Fraud is a serious problem. One report recently estimated the cost of fraud to the UK economy as at least £219 billion, nearly as much as the UK spends on healthcare each year. In the year to September 2023 the England and Wales crime survey recorded that Fraud and Computer Misuse offences represented nearly half of all offences reported by individuals – there is no doubt that fraud has reached epidemic proportions.
One response to this fraud epidemic has been the introduction of the Economic Crime and Corporate Transparency Act 2023. This aims to encourage organisations to work harder to prevent fraud, by criminalising the failure to prevent fraud committed by their employees. The ECCTA applies to all organisations, including charities, above a specified threshold that meet two out or more of the following three criteria in the financial year before the alleged fraud, some charities might not reach the below threshold in relation size, but might provide services to a larger organisation, and will still need to adhere to the provisions of ECCTA.
- More than 250 employees.
- More than £36 million turnover. • More than £18 million in total assets.
This short helpsheet gives an overview of the failure to prevent offence, the types of behaviour that might constitute an offence and the questions we need to ask ourselves to make sure we are doing what we can to comply with this legislation.
The Economic Crime and Corporate Transparency Act 2023.
The Act received Royal Assent on 26 October 2023 and introduces 2 new corporate offences, Section 196, Attributing criminal liability for economic crimes to certain bodies and Section 199, Failure to Prevent Fraud.
Attributing criminal liability for economic crimes to certain bodies, section 196.
If a senior manager acting within the actual or apparent scope of their authority commits a relevant offence, the organisation can also be considered to be guilty of the offence.
This means that if a fraud offence is committed by an employee with a significant role in making decisions about how the activities of the organisation are managed then the organisation may be subject to a fine. As charities it is important to note that the offence is committed regardless of the size of the organisation.
Failure to Prevent Fraud, section 199.
ECCTA introduces a ‘failure to prevent fraud’ offence for large organisations and their
subsidiaries, it is important to mention here that not all charities will fall under this category however those meeting two or more of the previously specified criteria will. Having knowledge on ECCTA regardless of the size of your charity is beneficial in this time of change, particularly as the guidance has now been released by the Home Office which provides the six guiding principles an organisation should apply to inform its fraud prevention procedures. These principles can be found on the government website and are as follows: Top Level Commitment, Risk Assessment, Proportionate Risk Based Procedures, Due Diligence, Communication, Monitoring and Review.
The offence of failing to prevent fraud arises when an ‘associated person’ e.g. an employee, volunteer, or employee of a subsidiary commits fraud intending to benefit the organisation. For a fundraising charity this might include: • A shop manager claiming gift
aid when they should not – the claim does not directly benefit the employee but does benefit the organisation to the detriment of HMRC.
- Deliberately selling counterfeit items in Charity shops, with the proceeds going to the organisation.
- Allowing a third-party provider (e.g. free will service solicitor, door-to door fundraiser, on street fundraiser) to dishonestly misrepresent themselves in order to gain income for the charity.
- Fraudulently misrepresenting the use of restricted funds, e.g. donations made for a specific purpose deliberately used for another different purpose, and the donor deceived.
- Fraudulently misrepresenting the charity to obtain corporate donations, e.g. over stating our ‘green credentials’ to secure donations.
In all these examples the individual does not directly benefit, but the charity does. Charities might be at particular risk because of a perception, by an individual, that they are acting for a ‘greater good’ i.e. they are doing the wrong thing “for the right reason”, without understanding the consequences.
Implications for Charities.
ECCTA represents a significant shift in corporate criminal liability. It has far-reaching implications for all organisations, particularly those above the threshold which will include some charities.
The charity sector needs to familiarise itself with their new responsibilities under this legislation and take appropriate steps to ensure compliance. This will include asking questions like:
- Who is responsible for fraud risk at Trustee level?
- Who is responsible for fraud risk at a Board level?
- Do our current risk assessments consider the risk of fraud that benefits the charity?
- If they do, how wide is this assessment – for example, is it just limited to the Finance or fundraising functions? Do we include the consideration of fraud before new fundraising products go to market?
- Can we demonstrate a strong culture of ethics and integrity within our organisation, our subsidiaries and others working on our behalf?
- How widespread is fraud training? – Does it explain employee and volunteer responsibilities?
- Does it empower employees and volunteers to speak up if they need to?
FURTHER READING
- New failure to prevent fraud guidance published – GOV.UK
- Failure to prevent Fraud – Government Factsheet
- Failure to prevent fraud: key guidance released, RPC blog
- Annual Fraud Indicator, 2023, Crowe, Peters & Peters, University of Portsmouth
- Section 196, Economic Crime and Corporate Transparency Act 2023
- Paragraph 4, Section 196, Economic Crime and Corporate Transparency Act 2023
- Any of the offences listed at schedule 12 Economic Crime and Corporate Transparency Act 2023
- Sections 201 & 202 define a large organisation Economic Crime and Corporate Transparency Act 2023
- Paragraph 4, Section 199 lists person acting on behalf of the organisation Economic Crime and Corporate Transparency Act 2023
- Any of the fraud offences listed at schedule 13 Economic Crime and Corporate Transparency Act 2023
ACKNOWLEDGEMENT
This helpsheet was kindly prepared by Phil Sapey from Cancer Research UK.
DISCLAIMER
Published 2024.
© Fraud Advisory Panel and Charity Commission for England and Wales 2023. Fraud Advisory
Panel and Charity Commission for England and Wales will not be liable for any reliance you place on the information in this material. You should seek independent advice.
This work is licensed under a Creative Commons Attribution NonCommercial NoDerivatives 4.0 International License.
