With the Economic Crime and Corporate Transparency Act 2023 now on the statute books in the UK, businesses need to understand and prioritise the new corporate criminal offense introduced by the legislation: ‘failure to prevent fraud’. Positive action by organisations with respect to recruitment and the vetting of staff, can play its part in helping organisations stay on the right side of the new law.

Data released last month by CIFAS highlighted a troubling trend: over the 12 months of 2023, over 1/3 (38%) of the employees reported for dishonest conduct had been in position for less than a year, compared to 21% in 2022. CIFAS’ Insider Threat Database saw an annual increase of 14% in cases for 2023 with 49% of these being related to dishonest conduct by employees – an increase from 39% in 2022. The takeaway is that organisations are increasingly at risk from new employees which shows a weakness in hiring policies and practices.

While the cost-of-living crisis that has characterised the past 2 years may account for part of the increase – and it may be therefore that the number is inflated accordingly – this rationale does not absolve organisations from failing to take the relatively easy steps that would minimise the risk to them initially.

Types of fraud and their impact

Current trends commonly involve employees diverting payments to personal accounts, procurement fraud, misappropriation of assets, and bribery and corruption. Globally, the sectors most vulnerable to employee fraud include banking and financial services, government and public administration, and manufacturing. These industries are particularly susceptible due to the size and the nature of their business operations.

The increase in the volume of employee fraud is a stark reminder of the critical need for stringent anti-fraud measures. These crimes not only result in financial losses but can also cause significant reputational damage and erode customer trust and of course there is the ever-present threat of prosecution for ‘failure to prevent fraud’ in the background.

Key Anti-Fraud strategies for businesses

To combat the threat of insider fraud, it is essential for businesses to adopt a comprehensive approach. Our recommendations to consider are as follows:

  • The initial approach to combating fraud must be to conduct thorough background checks on new employees. Before recruitment, detailed checks to include investigations into criminal and credit history should be conducted. Our investigators and analysts research new employees globally for multi clients – prevention remains better than cure.
  • Organisations should implement effective training and awareness programs: Regular training on identifying and reporting fraudulent activities can empower employees to act as the first line of defence against fraud by their colleagues and may play a part in mitigating an individual’s actions by making them feel part of the ‘team’ right from the start of their employment.
  • Training can only be effective if an organisation has clear anti-fraud policies: All employees should be aware of their employers’ anti-fraud policies and such policies must be both robust and easily understood by all levels within an organisation. Policies serve as both a deterrent and as foundational guidelines for ethical behaviour.
  • Finally, there is a need for strong controls. regular monitoring and proactive reviews: Regular scrutiny of financial statements and proactive audits in high-risk areas of any organisation are crucial to detect unusual patterns that may indicate fraudulent activities, which can then be addressed with the appropriate remedial action taken.

Staying ahead of the threat

If there is the merest suspicion of fraud, immediate action is necessary to prevent further losses. This includes documenting evidence and, if necessary, involving counter fraud specialists such as those engaged within MHG & by our associate Company GSA Global or, in cases of obvious criminality, the authorities and law enforcement professionals, where our support can be of significant assistance.

As the threat landscape evolves, it is imperative for businesses to stay ahead of potential legal and financial repercussions by fortifying their anti-fraud frameworks from the outset. A strong foundation based on effective employee and applicant vetting not only helps in terms of fraud prevention, but can also serve as a legal defence, demonstrating due diligence in the face of regulatory requirements.

In my view, organisations must view the ‘failure to prevent fraud’ offence not as a hurdle, but as an opportunity to strengthen their processes and defences against fraud. By prioritising relatively simply measures, companies can safeguard their financial health, protect their reputation, and minimise their risk thereby maximising long-term success.

Michael Handley
Managing Director
[email protected]