House of Lords fraud review highlights gaps and urges introduction of new failure to prevent offence

On 12 November 2022, the House of Lords Fraud Act 2006 and Digital Fraud Committee (the ‘Fraud Committee’) published the results of its lengthy inquiry. The Fraud Committee’s report, entitled ‘Fighting Fraud: Breaking the Chain’, delivers a clear, firm message that agency and legislative reform is needed if the UK is to properly deal with the scale of the fraud problem it is now faced with.

The inquiry involved several days of oral evidence from a range of witnesses, including lawyers, anti-corruption and law enforcement professionals and academics. The Fraud Committee’s report was published under the heading “The UK has retreated from the fight against fraud”, which neatly encapsulates the country’s current fraud landscape: a significant amount of hard work will need to be done first to catch up with the rise in fraud, and then to get on top of it.

According to Action Fraud data quoted in the report, £1.9 billion has been lost to fraud by individuals over the past 13 months. It was also found that 41% of all recorded crimes against individuals in England and Wales is fraud related. Overall, fraud has increased by 25% since March 2020, with much of that increase due to the effect of an accelerated move to digitisation as a result of the Covid-19 pandemic. Yet despite the scale of the problem, only 1% of UK police resources are focused on economic crime.

The Fraud Committee’s report coincided with a separate publication from the National Audit Office (the ‘NAO’), analysing the Home Office’s response to fraud against businesses and individuals. This report also makes concerning reading. One of its key findings is that although the threat from fraud is increasing and evolving, the number of frauds resulting in a charge or summons is falling. The report also states that there are significant gaps in the Home Office’s understanding of the threat from fraud, and that despite the need for coordinated action from government to tackle fraud, the Home Office “is not yet leading an effective cross-government approach and has had limited influence over its partners in the public and private sectors”.

The Fraud Committee acknowledges that the legislative framework established in the Fraud Act 2006 (the ‘Act’) is generally sound and that, despite its age, it is broad and flexible enough “to adapt to modern forms of digital fraud”. However, the Fraud Committee makes clear that there are a number of areas relating to oversight and enforcement of the law which need to be improved, some urgently. As the Fraud Committee explains, “due to the under-resourcing of law enforcement, many victims will never see the criminals caught or face justice in the first place”.

A number of key recommendations have been put forward in an attempt to provide viable solutions to this significant and growing issue. These include:

• the creation of a Cabinet sub-committee with a mandate to tackle fraud;
• the amendment of the Strategic Policing Requirement;
• the introduction of a Government-funded consumer awareness campaign;
• a delay on certain high-risk banking payments, to ensure institutions have adequate time to analyse the payment and detect fraud; and
• a call for the Online Safety Bill to be brought before Parliament urgently in order to enact the measures against fraudulent content and scam advertising.

But perhaps the most significant recommendation for businesses is the Fraud Committee’s recommendation that a general corporate offence of ‘failure to prevent fraud’ should be introduced. This offence would be applicable across all sectors and accompanied by significant financial penalties.

A reform to the law around corporate liability for economic crime has been under consideration for some time, driven by the relative success of the introduction of failure to prevent bribery in 2011, and the addition of the corporate offences of failure to prevent the facilitation of tax evasion in 2017. In November 2020, the UK government published a response to its call for evidence (issued back in January 2017) on this potential reform, which renewed speculation as to whether a general ‘failure to prevent economic crime’ offence could be tabled. In January 2021, the House of Commons debated (but ultimately rejected) an amendment which would have brought such an offence into law, although it would have been applicable only to firms regulated by the Financial Conduct Authority.

But when, in June this year, the Law Commission presented the government with 10 options as to how the law could be improved to ensure that corporations are effectively held to account for serious crimes, it suggested adding four, more specific, ‘failure to prevent’ offences, including failing to prevent fraud by an associated person. Although narrower than ‘failure to prevent economic crime’, this should nevertheless represent a significant step forward. A new corporate offence would incentivise businesses to play a bigger and more effective role in fighting fraud; according to the Fraud Committee, some companies now simply consider fraud “as a cost of doing business” and effectively do nothing to stop it from being facilitated by their services, and “corporate irresponsibility will not change until businesses feel the financial impact of liability coupled with reputational damage.”

The work of both the Fraud Committee and the NAO highlights the need for some improvements to anti-fraud legislation but, more importantly, to the law of corporate liability. The report also recognises that, in practice, the under-resourcing of law enforcement – which prevents many investigations from progressing in the first place – must also be addressed before the UK can truly tackle what has now become a very big issue.

The Committee’s report, in summary and full form, can be found on this page. The NAO report examining the Home Office’s response to fraud is available here.

Further Information

For further information on any issue raised in this blog, please contact Nicola Finnerty or a member of our criminal litigation team.

ABOUT THE AUTHORS

Nicola Finnerty is a Partner in our Criminal Litigation team and a leading expert in white collar and business crime, proceeds of crime & asset forfeiture. Over the last 25 years she has been involved in many of the most high-profile, complex criminal and regulatory investigations and prosecutions, both in the UK and in matters which span multiple jurisdictions. Her expertise includes money laundering, fraud & bribery and corruption along with being regularly consulted by individuals and institutions in the regulated sector in respect of the Money Laundering Regulations 2017. Nicola represents high-net-worth individuals, multi-nation corporate clients, financial institutions and professional firms in investigations and proceedings brought by UK enforcement agencies.