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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