In recent years, there has been a
growing trend towards holding organisations accountable for the actions of
their employees, agents, and subsidiaries, particularly in cases involving
fraud offences. This shift in legal responsibility reflects a recognition that
large organisations and partnerships must ensure that their commercial
activities are conducted ethically and in compliance with the law.
The concept of an ‘associated person’ is
a crucial aspect of this trend. An associated person can be broadly defined as
anyone connected to an organisation or partnership in a way that allows them to
act on behalf of the organisation. This includes employees, agents,
subsidiaries, and individuals who perform services for or on behalf of the
organisation.
For instance, if an employee of a large
organisation commits a fraud offence, the potential consequences for the
organisation are severe. The organisation may be held liable for its actions.
This is because the employee is considered an associated person of the
organisation, and their actions can be attributed to the organisation itself.
Similarly, if a subsidiary’s employee commits a fraud offence for the benefit
of the parent organisation, the parent organisation can be held liable if it
did not take ‘reasonable’ steps to prevent the offence.
The Imperative for Fraud Detection and
Prevention
The rationale behind this approach is
straightforward. Large organisations have significant resources and influence
and must ensure that their employees and subsidiaries operate lawfully and
ethically. By holding organisations accountable for the actions of their
associated persons, the law incentivises organisations to implement robust
compliance measures and closely monitor the activities of their employees and
subsidiaries.
However, it is essential to note that
liability for the actions of associated persons is not automatic. To establish
liability, it must be shown that the organisation failed to mitigate the
‘reasonable’ steps to prevent the fraud offence. What constitutes ‘reasonable’
steps will differ according to the circumstances of each case, but may include
measures such as conducting background checks on staff, providing training on
ethical conduct, and implementing internal controls to prevent fraud.
Holding organisations liable for the
actions of their associated persons in fraud offences represents an essential
step towards ensuring accountability and ethical conduct in the business world.
By making organisations responsible for the actions of their employees, agents,
and subsidiaries, the law sends a clear message that only the highest ethical
operating standards are acceptable. This shift in legal responsibility is a
positive development that helps protect consumers, investors, and the integrity
of the business community.
The Most Common Types of Fraud
The fraud offences outlined below are
extensive and represent the types of fraudulent activities that frequently
arise within large corporations and organisations:
- Common law: Cheating the public revenue.
- Organisations Act 2006, section 993: Fraudulent
trading.
- Theft Act 1968, section 19: False statements by
organisation directors.
- Theft Act 1968, section 17: False accounting.
- Fraud Act 2006, section 2: Fraud by false
representation.
- Fraud Act 2006, section 3: Fraud by failing to
disclose information.
- Fraud Act 2006, section 4: Fraud by abuse of position.
- Fraud Act 2006, section 11: Obtaining services
dishonestly.
- Fraud Act 2006, section 9: Participation in a
fraudulent business.
The Need for Organisational Action
Fraud prevention is a crucial aspect of
running a successful and ethical business. Large organisations in the UK have
long understood the importance of solid fraud prevention procedures to
safeguard their reputation, assets, and stakeholders. With the ever-evolving
landscape of financial crime and increasing regulatory requirements, it is
imperative for organisations to continuously assess and enhance their fraud
prevention measures to stay ahead of potential threats.
The UK Bribery Act, which came into
force on 1 July 2011, was a significant milestone in the fight against
corruption and fraud. One of the Act's key provisions was the introduction of
the offence of 'failure to prevent' bribery. This meant that organisations
could be held liable for corruption committed by their employees or agents
unless they could demonstrate that they had adequate procedures to prevent such
misconduct.
In response to the Bribery Act, many
organisations in the UK have implemented robust financial crime control
frameworks and procedures. These measures are designed to deter, detect, and
prevent fraud, bribery, and other forms of economic crime. However, the threat
landscape is constantly evolving, and fraudsters are becoming increasingly
sophisticated in their methods. Therefore, it is essential for organisations to
regularly review and enhance their fraud prevention measures to adapt to
threats and vulnerabilities.
Organisational Fraud Prevention Policies
and Procedures
The importance of having robust fraud
prevention procedures in place cannot be overstated for large organisations in
the UK. The UK Bribery Act and other regulatory requirements have clarified
that organisations must proactively prevent fraud and corruption. By regularly
reviewing and enhancing their fraud prevention measures, organisations can
better protect themselves and their stakeholders from the risks posed by
financial crime. Organisations must stay vigilant and proactive in the fight
against fraud to maintain their integrity and reputation in the market.
The government's guidance on 'adequate
procedures' to prevent bribery was based on a risk-based approach to
compliance, which featured six fundamental principles. These principles are
designed to be flexible and should be tailored to fit the organisation's
specific context, including its size, the products and services it offers, and
other relevant factors. Ultimately, the procedures implemented by an
organisation must be suitable and commensurate with the distinct risks it
encounters. These six principles are as follows:
- Principle 1: Proportionate Procedures.
- Principle 2: Top-Level Commitment.
- Principle 3: Risk Assessment.
- Principle 4: Due Diligence.
- Principle 5: Communication
(including training).
- Principle 6: Monitoring and Review.
These principles provided a roadmap for
organisations to develop and implement effective fraud prevention measures.
Considering the ongoing challenges of fraud and financial crime, a regular
review is appropriate for organisations to revisit their existing fraud
prevention measures and enhance them where required. This could involve
conducting a comprehensive review of their current procedures, identifying gaps
and weaknesses, and implementing controls and safeguards to strengthen their
defences against fraud.
Enhancing Fraud Prevention Policies and
Procedures
A good starting point for organisations
looking to enhance their fraud prevention measures is to adopt a risk-based
approach modelled on established principles. Organisations can tailor their
prevention strategies by identifying and assessing potential operational risks
to address the most pressing concerns. This proactive approach strengthens
internal controls and ensures that resources are allocated effectively to
prevent fraudulent activities.
One essential step an organisation can
take to drive positive corporate behaviours and enhance fraud prevention
measures is establishing a robust ethical culture. By fostering a culture of
integrity and transparency, organisations can create an environment where
employees are more likely to report suspicious activities and uphold ethical
standards. This can help deter fraud and misconduct before they escalate into a
more significant issue.
Another essential measure organisations
can take to prevent fraud is implementing robust internal controls and
monitoring systems. Organisations can identify potential vulnerabilities by
regularly reviewing and updating internal controls and taking proactive steps
to mitigate risks. This may involve conducting regular audits, implementing
segregation of duties, and monitoring transactions for irregularities.
In addition to internal controls,
organisations can also benefit from investing in fraud detection technologies
and tools. Advanced analytics and monitoring systems can help organisations
identify patterns and anomalies indicating fraudulent activities. By harnessing
the power of technology, organisations can improve their ability to detect and
prevent fraud in real time.
Furthermore, organisations can enhance
their fraud prevention measures by providing ongoing training and education to
employees. By raising awareness of the risks associated with fraud and
misconduct, organisations can empower employees to recognise and report
suspicious activities. Training programs can also help employees understand
their role in preventing fraud and maintaining a culture of integrity within
the organisation.
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