behalf.
The guidance underscores the significance of managing supply chain and third-party risks. It suggests that organisations need robust due diligence processes and monitoring systems for suppliers and service providers who might fall under the category of “associated persons.” Enhanced due diligence is advised for all associated entities, leveraging advanced technology tools for risk management.
Organisations are encouraged to employ Artificial Intelligence (AI) and Machine Learning (ML) to analyse vast data sets and identify suspicious patterns effectively. These technologies can also aid in reducing false positives that might otherwise hinder fraud investigations.
The release of this guidance signifies a crucial step in enhancing corporate accountability in the UK. By enforcing proactive fraud prevention and risk mitigation measures, organisations can better safeguard their operations, reputation, and financial integrity against various cyber and financial threats.
As organisations gear up for the upcoming implementation period, they should consider utilising advanced risk management tools provided by Moody’s. These tools include the Shell Company Indicator for identifying potentially fraudulent entities and integrated solutions for Entity Verification and ongoing risk monitoring, which leverage Moody’s extensive risk-relevant data on individuals and entities globally.
This new regulatory landscape offers both challenges and opportunities for organisations to enhance their fraud prevention mechanisms. Adopting a swift and comprehensive approach to compliance can not only meet legal requirements but also foster a culture of integrity and proactive risk management within the corporate sector.
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