The main consequences of ESG misstatements so far have been reputational damage. But the introduction of the 'failure to prevent fraud’ offence in the UK Economic Crime and Corporate Transparency Act 2023 introduces a far more serious penalty.
The new ‘failure to prevent fraud’ offence sets out a definition of fraud that also includes:
- Dishonest sales and trading practices that hide information from parties such as consumers or investors
- Dishonest practices in financial markets
This definition of fraud could therefore include ESG statements and claims found to be dishonest or that fail to provide a full, balanced and fair picture – for example, by manipulating or falsely representing ESG data to enhance its image on sustainability. Crucially, whether or not this constitutes a fraud offence will depend on whether it was an intentional act of deception.
Any organisation that is found to be engaging in such practices may be caught under this new legislation. And that means it could face prosecution and potentially unlimited fines.
Furthermore, the ‘failure to prevent fraud’ offence will apply regardless of whether the organisation’s senior management were aware of the offence being committed. If employees in the organisation commit fraud on behalf of the organisation, senior management will not be able to claim it was unaware of the fraud as a mitigation.
The only defence for large organisations will be evidence that they have in place ‘reasonable procedures’ to prevent or detect the fraud from happening in the first place. The government will be providing guidance on ‘reasonable procedures’ to shed further light on this in the coming months. It’s important for large organisations included under the scope of this legislation to use this as a tool to assess their exposure and enhance their compliance.
The responsibility for identifying and mitigating fraud risk typically sits with the finance function - but compliance officers in the organisation are likely to be instrumental when responding to this legislation due to their experience in designing, implementing and monitoring such ‘adequate’ and ‘reasonable’ procedures under the UK Bribery Act and UK Criminal Finance Act.