Part 5 – Miscellaneous Failure to prevent fraud Section 199: Failure to prevent fraud
Sections 199 to 206 create a new offence of failure to prevent fraud. The offence will be committed by a large organisation when a relevant fraud offence is committed by an associated person such as an employee or agent, acting to benefit the organisation. It will also be possible to prosecute a parent company where the offence is committed by an associated person of a subsidiary, with the intention of benefitting the parent company and where the group headed by the parent company exceeds the thresholds for a large organisation.
	Section 199 deals with the substantive elements of the offence.
	Subsection (1) provides that a relevant large organisation is guilty of an offence where an associated person commits a relevant fraud offence with intent to benefit either the body itself, or a person to whom the associate provides services on behalf of the relevant body. Thus, the offence would be committed where, for example, an employee of a company engages in fraud with intent to benefit the company, or engages in fraud with intent to benefit a client for whom the employee provides services on behalf of the company. Benefit is not defined, but is not restricted to financial benefit.
	The requirement for an intent to benefit the organisation, or a person to whom the associated person provides services on behalf of the organisation, is broader than the requirement in the offence of failure to prevent bribery in the Bribery Act 2010, section 7, that the associated person intends thereby to "obtain or retain business" or to "obtain or retain a business advantage" for the body.
	It is only necessary that the associate "commits" the offence. There is no need for the associate to be prosecuted for or convicted of the offence. Where the associate has been convicted of a fraud offence, that would be proof of the fact that they had committed the offence in later proceedings against the body, unless the body could prove otherwise (Police and Criminal Evidence Act 1984, s 75). Otherwise, the prosecution would need to be able to prove to the criminal standard that the fraud offence had been committed, and that it had been committed by an associate.
	The offence must take place during a financial year of the relevant body in which it (or the groups of which it is a part) meets the definition of a large organisation.
	Subsection (2) provides that a relevant body will be in scope of the offence, even if it is not itself a large organisation, provided that it is a subsidiary of a large organisation.
	Subsection (3) provides that the relevant body is not guilty of an offence if it was an intended victim of the fraud offence. Where the relevant body is an intended victim of the offence it is unlikely that the condition in section 199(1)(a) (that the fraud is intended to benefit the body) will be made out, so this condition is likely only to apply to prosecutions under section 199(1)(b), where the offence is intended to benefit a person to whom the associate provides services on behalf of a body – for instance, where an employee conspires with a client of a company to defraud their employer.
	An organisation would be the intended victim of the fraud offence if it would have suffered the intended loss that the fraud offence would result in. However, the term "intended victim" is not defined. An organisation could be the intended victim if the purpose of the offence was to cause some other harm to the organisation.
	Subsections (4) and (5) provide a defence where the organisation had put in place procedures to prevent associated persons from committing fraud with intent to benefit it or a client. The section is broadly the same as in the offence of failure to prevent facilitation of tax evasion. The burden of proof is on the defendant to show that it had put in place such procedures as it was reasonable in the circumstances to have put in place, or that it was reasonable in all the circumstances not to have any prevention procedures in place. This would have to be proved on the balance of probabilities.
	Subsection (5) defines a fraud offence as an offence in Schedule 13, or an offence of aiding, abetting, counselling or procuring the commission of an offence in Schedule 13. Offences of conspiring to commit an offence, and offences of encouraging or assisting crime in the Serious Crime Act 2007, sections 44-46 are not covered, since these offences can be committed even if the substantive fraud is never carried out.
	However, if the associate conspires to carry out a fraud, and it is carried out, then they would be guilty of the substantive offence of fraud, whether as a primary offender or as an accessory, and therefore the condition in (1) would be made out, even if they were prosecuted for, and convicted of, conspiracy.
	Likewise, if the associate encourages or assists someone to carry out a fraud offence and that person does carry out the fraud offence, then – even if the associate were prosecuted under the Serious Crime Act 2007 – they would, in fact, have also committed a substantive offence and therefore the company could be prosecuted for failure to prevent fraud.
	Subsection (7) defines who is to be considered an associated person of a relevant body, and are broadly similar in effect to those in the offences of failure to prevent bribery and facilitation of tax evasion.
	Subsection (8) provides that a person is also associated with a body if they are an employee of a subsidiary of that body. This would enable proceedings to be brought against a parent company where the parent company is a large organisation and a fraud offence is committed by an employee of a subsidiary, and is intended to benefit the parent company.
	Subsection (9) provides that whether a person performs services for or on behalf of a relevant body is a question to be determined by reference to all the circumstances and not merely the legal relationship between the person and the body.
	Subsection (10) allows proceedings to take place in any part of the UK. This would, for instance, enable a company to be prosecuted in Scotland because that is where the company is based, even though some of the fraudulent activity took place in Northern Ireland. It is envisaged that the prosecuting authorities in the three jurisdictions will develop working arrangements as to which body should prosecute offences with a cross-border element. Subsection (11) makes provision for prosecutions in Scotland in such circumstances are not subject to the normal jurisdictional restrictions on the sheriff court where proceedings are brought.
	Subsection (12) sets the maximum penalty for the offence as an unlimited fine following conviction on indictment or in summary proceedings in England and Wales; and as the statutory maximum for summary proceedings in Scotland and Northern Ireland. Subsection (12) provides for the relevant body to be fined. In England and Wales, unlimited fines are available upon summary conviction. In Scotland and Northern Ireland, a fine upon summary conviction is limited to the statutory maximum.
	Subsections (13) and (14) are interpretative provisions.