By Annie Makoff Anti-money laundering Is omitting small business from ‘failure to prevent fraud’ legislation a cause for concern? 25 May 2023 Dealing with SMEs could soon come with higher risk of fraud as criminals may target exempt businesses. New anti-fraud legislation known as the ‘failure to prevent fraud’ offence is due to become law, but it will not apply to small businesses. The new offence rules, which form part of the economic crime and corporate transparency bill, are intended to crack down hard on fraud in large firms while removing the burden on small businesses. Small businesses will still remain accountable to existing anti-fraud laws such as the ‘failure to prevent bribery’ law and tax evasion offences. The large organisations and businesses in scope of the legislation will include corporate bodies, partnerships and not-for-profit organisations that employ more than 250 employees, have more than £36 million turnover and have more than £18 million in total assets. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more The proposed legislation aims to: Make it easier to prosecute fraud committed by an employee for the benefit of the business. (For example, dishonest sales practices, false accounting or purposely hiding important and/or relevant information from customers, clients or investors.) Hold companies to account, particularly those that do not have reasonable fraud prevention policies in place. There will be no requirement to prove company bosses knew about or encouraged fraud. Inevitably, there are concerns around the exemption of small businesses: One MP warned exempting small businesses could make it easier to “circumnavigate the law” while campaign group Spotlight said it sent the “wrong message” that fraud was not prevalent in SMEs. So what do accountants think? What impact might this have on the businesses and HMRC’s fraud targets? The initiative could lead to organised crime groups running small, fraudulent businesses Simon Smith, Partner, Wellers At the moment, the details of the changes are still very vague so it’s difficult to understand the full complexities and extent of the legislation. The definition of small entities will be key. If the Government aligns its definition with Companies House, we are actually talking about companies with a turnover of up to £12 million, which isn’t that small. For genuine small businesses, changes to the anti-fraud legislation would lessen the burden of red tape, which would be welcomed, especially as small business owners are already crushed by lots of bureaucracy which takes away from the day-to-day running of their business. The initiative could however be exploited by fraudulent businesses such as modern organised crime. Whilst these tend to be large businesses, they could break up their entities into multiple smaller ones to get around HMRC’s anti-fraud red tape and go unprosecuted for longer. This would cause a separate issue for HMRC in the long term. Accountants have a responsibility and duty to report to the authorities anything that looks untoward in a client’s accounts. I am Wellers’ Money Laundering Officer so anything that doesn’t look right is reported to me. We have strict onboarding processes in place, part of which includes a risk assessment, to weed out any fraudulent activity by potential clients. This is particularly important for businesses that deal with higher amounts of cash than most, such as those in the hospitality industry. Verdict: The initiative could cause issues for HMRC in the long run as it could easily be exploited by organised crime groups running fraudulent businesses to avoid HMRC’s anti-fraud red tape. Working with small companies will come with an increased risk of fraud Mark Strafford, Head of Civil Forensic Accounting, Sedulo Omitting small companies from the legislation may send out the message that relevant authorities no longer consider small companies worthy of pursuing, possibly making the UK a more attractive proposition for those seeking to commit fraudulent activity. We have first-hand experience of the use of smaller companies in an intermediary capacity to facilitate fraudulent transactions in the context of multi-million pound frauds. It is reasonable to assume that the added layer of privacy for a smaller company was a factor in making this possible. Even in the case of large fraud matters, action from a criminal perspective frequently appears to lag significantly behind the time taken to investigate and act from a civil perspective. Excluding smaller companies from aspects of anti-fraud legislation is unlikely to improve the current position for smaller companies and would likely have the opposite effect. Given that small businesses will likely be exempt under the new legislation, it’s reasonable to assume there will be an increased level of risk when working with small companies. Verdict: Excluding small companies from legislation could encourage fraudsters to use such companies in an intermediary capacity. Therefore, dealing with small businesses could soon come with increased risk. Exempting small businesses won’t be an issue: processes elsewhere are tightening up for all businesses Jessica Middleton, Founder, Middleton Professional Accounting Services (MPAS) Exempting small businesses from anti-fraud legislation isn’t much of a concern. It’s much harder to deny knowledge in a small business compared to large businesses with many levels, managers and employees. Larger businesses often have the manpower to deal with the additional administrative procedures fraud may involve, whereas oftentimes, small business owners are juggling multiple responsibilities and wearing many different business hats. However, it does then fall to the SME to ensure they have water-tight procedures in place. Businesses that already have to do due diligence checks for anti-money laundering purposes, whether small or large, will face reforms to tighten the processes, from assessing to reporting to the NCA. Businesses will soon be required to file Profit & Loss accounts with Companies House, instead of SMEs filing a simplified balance sheet. Companies House will also have more querying power and will require directors to verify their identity and overseas companies will not be able to set up UK companies. Whilst this particular legislation may exclude SMEs on the wider scale of dealing with economic crimes and fraudulent accounting practices, the processes are tightening up, which is great. It puts investors, creditors, and consumers at ease and works to prevent fraud of any size from occurring. Verdict: Exempting small businesses won’t be an issue because processes elsewhere are tightening up as part of the wider anti-fraud drive. Excluding small businesses from anti-fraud legislation will come as a relief to business owners William Abell, Director, Transaction Services, Gerald Edelman The exclusion of SMEs from the new UK ‘failure to prevent’ fraud corporate criminal offence will come as a welcome relief to owners and managers of SMEs. They will not have to worry that their businesses could be criminally prosecuted (with the potential for an unlimited fine if convicted) for failing to prevent misconduct by an associated party (eg, employee or contractor), even if they were unaware of the misconduct. The exclusion also provides an administrative benefit to SMEs, as their documentation and record-keeping in respect of their compliance procedures will be less critical. That said, it is essential for all UK companies, regardless of size, to design and maintain appropriate compliance procedures to ensure that fraud and misconduct are prevented, given the financial and reputational damage they can cause. There’s also the potential for the SME exclusion from the new criminal offence to be removed in the future, which provides an incentive for SME owners/managers to ensure that their compliance procedures (including the related documentation and record keeping) are of appropriate quality now. Had the scope of the criminal offence been extended to include SMEs, it would have placed an additional cost (both in terms of time and money) on UK SMEs, decreasing the attractiveness of running an SME in the UK. Verdict: Excluding small businesses from legislation will come as a relief, but it will be essential for these companies to design and maintain appropriate compliance procedures to ensure fraud and misconduct is prevented. This legislation will protect smaller businesses targeted by other companies Miles Brooks, certified Public Accountant and Director of Tax Strategy, CoinLedger Small businesses are excluded from the legislation to lessen the challenges facing them and to support economic growth. Small businesses have long been victims of fraud perpetrated by other, larger corporations. Therefore, this move will actually protect small businesses best. Small businesses lose hundreds of thousands of euros yearly, and this anti-crime policy will protect them, encouraging them to grow, thus increasing their revenues and expanding the businesses, which translates into more job opportunities and better income for the government. In terms of future advice, companies might spend more reassessing potential fraud risks to know what needs to be revised. They might also incur more costs on training, seeking tailored training, and getting effective fraud audit/monitoring processes. They might also need more frequent systems and control reviews to remain compliant with the laws. Verdict: Smaller businesses are often victims of fraud perpetuated by larger companies, so this legislation will provide more protection. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more Annie Makoff is a freelance journalist and editor.