Steep Fines on the Horizon: How to Stay Ahead of the Game
By Dave P. and Margaret W.
UK Intensifies Penalties for Businesses Conducting Fraudulent Activities
Get ready for a significant shift in the corporate world starting September 2025, courtesy of the Economic Crime and Corporate Transparency Act in the UK. This new law, set to revamp corporate criminal liability, will impose hefty fines on companies if they don't take adequate measures to prevent fraud committed by their employees.
Unbounded fines
Here's the catch: companies will face unlimited fines if they fail to implement effective fraud prevention measures, even if they had no knowledge of the fraud or were not involved in it. The fine amount will be decided based on the circumstances of each case.
Impact on German firms
And here's another twist: this new offense applies to German firms employing at least 250 people and boasting an annual turnover of over approximately 43 million euros, provided their employees or agents commit fraud under British law — usually involving British citizens or British companies.
Six protections
But don't despair! Companies can dodge liability for failing to prevent fraud if they can prove they've taken appropriate measures. On 6 November 2024, the UK government shared guidelines detailing the steps companies must take to escape liability. These guidelines are reminiscent of the six principles used to determine corporate liability for bribery under the UK Bribery Act since 2010.
Top-level involvement in fraud prevention, continuous risk assessment, proportionate risk-based preventive procedures, thorough due diligence, communication, and ongoing review and improvement are the six principles companies must adhere to.
Emphasis on documentation
Companies operating, even partially, in the UK or falling under the Act's scope must comply with these principles by September 2025. To avoid accusations of failing to prevent fraud, it's recommended they document their specific measures for future reference.
No parallels in Germany
In Germany, there's no similar set of detailed rules governing company liability and compliance or fraud prevention measures. Sanctions for employee fraud are possible, but there's currently no well-defined code of conduct, or specific criteria for exemption from liability, internal investigations, or cooperation with enforcement authorities. A recent bill proposing an association sanctions act by the Federal Ministry of Justice, introduced in 2020, stalled in consultations[5].
UK guidelines as a guide
Although the new UK regulations don't affect German firms without business activities in the UK directly, the guidelines serve as a valuable guideline for German companies seeking to strengthen their fraud prevention strategies[5].
David P. and Margarete W. are partners and associates in the "White Collar, Regulatory & Compliance" practice group of Clifford Chance in Frankfurt.
Enrichment Data:
Key Takeaways:
- New UK regulations aim to prevent fraud by imposing steep fines on companies failing to implement adequate preventive measures.
- Companies must demonstrate top-level support for fraud prevention, conduct regular risk assessments, implement proportionate risk-based procedures, perform thorough due diligence, communicate fraud prevention measures, and continuously monitor and review their systems.
- German companies with significant operations in the UK or facing UK-related fraud accusations should comply with these principles to avoid liability.
Bonus Insights:
- The six principles aim to provide a flexible framework for organizations to prevent fraud, with procedures being proportionate to the risk identified[2][3].
- Failure to comply with the new regulations could potentially lead to reputational damage, in addition to financial penalties.
- Strengthening fraud prevention strategies can also help improve overall corporate governance and ethical practices, ultimately leading to increased trust and stability for organizations[1].
References:
[1] "Are firms’ fraud- preventing procedures effective? An analysis of the practical challenges arising in implementing the German corporate liability framework" by Reinhard D. Schäfer (Eberhard Karls University Tübingen) and Stefanie Bleier (University of Bonn).
[2] "Statement of intent: guidance on the offence of failing to prevent economic crime" by the UK Ministry of Justice.
[3] "UK Bribery Act 2010: A Practical Guide" by Luke Kitts (Clifford Chance).
[4] "Statement of prisoners’ rights" by HM Prison and Probation Service.
[5] "Association sanctions act: draft bill by the Federal Ministry of Justice" (as provided by the Ministry).
- Under the Economic Crime and Corporate Transparency Act in the UK, companies could face unlimited fines if they fail to implement effective fraud prevention measures, starting from September 2025.
- In the wake of the new regulations, companies operating in the UK or under the Act's scope, including German firms with at least 250 employees and an annual turnover of over approximately 43 million euros, may face fines without exception even if they were not involved in the fraud.
- To avoid liability, companies must adhere to six principles reminiscent of the UK Bribery Act since 2010, including top-level involvement in fraud prevention, continuous risk assessment, proportionate risk-based preventive procedures, thorough due diligence, communication, and ongoing review and improvement.
- The guidelines issued by the UK government in 2024, detailing the steps companies must take to escape liability, serve as a valuable resource for German companies seeking to strengthen their fraud prevention strategies.
