The new failure to prevent fraud offence comes into effect on 1 September 2025. The offence will be committed by an in-scope organisation, which could include a charity, if an associated person commits a specified fraud offence with the intention of benefitting the organisation or its clients. This offence is being introduced in addition to the existing fraud offences but it could have a greater impact on organisations found guilty as the sanction is an unlimited fine.
The offence
An organisation will be in-scope if it is a body corporate or limited partnership which is classified as a large organisation. An organisation will be 'large' if it meets two of the following criteria:
- more than 250 employees;
- £36 million annual turnover;
- £18 million in total assets shown in the organisation's balance sheet (including land).
A large, incorporated charity would therefore be an in-scope organisation for the purposes of the offence. The legislation does not distinguish between exempt and non-exempt charities.
An 'associated person' includes employees, agents, subsidiaries or those providing services for or on behalf of the organisation.
The specified fraud offences include cheating the public revenue, false accounting, false statements by company directors, fraudulent trading, fraud, participating in fraudulent business carried on by a sole trader, obtaining services dishonestly, and aiding, abetting, counselling or procuring the commission of one of these offences.
Sanctions
The failure to prevent fraud offence is a criminal offence which can be prosecuted by the Crown Prosecution Service. If an organisation is found guilty, it will be subject to an unlimited fine. In the case of charities, sentencing guidelines require the court to have regard to the impact of the fine on the charity's ability to perform its public or charitable functions. Any action will be brought against the organisation as opposed to the individual trustees.
An organisation will have a defence if it can show that reasonable fraud prevention procedures were in place or that it was not reasonable to expect such procedures to have been in place. The Home Office has published guidance on reasonable fraud prevention procedures.
Issues for charities
For the purpose of the failure to prevent fraud offence, it is important to distinguish between cases where large charities have fallen victim to fraud and suffered loss from those where the charity has benefitted from fraud. For example, Martin Sargeant defrauded the London Diocesan Fund and associated church charities of £5.2 million and was convicted for fraud by abuse of office. It would seem that such a case would not be in scope of the failure to prevent fraud offence, as the charities concerned were victims of the fraud.
An example of a charity benefitting from fraud would be the failure by the internal finance officer to pay VAT due to HMRC. This constitutes the offence of cheating the public revenue. Such a case could be in scope of the failure to prevent fraud offence if the internal finance officer intended to benefit the charity and the charity did not have reasonable fraud prevention procedures in place. In this case, it is possible that the charity could also be liable for failure to prevent facilitation of tax evasion.
As the failure to prevent fraud offence is not yet in force, the full extent to which it may impact charities is unclear. There is a question over the extent to which charitable funds could be used to pay a fine issued under this legislation. The Code of Fundraising Practice states that "a donation must be used for the purpose for which it is given", so charities would have to carefully consider which funds could be allocated to pay the fine. Additionally, whilst the charity may have some sort of insurance in place, such as trustees' liability insurance, such policies often do not cover criminal fines. Where there is a director or trustee at fault, the charity may be able to issue proceedings against them to recover the funds used to pay the fine.
For charities, being found guilty of this offence is likely to start to a wave of further investigations and proceedings which will not only be costly but could also cause significant reputational damage. Any fraud which is in scope of the offence is likely to be serious enough that a serious incident will need to be reported to the Charity Commission. The Commission may open an inquiry and appoint managers to manage the charity's affairs alongside or instead of the trustees. Ultimately, the Commission will seek to implement a long-term solution to any problems identified which could include removing the person responsible for the fraud or putting the charity into administration.
If you have any queries or would like to discuss the new offence, please contact Nishita Gudka at Nishita.Gudka@lbmw.com, Ian Blaney at Ian.Blaney@lbmw.com